Introduction Reference:STFM Chapter 1 ETM  Chapter 1
An Overview of Financial Management <ul><li>Role of financial management </li></ul><ul><li>Goals of the corporation </li><...
<ul><li>What causes a company to have a particular stock value? </li></ul><ul><li>How can managers make choices that add v...
Corporate Financial Decisions <ul><li>Capital Structure Decisions </li></ul><ul><li>Investment Decisions </li></ul><ul><li...
<ul><li>Amount   of cash flows expected by shareholders </li></ul><ul><li>Timing  of the cash flow stream </li></ul><ul><l...
Treasury Management’s Overall Objective <ul><li>Efficient utilization of cash in a manner consistent with the  overall str...
Operating Cycle 1.  Acquire Materials  or Resources 2.  Convert Materials to Goods Convert Resources to Services 3.  Sell ...
Major Objectives of Treasury Management <ul><li>Maintaining liquidity </li></ul><ul><li>Optimizing cash resources </li></u...
Cash Flows and the Timeline <ul><li>Cash  Concentration  Cash </li></ul><ul><li>Inflows   And Liquidity   Outflows </li></...
<ul><li>Sales </li></ul><ul><ul><li>Current level </li></ul></ul><ul><ul><li>Short-term growth rate in sales </li></ul></u...
Factors that Affect the Level and  Risk of Cash Flows <ul><li>Decisions made by financial managers: </li></ul><ul><ul><li>...
Cash Management vs Treasury Management <ul><li>Liquid assets vs financial assets </li></ul><ul><li>Short term vs long term...
Functions and Responsibilities of a Treasury Manager <ul><li>System Design, Implementation, and Evaluation </li></ul><ul><...
Daily Cash Management <ul><li>Daily funds management </li></ul><ul><ul><li>Prepare cash position worksheet </li></ul></ul>...
Factors Affecting Treasury Management Practices <ul><li>Banking Structure </li></ul><ul><li>Mail System </li></ul><ul><li>...
Treasury Linkages & Interfaces Treasury $ A/R Risk  Mgt. Investment Borrowing Pension Mgt. Purchasing A/P General Ledger I...
Key to Success for a Treasury Manager <ul><li>Cooperation with other functions </li></ul>
Differences Between the U.S. and Other Countries <ul><li>Large number of banks </li></ul><ul><li>Lack of nationwide bankin...
Bank and Treasury Management Prior to 1950
Cash Management Evolution  1950s <ul><li>First Lockbox </li></ul><ul><li>The Accord and the Government Securities Market <...
Cash Management Evolution  1960’s <ul><li>Short Term Investment Vehicles </li></ul><ul><li>Managing Banking Balances </li>...
Cash Management Evolution 1970s <ul><li>Remote Disbursement </li></ul><ul><li>Controlled Disbursement </li></ul><ul><li>Fu...
Cash Management Evolution 1980s <ul><li>DIDMCA of 1980 </li></ul><ul><li>Noon Presentment/Payor Services </li></ul><ul><li...
<ul><li>Personal Computers </li></ul><ul><li>Internalization of Financial Markets </li></ul><ul><li>Bank Creditworthiness ...
Cash Management Evolution 1990’s <ul><li>Derivatives </li></ul><ul><li>Electronic Payment of State and Federal Taxes </li>...
<ul><li>Use of computers and electronic transfers of information and value </li></ul><ul><li>The globalization of business...
The Role of Working Capital Sales A /R Cash Inv
Objectives <ul><li>View firm as a system of cash flows </li></ul><ul><li>How WC and depreciation create disparities betwee...
The Cash Flow Timeline <ul><li>Order   Order   Sale   Cash   </li></ul><ul><li>Placed   Received     Received </li></ul><u...
...in the beginning <ul><ul><ul><ul><ul><li>Balance Sheet - June 1 </li></ul></ul></ul></ul></ul><ul><li>Cash $1,000 Debt ...
