Short-Term Financing ** 206 Flashcards
what is the operating cycle?
time between when a firm buys inventory and when it receives money back from selling product
cash cycle
time between when a firm pays for inventory and when it receives cash from sale of output produced from that inventory
CCC formula
inventory days+ a/r days - a/p days
inventory days
inventory/ average daily COGS
acc receivable days
acc r/average daily sales
acc p days
acc p/ average daily COGS
how would you describe acc p days?
days it takes to pay out all of the money owed from sales process
on timeline a/r days, a/p days, inv days
inventory:
firm buys to when firm sells product
a/p days:
firm buys inventory to when it actually pays
a/r days:
firm sells product and firm actually recieves money for product
risk and operating cycle
higher risk if OC is larger/not managed well
what does a -CCC mean?
money has to come in before it can go out
increase in NWC is
negative and vice versa
FCF is what
the cash flow available to investors given the current operations of a firm
V formula using FCF
V=FCF/r-g
trade credit
arrangement to buy g/s on account without immediate cash so pretty much acc payable
credit that firm extends to customers
tax credit 2/10
get 2% cash discount if pay within first 10 days
tax credit int payment
discount amount
tax credit IR over .. days
interest/principal (amount w discount)
then don’t forget to EAR it
if you miss the discount…
adds costs which essentially becomes and int/principal payment
benefits of tax credit
simple
convenient
lower transaction costs
flexible source of funds, sometimes only source of funds for a firm
reasons to offer tax credit
indirect way to lower cost to some customers
gives more info of credit quality of customer than traditional outside lender
inventory can be used as collateral
3 steps to determine credit policy
establish credit statement
establish credit terms
establish collection policy
5 C’s of credit
character
capacity
capital
collateral
conditions
a/r days definition
number of days for a firm to collect on its sales
payment patterns
info about the percentage of monthly sales that is received next month
aging schedule
timeframe for recouping receivables
categorizes accounts by number of days been on firms books
why should firms monitor acc payable?
to ensure making payments at optimal time
pay late/stretch
lowers EAR but not good long term strategy
paying late
cash on delivery
pays at the time of delivery
cash before delivery
pay before time of delivery
2 good reasons to hold inventory
helps avoid stock-outs
addresses seasonality in demand
5 costs of holding inventory
acquisition costs
order costs
carrying costs
just in time inventory management
just in case inventory management
3 reasons to hold cash
meet day to day transaction balance
precautionary balance (compensate for uncertainty with CFs)
compensating balance (satisfy bank requirements)
3 financial statements
income statement
statement of cash flows
balance sheet
commercial paper
another short-term form of debt
unsecured
cheap and used by large corporations
int is paid by selling it at initial cost
secured loans
loans secured with short-term assets (AR or inv)
pledging of acc r
Lender reviews the invoices and decides which credit accounts it will accept as
collateral based on its own credit standards
factoring of ar
Firms sell receivables to the lender; lender pays the firm the amount due from its
customers at the end of the firm’s payment period less a factors fee
inventory as collateral
Floating, general or blanket lien; all of the inventory is used to secure the loan.
Trust receipts loan or floor planning; distinguishable inventory items are held in a trust as security for the loan.
Warehouse arrangement; inventory that serves as collateral is stored in a separate warehouse.
cost of debt considerations
compensating balance requirements
commitment fees
loan organisation fee
