1 / 28

Chapter 16

Chapter 16. Management of Short-term Assets. Preliminary Definitions. Working capital: Current (short-term) assets Net working capital: Current assets minus current liabilities Working capital policy: Management of current assets and current liabilities. The Operating Cycle.

timothy-terry
Download Presentation

Chapter 16

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 16 Management of Short-term Assets

  2. Preliminary Definitions • Working capital: Current (short-term) assets • Net working capital: Current assets minus current liabilities • Working capital policy: Management of current assets and current liabilities

  3. The Operating Cycle • Time it takes to produce output, sell it, and collect payment • Timing of payments • Varies among industries • Affects the need for short-term finance

  4. Financing and Working Capital Policy • Matching sources and uses of funds • Basic principle: do not use short-term sources to finance long-term assets • Cost structure of funds: • Long-term sources tend to be more expensive than short-term source

  5. Cost Structure Illustrated by a Yield Curve

  6. Aggressive Working Capital Policy • Use of more short-term sources • Increases profitability • Increases risk • But also increases the need to roll over or refinance short-term debt

  7. Inventory Cycle • Inventory is • acquired • drawn down to some level • replenished • and the cycle is repeated • The safety stock

  8. The Inventory Cycle $ B A T1 T2 Time

  9. The Economic Order Quantity (EOQ) • Ordering costs versus carrying costs • Fewer orders reduce ordering costs but increases carrying costs

  10. The Economic Order Quantity (EOQ) • The EOQ minimizes the sum of • Ordering costs (e.g., shipping and processing costs) plus • Carrying costs (e.g., warehouse expense, insurance, and interest expense)

  11. The Economic Order Quantity (EOQ) • EOQ = (2SF/C).5 • EOQ = ((2 x 10,000 x $50)/$10).5 = 316

  12. The Economic Order Quantity (EOQ) $ Costs A Total Costs E F Total Carrying Costs D $3,180 Total Ordering Costs B C 316 Order Size

  13. The Inventory Cycle Combined with the EOQ Units of Inventory 366 Level of Inventory Safety Stock 50 0 5 10 15 Days

  14. The Inventory Cycle Combined with the EOQ • Maximum inventory: EOQ plus the safety stock • Minimum inventory: Safety stock • Average inventory: EOQ/2 + safety stock

  15. EOQ Model • A very simple model • Assumes • sales occur evenly • no quantity discounts • individual items are identifiable • Highlights the trade off between ordering costs and carrying costs

  16. Just-in-Time inventory management • Designed to minimize the amount of inventory • Requires • accurate forecasts • excellent timing • dependable shipping • flexible schedules • frequent communication

  17. Management of Accounts Receivable • Credit policy encompasses • Who will receive credit • Terms of credit • Collections

  18. Decision to Grant Credit • Trade-off between additional sales versus additional costs • Additional costs • Cost of goods sold • Credit and collection costs • Bad debt expense • Carrying costs

  19. Analyzing Accounts Receivable • Receivables turnover: Credit sales/Accounts receivable • Aging schedules: Determine payment patterns

  20. Cash Management • Faster collections • Slower disbursements • Investing short-term funds

  21. Facilitating Faster Collections • Electronic funds transfers • Lockbox

  22. The Flow of Checks and Funds

  23. Money Market Instruments and Yields the Instruments • U.S. Treasury bills • Commercial paper • Negotiable certificates of deposit • Banker's acceptances • Eurodollar CDs • Repurchase agreements (REPOs)

  24. Yields: the Discount Yield • Depends on • The principal amount • The amount of the discount • The time to maturityYd = Par value - Price x ________360_______ Par value Number of days to maturity

  25. Yields: the Discount Yield • Yd = Par value - Price x ________360_______ Par value Number of days to maturity • $10,000 - $9,791 x _360_ = $10,000 180 4.18%

  26. Yields: the Discount Yield • Weaknesses • Use of 360 days • Return based on par value and not price

  27. Alternative Calculation: Simple Interest • Yd = Par value - Price x _ 365______ Price Number of days to maturity • $10,000 - $9,791 x _365_ = $9,791 180 4.33%

  28. Alternative Calculation: Compound Interest • Price(1 + i)t = Face Value • Example • price: $9,791face value: $10,000time period: 180 days$9,791(1 + i)0.49315 = $10,000i = (1.02135)2.0278 - 1 = 4.38%

More Related