The Next Day, June 2 <ul><ul><ul><ul><ul><li>Balance Sheet - June 2 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>...
End of June <ul><ul><ul><ul><ul><li>Balance Sheet - June 30 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Sale of prod...
July 1 <ul><ul><ul><ul><ul><li>Balance Sheet - July 1 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Pay operating accr...
July 15 <ul><ul><ul><ul><ul><li>Balance Sheet - July 15 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Pay payables wit...
July 31 <ul><ul><ul><ul><ul><li>Balance Sheet - July 31 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Collect accounts...
Profit versus Cash Flow <ul><li>Question : Why did the firm end up with $125 in additional cash while earning a profit of ...
Important Points <ul><li>The firm must manage its cost structure to generate a profit </li></ul><ul><li>WC accounts must b...
Relationship Between Accrual Income and Cash Flow Income Statement Adjustment Account Cash Flow Account Sales -  Change in...
Managing the Cash Cycle <ul><li>Managing Inventory </li></ul><ul><li>Managing Receivables </li></ul><ul><li>Managing Payab...
Managing Inventory <ul><li>JIT </li></ul><ul><li>Trade-offs between: </li></ul><ul><ul><li>stock out costs </li></ul></ul>...
Managing Receivables <ul><li>Who should receive credit and how much? </li></ul><ul><li>Credit terms </li></ul><ul><li>Moni...
Managing Payables <ul><li>Search for terms that match with cash receipts </li></ul><ul><li>Timing of payment </li></ul><ul...
Electronic Commerce <ul><li>Revolutionizing management of cash cycle </li></ul><ul><li>Proprietary systems </li></ul><ul><...
How Much WC is Enough <ul><li>One view </li></ul><ul><ul><li>optimal level is zero </li></ul></ul><ul><ul><li>WC is an idl...
How Management of Working Capital is Changing
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Lecture 1

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Lecture 1

  1. 1. Introduction Reference:STFM Chapter 1 ETM Chapter 1
  2. 2. An Overview of Financial Management <ul><li>Role of financial management </li></ul><ul><li>Goals of the corporation </li></ul><ul><li>Issues of the new millenium </li></ul>
  3. 3. <ul><li>What causes a company to have a particular stock value? </li></ul><ul><li>How can managers make choices that add value to their companies? </li></ul><ul><li>How can managers ensure that their companies don’t run out of cash while executing their plans? </li></ul>What three questions do financial leaders seek to answer?
  4. 4. Corporate Financial Decisions <ul><li>Capital Structure Decisions </li></ul><ul><li>Investment Decisions </li></ul><ul><li>Financing Decisions </li></ul><ul><li>Dividend Decisions </li></ul>
  5. 5. <ul><li>Amount of cash flows expected by shareholders </li></ul><ul><li>Timing of the cash flow stream </li></ul><ul><li>Risk of the cash flows </li></ul>Treasury Management Factors that Affect Stock Price
  6. 6. Treasury Management’s Overall Objective <ul><li>Efficient utilization of cash in a manner consistent with the overall strategic objectives of the firm . </li></ul>
  7. 7. Operating Cycle 1. Acquire Materials or Resources 2. Convert Materials to Goods Convert Resources to Services 3. Sell Goods or Services 4. Collect Payment for Goods or Services
  8. 8. Major Objectives of Treasury Management <ul><li>Maintaining liquidity </li></ul><ul><li>Optimizing cash resources </li></ul><ul><li>Establishing and maintaining access to short-term financing </li></ul><ul><li>Maintaining access to medium- and long-term financing (capital budgeting) </li></ul><ul><li>Maintaining shareholder relations </li></ul><ul><li>Managing risk </li></ul><ul><li>Coordinating financial functions and sharing financial information </li></ul>
