Tài chính doanh nghiệp - Chapter 17: Working capital management

Working Capital ManagementChapter 170Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerKey Concepts and SkillsUnderstand how firms manage cash and various collection, concentration and disbursement techniquesUnderstand how to manage receivables and the basic components of credit policyUnderstand various inventory types, different inventory management systems and what determines the optimal inventory level1Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerChapter OutlineFloat and Cash ManagementCash Management: Collection, Disbursement, and InvestmentCredit and ReceivablesInventory ManagementInventory Management Techniques2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerReasons for Holding CashSpeculative motive – hold cash to take advantage of unexpected opportunitiesPrecautionary motive – hold cash in case of emergenciesTransaction motive – hold cash to pay the day-to-day billsTrade-off between opportunity cost of holding cash relative to the transaction cost of converting marketable securities to cash for transactions3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerUnderstanding FloatFloat – difference between cash balance recorded in the cash account and the cash balance recorded at the bankDisbursement floatGenerated when a firm writes chequesAvailable balance at bank – book balance > 0Collection floatCheques received increase book balance before the bank credits the accountAvailable balance at bank – book balance < 0Net float = disbursement float + collection float4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Types of FloatYou have $3000 in your bank account. You just deposited $2000 and wrote a cheque for $2500What is the disbursement float?What is the collection float?What is the net float?What is your book balance?What is your available balance?5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCash CollectionPayment Payment Payment CashMailed Received Deposited AvailableMailing TimeProcessing DelayAvailability DelayCollection DelayOne of the goals of float management is to try and reduce the collection delay. There are several techniques that can reduce various parts of the delay.6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCash DisbursementsSlowing down payments can increase disbursement float – but it may not be ethical or optimal to do thisControlling disbursementsZero-balance accountControlled disbursement account7Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerInvesting CashMoney market – financial instruments with an original maturity of one year or lessTemporary Cash SurplusesSeasonal or cyclical activities – buy marketable securities with seasonal surpluses, convert securities back to cash when deficits occurPlanned or possible expenditures – accumulate marketable securities in anticipation of upcoming expenses8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 17.29Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCharacteristics of Short-Term SecuritiesMaturity Firms often limit the maturity of short-term investments to 90 days to avoid loss of principal due to changing interest ratesDefault risk Avoid investing in marketable securities with significant default riskMarketability Ease of converting to cash10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCredit Management: Key IssuesGranting credit increases salesCosts of granting creditChance that customers won’t payFinancing receivablesCredit management examines the trade-off between increased sales and the costs of granting credit11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Cash Flows from Granting CreditCredit Sale Cheque Mailed Cheque Deposited Cash AvailableCash CollectionAccounts Receivable12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComponents of Credit PolicyTerms of saleCredit periodCash discount and discount periodType of credit instrumentCredit analysis – distinguishing between “good” customers that will pay and “bad” customers that will defaultCollection policy – effort expended on collecting receivables13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTerms of SaleBasic Form: 2/10 net 452% discount if paid in 10 daysTotal amount due in 45 days if discount not takenBuy $500 worth of merchandise with the credit terms given abovePay $500(1 - .02) = $490 if you pay in 10 daysPay $500 if you pay in 45 days14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Cash DiscountsFinding the implied interest rate when customers do not take the discountCredit terms of 2/10 net 45 and $500 loan$10 interest (.02*500)Period rate = 10 / 490 = 2.0408%Period = (45 – 10) = 35 days365 / 35 = 10.4286 periods per yearEAR = (1.020408)10.4286 – 1 = 23.45%The company benefits when customers choose to forego discounts15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Costs of Granting CreditCost ($)Amount of credit extended ($)Opportunity costsCarrying CostOptimal amount of credit16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCredit AnalysisProcess of deciding which customers receive creditGathering informationFinancial statementsCredit reportsBanksPayment history with the firmDetermining Creditworthiness5 Cs of CreditCredit Scoring17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFive Cs of CreditCharacter – willingness to meet financial obligationsCapacity – ability to meet financial obligations out of operating cash flowsCapital – financial reservesCollateral – assets pledged as securityConditions – general economic conditions related to customer’s business18Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCollection PolicyMonitoring receivablesKeep an eye on average collection period relative to your credit termsUse an ageing schedule to determine percentage of payments that are being made lateCollection policyDelinquency letterTelephone callCollection agencyLegal action19Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerInventory ManagementInventory can be a large percentage of a firm’s assetsCosts associated with carrying too much inventoryCosts associated with not carrying enough inventoryInventory management tries to find the optimal trade-off between carrying too much inventory versus not enough20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTypes of InventoryManufacturing firmRaw material – starting point in production processWork-in-progressFinished goods – products ready to ship or sellRemember that one firm’s “raw material” may be another company’s “finished good”Different types of inventory can vary dramatically in terms of liquidity21Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerInventory CostsCarrying costs – range from 20 – 40% of inventory value per yearStorage and trackingInsurance and taxesLosses due to obsolescence, deterioration or theftOpportunity cost of capitalShortage costsRestocking costsLost sales or lost customersConsider both types of costs and minimise the total cost22Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerInventory ManagementClassify inventory by cost, demand and needThose items that have substantial shortage costs should be maintained in larger quantities than those with lower shortage costsGenerally maintain smaller quantities of expensive itemsMaintain a substantial supply of less expensive basic materials23Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerEOQ ModelThe EOQ model minimises the total inventory costTotal carrying cost = (average inventory) x (carrying cost per unit) = (Q/2)(CC)Total restocking cost = (fixed cost per order) x (number of orders) = F(T/Q)Total Cost = Total carrying cost + total restocking cost = (Q/2)(CC) + F(T/Q)24Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: EOQConsider an inventory item that has carrying cost = $1.50 per unit. The fixed order cost is $50 per order and the firm sells 100,000 units per year.What is the economic order quantity?25Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExtensionsSafety stocksMinimum level of inventory kept on handIncreases carrying costsReorder pointsAt what inventory level should you place an order?Need to account for delivery timeDerived-Demand InventoriesMaterials Requirements Planning (MRP)Just-in-Time Inventory26Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerQuick QuizWhat is the difference between disbursement float and collection float?What is credit analysis and why is it important?What is the implied rate of interest if credit terms are 1/5 net 30?What are the two main categories of inventory costs?What components are required to determine the economic order quantity?27Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan Trayler