Podcast
Questions and Answers
What is the primary goal of cash and marketable securities management?
What is the primary goal of cash and marketable securities management?
- To ensure sufficient liquidity for short-term obligations (correct)
- To maximize investment returns only
- To maintain a fixed level of cash regardless of business operations
- To minimize all liabilities the company holds
A shorter cash conversion cycle generally indicates what for a company?
A shorter cash conversion cycle generally indicates what for a company?
- Decreased profitability potential
- Higher accounts payable days
- Increased inventory holding periods
- More efficient cash conversion from inventory to receivables (correct)
What does the optimal cash balance primarily aim to optimize?
What does the optimal cash balance primarily aim to optimize?
- Liquidity and opportunity cost of holding cash (correct)
- Overall company profits without concern for liquidity
- Investment into high-risk assets exclusively
- Maintaining the highest level of cash reserves at all times
Which of the following factors does NOT contribute to the calculation of the cash conversion cycle?
Which of the following factors does NOT contribute to the calculation of the cash conversion cycle?
Why is a longer cash conversion cycle considered disadvantageous for a company?
Why is a longer cash conversion cycle considered disadvantageous for a company?
What does Payables Days measure in the cash conversion cycle?
What does Payables Days measure in the cash conversion cycle?
Which of the following best describes an optimal cash balance?
Which of the following best describes an optimal cash balance?
In relation to liquidity and cash management, which statement is accurate?
In relation to liquidity and cash management, which statement is accurate?
What is the primary reason for holding cash in a company?
What is the primary reason for holding cash in a company?
Which of the following correctly defines 'Collection Float'?
Which of the following correctly defines 'Collection Float'?
What component of a cash management system involves predicting future cash flows?
What component of a cash management system involves predicting future cash flows?
Which cash management strategy might involve negotiating with suppliers?
Which cash management strategy might involve negotiating with suppliers?
What is the effect of a strong precautionary cash balance for a company?
What is the effect of a strong precautionary cash balance for a company?
What is the relationship between Average Cash Balance and Opportunity Cost in calculating Holding Costs?
What is the relationship between Average Cash Balance and Opportunity Cost in calculating Holding Costs?
Which strategy can enhance the liquidity of a company during cash management?
Which strategy can enhance the liquidity of a company during cash management?
In what way can a company manage 'disbursement float' effectively?
In what way can a company manage 'disbursement float' effectively?
What does the term 'opportunity cost' refer to in the context of holding cash?
What does the term 'opportunity cost' refer to in the context of holding cash?
Which motive causes a company to hold cash above its immediate operational needs?
Which motive causes a company to hold cash above its immediate operational needs?
Which of the following actions does NOT contribute to collecting cash faster?
Which of the following actions does NOT contribute to collecting cash faster?
What financial risk does an effective cash management system aim to mitigate?
What financial risk does an effective cash management system aim to mitigate?
What is the correct formula for calculating transaction costs?
What is the correct formula for calculating transaction costs?
What is the primary purpose of maintaining safety stock in inventory management?
What is the primary purpose of maintaining safety stock in inventory management?
Which formula would be used to calculate the total carrying costs of inventory?
Which formula would be used to calculate the total carrying costs of inventory?
What is a characteristic of commercial paper as a source of short-term funds?
What is a characteristic of commercial paper as a source of short-term funds?
What is one of the main drawbacks of relying on short-term funds?
What is one of the main drawbacks of relying on short-term funds?
When calculating the reorder point in inventory management, what does the 'Daily Usage' represent?
When calculating the reorder point in inventory management, what does the 'Daily Usage' represent?
Which of the following is NOT a source of short-term funds?
Which of the following is NOT a source of short-term funds?
What does the Effective Annual Rate (EAR) consider when estimating the cost of a loan?
What does the Effective Annual Rate (EAR) consider when estimating the cost of a loan?
The formula for calculating the total ordering cost includes which of the following components?
The formula for calculating the total ordering cost includes which of the following components?
What is the relationship between safety stock and reorder point?
What is the relationship between safety stock and reorder point?
Why might businesses prefer short-term funds over long-term funds?
Why might businesses prefer short-term funds over long-term funds?
What is the primary objective of effective receivables management?
What is the primary objective of effective receivables management?
Which of the following describes the purpose of an inventory control system?
Which of the following describes the purpose of an inventory control system?
What does the Economic Order Quantity (EOQ) model help determine?
What does the Economic Order Quantity (EOQ) model help determine?
Which factor is NOT typically included in the carrying costs of inventory?
Which factor is NOT typically included in the carrying costs of inventory?
What is a precautionary cash balance used for?