  9. 9. Cash Flows and the Timeline <ul><li>Cash Concentration Cash </li></ul><ul><li>Inflows And Liquidity Outflows </li></ul><ul><li> Management </li></ul><ul><li> Flows </li></ul>
  10. 10. <ul><li>Sales </li></ul><ul><ul><li>Current level </li></ul></ul><ul><ul><li>Short-term growth rate in sales </li></ul></ul><ul><ul><li>Long-term sustainable growth rate in sales </li></ul></ul><ul><li>Operating expenses </li></ul><ul><li>Capital expenses </li></ul>Three Determinants of Cash Flows
  11. 11. Factors that Affect the Level and Risk of Cash Flows <ul><li>Decisions made by financial managers: </li></ul><ul><ul><li>Investment decisions (product lines, production processes, geographic market, use of technology, marketing strategy) </li></ul></ul><ul><ul><li>Financing decisions (choice of debt policy and dividend policy) </li></ul></ul><ul><li>The external environment </li></ul>
  12. 12. Cash Management vs Treasury Management <ul><li>Liquid assets vs financial assets </li></ul><ul><li>Short term vs long term </li></ul><ul><li>Functional vs strategic </li></ul>
  13. 13. Functions and Responsibilities of a Treasury Manager <ul><li>System Design, Implementation, and Evaluation </li></ul><ul><li>Funds Management </li></ul><ul><li>Banking System Administration </li></ul><ul><li>Forecasting </li></ul><ul><li>Risk Management </li></ul><ul><li>Financing </li></ul>
  14. 14. Daily Cash Management <ul><li>Daily funds management </li></ul><ul><ul><li>Prepare cash position worksheet </li></ul></ul><ul><ul><li>Monitor cash balances </li></ul></ul><ul><ul><li>Mobilize funds </li></ul></ul><ul><ul><li>Research and reconcile exception items </li></ul></ul><ul><ul><li>Coordinate finance functions with A/R, A/P and accounting </li></ul></ul><ul><li>Banking system administration </li></ul><ul><li>Liquidity management </li></ul><ul><li>Forecasting </li></ul><ul><li>Systems design, implementation and evaluation </li></ul><ul><li>Financial risk management </li></ul>
  15. 15. Factors Affecting Treasury Management Practices <ul><li>Banking Structure </li></ul><ul><li>Mail System </li></ul><ul><li>Payment Conventions </li></ul><ul><li>Interest Rates </li></ul><ul><li>Regulatory Environment </li></ul><ul><li>Tax Status </li></ul><ul><li>Risk Appetite </li></ul><ul><li>IT Capabilities </li></ul>
  16. 16. Treasury Linkages & Interfaces Treasury $ A/R Risk Mgt. Investment Borrowing Pension Mgt. Purchasing A/P General Ledger Internal Audit Treasury $ Banks Regulatory Agencies Suppliers Customers External Investment Mgrs. Financial Markets A/P Industry Trade Groups External Auditors Intra corporate Integration Inter corporate Integration
  17. 17. Key to Success for a Treasury Manager <ul><li>Cooperation with other functions </li></ul>
  18. 18. Differences Between the U.S. and Other Countries <ul><li>Large number of banks </li></ul><ul><li>Lack of nationwide banking </li></ul><ul><li>Extensive use of mail for payment </li></ul><ul><li>Bills paid by check </li></ul>
  19. 19. Bank and Treasury Management Prior to 1950
  20. 20. Cash Management Evolution 1950s <ul><li>First Lockbox </li></ul><ul><li>The Accord and the Government Securities Market </li></ul>
  21. 21. Cash Management Evolution 1960’s <ul><li>Short Term Investment Vehicles </li></ul><ul><li>Managing Banking Balances </li></ul><ul><li>Lockbox Models </li></ul>
