Managing Short-Term Resources

1. PA 546 Constantine Hadjilambrinos Managing Short-Term Resources Lecture 3 September 13, 2005

2. PA 546 Constantine Hadjilambrinos Working capital: Current assets – Current liabilities Current assets: Cash and highly liquid assets (money market accounts, very short term bonds, etc.) Liquidity has a “cost”: High liquidity means that investment opportunities offering better rates of return cannot be utilized.

3. PA 546 Constantine Hadjilambrinos Cash Management Cash reserves Line of credit Investment

4. PA 546 Constantine Hadjilambrinos Short-term cash investments Liquidity Capital risk • Checking account • Savings account • Certificate of deposit • Treasury notes • US Govt. bonds • Other govt. notes • Other govt. bonds • Corporate notes • Corporate bonds

5. PA 546 Constantine Hadjilambrinos Cash budgeting • Match projected expenditures with projected revenues • Estimate appropriate level of emergency funds • Balance safety with investment opportunities

6. PA 546 Constantine Hadjilambrinos Bank Services • Account services Processing deposits, checks, and reconciling accounts Concentration/zero balance accounts Daily account notification Electronic funds transfer • Collection services Wire transfers Lockboxes Night depository Armored cars Counting depositing funds

7. PA 546 Constantine Hadjilambrinos Bank Services • Safeguarding services Safe deposit boxes Storage of stocks, bonds, and cancelled checks • Credit services Lines of credit Note purchases Lease-purchase financing Long-term bond underwriting • Investment services Investment instruments Investment advice Sweep facility Registration of bonds

8. PA 546 Constantine Hadjilambrinos Marketable securities • Debt Money market, notes, bonds — principal risk yield risk • Equity Stock — principal riskyield risk • Derivatives Options — principal risk

9. PA 546 Constantine Hadjilambrinos Accounts Receivable Invoice received Invoice paid Payment received Payment deposited Payment clears

10. PA 546 Constantine Hadjilambrinos Value of speed in billing/collection process Value of collections = 300 million per year r = 9% (0.09) Increase speed of billing/collection by 3 days So, for 3 days:

11. PA 546 Constantine Hadjilambrinos Short Term Obligations • Accounts payable Get discounts for early payment Avoid penalties for late payments (pay on time) *Typical terms 2/10 N/30 (No penalty if paid in 30 days and 2% discount if paid in 10 days or less. • Payroll payable Consider reducing frequency of payroll Delay in payment (when do benefits get paid?) • Short term debt Interest = Loan amount X Interest rate/yr X Fraction of yr. • Taxes payable