What is a precautionary cash balance used for?
How can companies analyze the effectiveness of receivables management policies?
How can companies analyze the effectiveness of receivables management policies?
Which of the following is a component of cash risk management?
Which of the following is a component of cash risk management?
What does the term 'collection float' refer to?
What does the term 'collection float' refer to?
What should a company's credit policy primarily take into account?
What should a company's credit policy primarily take into account?
Which strategy aids in optimizing cash disbursement?
Which strategy aids in optimizing cash disbursement?
What is the formula to calculate the average balance of accounts receivable?
What is the formula to calculate the average balance of accounts receivable?
What is the main purpose of offering early payment discounts?
What is the main purpose of offering early payment discounts?
Which of the following best describes stock-out costs?
Which of the following best describes stock-out costs?
Study Notes
Cash and Marketable Securities Management
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Cash conversion cycle (CCC) measures the time to convert inventory into cash.
- Calculated as: Inventory Days + Receivables Days - Payables Days
- Shorter CCC is better for increased liquidity and profitability.
- Longer CCC increases need for external financing and financing costs.
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Optimal cash balance (OCB) balances liquidity and profitability.
- Determined by a trade-off between holding costs and transaction costs.
- Calculated using the Baumol Model: Total Costs = Holding Costs + Transaction Costs.
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Reasons for Holding Cash
- Transaction motive: To cover daily operational expenses.
- Precautionary motive: To buffer against unexpected events.
- Speculative motive: To seize investment opportunities.
- Contractual motive: To meet loan agreement requirements (compensating balances).
Cash Management Strategies
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Accelerating collections: Faster receipt of payments from customers.
- Methods include: offering early payment discounts, using electronic payment systems, and implementing a lockbox system.
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Slowing disbursements: Strategic management of outgoing payments.
- Methods include: negotiating longer payment terms with suppliers, taking advantage of early payment discounts from suppliers, and optimizing payment cycles.
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Reducing precautionary idle cash: Investing surplus cash in short-term, highly liquid instruments.
- Examples include money market funds and short-term government bonds.
Collection Float vs. Disbursement Float
- Collection float (negative float): Time lag between selling on credit and receiving payment.
- Disbursement float (positive float): Time between issuing a payment and the funds actually being withdrawn.
Cash Management System (CMS)
- Goal: Efficiently manage cash flow, marketable securities, and short-term financial activities.
- Benefits: Improved liquidity, enhanced profitability, and reduced risk.
- Key Components:
- Cash forecasting
- Cash budgeting
- Cash collection
- Cash disbursement
- Cash investment
- Cash risk management
Receivables Management
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Goal: Ensure timely collection of receivables and minimize bad debt risk.
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Average Balance of and Investment in Accounts Receivable:
- Calculated by: Average balance of AR = Credit sales x Receivables days/360 (or 365).
- Investment in AR = Average balance of AR x Cost ratio.
Strategic Policies for Effective Receivables Management
- Credit Policy: Clear guidelines for extending credit.
- Collection Policy: Structured approach for collecting outstanding invoices.
- Discounts for Early Payment: Incentives to encourage faster payments.
Inventory Management
- Goal: Ensure the right amount of inventory is available at the right time, minimizing costs.
- Focuses on minimizing: carrying costs, ordering costs, and stockout costs.
Inventory Control System
-
Economic order quantity (EOQ) model: Determines the optimal order quantity.
- Formula: EOQ = √(2QO/C)
- EOQ = economic order quantity
- Q = annual quantity used
- O = cost per order
- C = carrying cost per unit
- Formula: EOQ = √(2QO/C)
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Reorder point: The inventory level at which a new order should be placed.
- Formula: Reorder point = (Daily Usage × Lead Time) + Safety Stock.
- Safety stock is a buffer against fluctuating usage or delays in lead time.
Sources of Short-Term Funds
- Common sources:
- Trade credit
- Bank loans
- Commercial paper
- Receivable factoring
- Credit lines
Estimating Cost of Short-Term Funds
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Annual cost of trade credit: Calculates the cost of forgoing the discount for early payment.
- Formula: Annual Nominal Rate = (Discount % / (100% - Discount %)) x (360 / (Payment days - Discount days)).
-
Effective annual rate (EAR): The actual annual cost of a loan, including interest rates and fees.
- Formula: EAR = (1 + (Interest Rate / Number of compounding periods))^Number of compounding periods - 1.
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Description
This quiz focuses on the management of cash and marketable securities, including key concepts such as the cash conversion cycle and the optimal cash balance. It explores the reasons for holding cash and various cash management strategies. Test your knowledge on enhancing liquidity and profitability.
