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presentation of cash management in finman
1.
2. • explain how different amounts of current assets and
current liabilities affect firm’s profitability and thus their
stock prices.
• explain how companies decide on the proper amount of
each current asset – cash, marketable securities,
accounts receivable and inventory
• discuss how the cash conversion cycle is determined,
how the cash budget is constructed, and how each is
used in working capital management
• discuss how companies set their credit policies, and
explain the effect of credit policy on sales and profits
• describe how the costs of trade credit and bank loans are
determined.
3. Working capital is a financial metric
that is the difference between a
company's current assets and current
liabilities. As a financial metric, working
capital helps plan for future needs and
ensure the company has enough cash
and cash equivalents meet short-term
obligations, such as unpaid taxes and
short-term debt.
4. Working capital is used to fund
operations and meet short-term
obligations. If a company has enough
working capital, it can continue to pay its
employees and suppliers and meet other
obligations, such as interest payments
and taxes, even if it runs into cash flow
challenges.
5.
6.
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8. A policy under which relatively large amounts of cash and marketable securities and inventories are carried out
and under which sales are stimulated by a liberal credit policy that results in a high level of receivables.
A policy under which holdings of cash and marketable securities,
inventories, and receivables are minimized.
Between the relaxed and restricted
13. SUPPOSE A COMPANY HAS THE FOLLOWING INFORMATION IN ITS
LATEST FINANCIAL STATEMENTS:
14.
15.
16. Credit policy is a set of rules that
includes the firm’s credit period,
discounts, credit standards, and
collection procedures offered.
17. - The length of time customers are given to pay for their purchases.
- Customers prefer longer credit periods, so lengthening the period will stimulate sales.
- However, a longer credit period lengthens the cash conversion cycle; hence, it ties up more capital in
receivables, which is costly. Also, the longer a receivable is outstanding, the higher the probability that the
customer will default and that the account will end up as a bad debt.
- Price reductions given for early payment.
- The discount specifies what the percentage reduction is and how rapidly payment must be made to be
eligible for the discount. For example, a 2% discount is often given if the customer pays within 10 days.
18. - The financial strength customers must exhibit to qualify for credit.
- factors considered for business customers include ratios such as the customer’s debt and interest
coverage ratios, the customer’s credit history (has the customer paid on time in the past or tended to be
delinquent), and the like.
- The degree of toughness in enforcing the credit terms.
- At one extreme, the firm might write a series of polite letters after a fairly long delay; while at the other
extreme, delinquent accounts may be turned over to a collection agency relatively quickly.
19.
20. Trade credit is debt arising from credit sales and
recorded as an account receivable by the seller
and as an account payable by the buyer.
Invest in financial instruments
Trade credit is a business arrangement where the
supplier allows the customer to purchase goods or
services on credit and pay for them at a later date.
It allows businesses to obtain the necessary
resources to operate and grow without the need for
immediate cash payments.
21. the trade credit that is obtained
without a cost, and it consists of
all trade credit that is available
without giving up discounts.
Given the credit term 2/10, net
30, the first 10 days of purchases
are free.
FREE TRADE
CREDIT
any trade credit over and
above the free trade credit.
Given the credit term 2/10,
net 30, the period in excess
of 10 days is not free
because it would mean giving
up the discount.
COSTLY TRADE
CREDIT
22. By calculating the nominal annual cost of trade
credit, companies can determine the financial
impact of utilizing trade credit as a financing option
in their supply chain. This allows the companies to
gain a comprehensive understanding of the
nominal annual cost of trade credit and make
informed decisions regarding their supply chain
financing options.