  22. 22. Cash Management Evolution 1970s <ul><li>Remote Disbursement </li></ul><ul><li>Controlled Disbursement </li></ul><ul><li>Funds Concentration </li></ul><ul><li>Bank Balance Reporting </li></ul><ul><li>Electronic Payment </li></ul><ul><li>Commercial Paper </li></ul>
  23. 23. Cash Management Evolution 1980s <ul><li>DIDMCA of 1980 </li></ul><ul><li>Noon Presentment/Payor Services </li></ul><ul><li>Electronic Commerce and Data Interchange </li></ul>
  24. 24. <ul><li>Personal Computers </li></ul><ul><li>Internalization of Financial Markets </li></ul><ul><li>Bank Creditworthiness </li></ul><ul><li>Cash Management Ethics </li></ul>1980s Developments (continued)
  25. 25. Cash Management Evolution 1990’s <ul><li>Derivatives </li></ul><ul><li>Electronic Payment of State and Federal Taxes </li></ul><ul><li>Interstate Banking </li></ul><ul><li>Internet </li></ul><ul><li>Financial Deregulation </li></ul><ul><li>EMU </li></ul>
  26. 26. <ul><li>Use of computers and electronic transfers of information and value </li></ul><ul><li>The globalization of business </li></ul><ul><li>Financial Regulation ? </li></ul>Financial Management Issues of the New Millenium
  27. 27. The Role of Working Capital Sales A /R Cash Inv
  28. 28. Objectives <ul><li>View firm as a system of cash flows </li></ul><ul><li>How WC and depreciation create disparities between profit and cash flow </li></ul><ul><li>Management aspects of various WC accounts </li></ul>
  29. 29. The Cash Flow Timeline <ul><li>Order Order Sale Cash </li></ul><ul><li>Placed Received Received </li></ul><ul><li>Accounts Collection </li></ul><ul><li>< Inventory > < Receivable > < Float > </li></ul><ul><li>Time ==> </li></ul><ul><ul><ul><ul><ul><li>Accounts Disbursement </li></ul></ul></ul></ul></ul><ul><li>< Payable > < Float > </li></ul><ul><li>Invoice Payment Cash </li></ul><ul><li>Received Sent Disbursed </li></ul>
  30. 30. ...in the beginning <ul><ul><ul><ul><ul><li>Balance Sheet - June 1 </li></ul></ul></ul></ul></ul><ul><li>Cash $1,000 Debt $ 500 </li></ul><ul><li> Common Stock 500 </li></ul><ul><li>Total $1,000 Total $1,000 </li></ul>
  31. 31. The Next Day, June 2 <ul><ul><ul><ul><ul><li>Balance Sheet - June 2 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Purchase Fixed Assets and Inventory </li></ul></ul></ul></ul></ul><ul><li>Cash $ 400 A/P $ 300 </li></ul><ul><li>Inventory 300 Debt 500 </li></ul><ul><li>Fixed Assets 600 Common Stock 500 </li></ul><ul><li>Total $1,300 Total $1,300 </li></ul>
  32. 32. End of June <ul><ul><ul><ul><ul><li>Balance Sheet - June 30 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Sale of product, incur operating expenses, </li></ul></ul></ul></ul><ul><ul><ul><ul><li>incur depreciation, and generate profit </li></ul></ul></ul></ul><ul><li>Cash $ 325 A/P $ 300 </li></ul><ul><li>A/R 700 Accruals 200 </li></ul><ul><li>Inventory 0 Debt 500 </li></ul><ul><li>Fixed Assets 600 Common Stock 500 </li></ul><ul><li>(Accum Depr) (100) Retained Earnings 25 </li></ul><ul><li>Total $1,525 Total $1,525 </li></ul>
  33. 33. July 1 <ul><ul><ul><ul><ul><li>Balance Sheet - July 1 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Pay operating accruals with cash </li></ul></ul></ul></ul><ul><li>Cash $ 125 A/P $ 300 </li></ul><ul><li>A/R 700 Accruals 0 </li></ul><ul><li>Inventory 0 Debt 500 </li></ul><ul><li>Fixed Assets 600 Common Stock 500 </li></ul><ul><li>(Accum Depr) (100) Retained Earnings 25 </li></ul><ul><li>Total $1,325 Total $1,325 </li></ul>
  34. 34. July 15 <ul><ul><ul><ul><ul><li>Balance Sheet - July 15 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Pay payables with cash </li></ul></ul></ul></ul><ul><li>Cash $ ( 175) A/P $ 0 </li></ul><ul><li>A/R 700 Accruals 0 </li></ul><ul><li>Inventory 0 Debt 500 </li></ul><ul><li>Fixed Assets 600 Common Stock 500 </li></ul><ul><li>(Accum Depr) (100) Retained Earnings 25 </li></ul><ul><li>Total $1,025 Total $1,025 </li></ul>
  35. 35. July 31 <ul><ul><ul><ul><ul><li>Balance Sheet - July 31 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Collect accounts receivable </li></ul></ul></ul></ul><ul><li>Cash $ 525 A/P $ 0 </li></ul><ul><li>A/R 0 Accruals 0 </li></ul><ul><li>Inventory 0 Debt 500 </li></ul><ul><li>Fixed Assets 600 Common Stock 500 </li></ul><ul><li>(Accum Depr) (100) Retained Earnings 25 </li></ul><ul><li>Total $1,025 Total $1,025 </li></ul>
  36. 36. Profit versus Cash Flow <ul><li>Question : Why did the firm end up with $125 in additional cash while earning a profit of $25? </li></ul><ul><li>Answer: Some expenses are not cash expenses. </li></ul><ul><li>Question : Why did the firm run out of cash during its operating cycle? </li></ul><ul><li>Answer: The cash deficit was due to the differences between the timing of cash disbursements and cash receipts. </li></ul>
  37. 37. Important Points <ul><li>The firm must manage its cost structure to generate a profit </li></ul><ul><li>WC accounts must be managed so that liquidity is maintained. </li></ul>
  38. 38. Relationship Between Accrual Income and Cash Flow Income Statement Adjustment Account Cash Flow Account Sales - Change in accounts receivable = Cash collected Cost of goods sold - Change in accounts payable + Change in inventory = Cash paid to suppliers Operating expenses - Change in operating accruals + Depreciation = Cash paid for operating expenses Interest - Change in accrued interest = Cash paid to creditors Taxes - Change in accrued taxes - Change in deferred taxes = Cash paid for taxes _________________ ___________________ Net Profit Operating Cash Flow
  39. 39. Managing the Cash Cycle <ul><li>Managing Inventory </li></ul><ul><li>Managing Receivables </li></ul><ul><li>Managing Payables </li></ul><ul><li>Electronic Commerce </li></ul>
  40. 40. Managing Inventory <ul><li>JIT </li></ul><ul><li>Trade-offs between: </li></ul><ul><ul><li>stock out costs </li></ul></ul><ul><ul><li>cost of excess inventory </li></ul></ul><ul><ul><li>ordering costs </li></ul></ul>
  41. 41. Managing Receivables <ul><li>Who should receive credit and how much? </li></ul><ul><li>Credit terms </li></ul><ul><li>Monitoring the outstanding balance </li></ul><ul><li>Speeding up the receipt of payments through lockboxes </li></ul>
  42. 42. Managing Payables <ul><li>Search for terms that match with cash receipts </li></ul><ul><li>Timing of payment </li></ul><ul><li>Controlled disbursement </li></ul>
  43. 43. Electronic Commerce <ul><li>Revolutionizing management of cash cycle </li></ul><ul><li>Proprietary systems </li></ul><ul><li>Impact of Internet </li></ul>
  44. 44. How Much WC is Enough <ul><li>One view </li></ul><ul><ul><li>optimal level is zero </li></ul></ul><ul><ul><li>WC is an idle resource </li></ul></ul><ul><ul><li>Provides little value </li></ul></ul><ul><li>How much in resources to commit? </li></ul><ul><ul><li>Why inventory? </li></ul></ul><ul><ul><li>Why receivables and payables? </li></ul></ul><ul><ul><li>Why short-term investments? </li></ul></ul>
  45. 45. How Management of Working Capital is Changing
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