Business Finance Reviewer PDF

BUSINESS FINANCE REVIEWER WEALTH VS PROFIT MAXIMIZATION Personal finance, finance for non-profit FINANCE Wealth Maximization – activities that manage financial...

BUSINESS FINANCE REVIEWER WEALTH VS PROFIT MAXIMIZATION Personal finance, finance for non-profit FINANCE Wealth Maximization – activities that manage financial organizations, and business finance. Latin word “finer” meaning “to end” or “to pay.” resources to increase the stakeholder’s value. An act or process of raising or providing funds. Profit Maximization – activities that manage financial BUSINESS FINANCE The science and art of managing money. resources intending to increase the company’s Area of finance that focuses on the handling and profitability. management of financial resources of a business FUNCTIONS OF FINANCE CONFICTS organization. 1. Allocate available funds. PROFIT MAXIMIZATION WEALTH MAXIMIZATION Three major divisions: financial management, capital 2. Acquiring needed funds. Main objective is to Main objective is to market, and financial investment. 3. Utilizing these funds to achieve sets of goals. ear large amount of achieve highest Capital Market – studies the different financial money. market values of institutions and their functions that aid both private and An organizational structure shows the roles and functions of Emphasizes short- shares of stocks. public borrowers of funds. term. Emphasizes long- Financial Investment – business decisions about the the employees in a company. Job descriptions may vary from Ignores the time term. value and price of stocks and bonds, portfolio, market, different companies depending on their size and form. value of money. Considers the time 1. Shareholders – owners of shares in a company. Each and security analysis, and behavior of investors. Ignores risks and value of money. share held is equal to one voting right. They elect the uncertainties. Recognizes risks board of directors. ROLES OF FINANCIAL MANAGERS Ignores timing of and uncertainties. 2. Board of Directors – the highest policy making body in return. Recognizes timing 1. Financing Decisions a corporation. Elected group of individuals to represent of return. Include making decisions on how to fund long-term the shareholders. investments and working capital which deals with 3. President/Chief Executive Officer – oversees all CLASSIFICATION OF FINANCE the day-to-day operations of the company. operations and resources of the company. Ensures that 1. As to the form of negotiation: Liability and equity planned strategies were implemented and executed. a. Direct Finance 2. Investing Decisions Involves direct borrowing. Deals with the management of firm’s assets or Financial Accounting – External The security acquired (direct security) by the where the company should spend their money. Financial Management – Internal surplus unit (lender) is the same security Long-term assets issued by the deficit unit (borrower) 3. Operating Decisions FINANCIAL MANAGEMENT Involves lending to ultimate borrowers. Deals with the day-to-day operations of the Deals with decisions that are supposed to maximize the b. Indirect Finance company. Working capital is the main concern of value of shareholder’s wealth. Involves the use of financial intermediaries. operating decisions. Utilization of funds obtained should be able to The transaction is called financial Income and expenses maximize: intermediation. 4. Dividend Policy o Wealth 2. As to users: Decides the policy to maximize the market value of o The value of the company a. Public Finance the firm. o The value of stockholders Deals with the revenues and expenditure Decide whether to distribute all the profits or Refers to strategic planning, acquiring, directing, and patterns of the government. distribute part of the profits to the shareholders. controlling of financial undertakings in an organization Concerned with the government affairs- in a way that it achieves its goals. managing the government’s sources and QUALITIES OF A FINANCIAL MANAGER Focused on capital budgeting decisions or investment uses of funds. Possess sound knowledge of accounting and economic decisions on the acquisition of asses and its b. Private Finance concepts and principles. corresponding financial schemes. All finance other than public finance is private Has profound understanding of operation science, finance. statistics, and marketing research.  Has gained technical experience in finance and using such accumulations for loans or FINANCIAL MARKET provided professional judgement. investment in securities of productive Are institutions and systems that facilitate transactions Has good communication skills in oral and written enterprise. in all types of financial claims. forms. c. Trust Companies – a legal business entity that They act as a bridge between those with excess funds Has impressive relationship with banks and other acts as a fiduciary agent or trustee on behalf of (savings units) and those who need funds (borrowing financial institutions. an individual person in the purpose of units). Has outstanding relationship within the business and management, administration, and final transfer Place where the selling-buying activity occurs to trade among other functional areas. of property. equity securities such as bonds and stocks, currencies, Is technically and morally upright and socially d. Credit Unions – mainly controlled and derivatives securities, notes and mortgages. responsible. operated by its members for the purpose of 1. As to term or maturity extending credit to the members, offering a. Money Market – short term COMPETENT MANAGERS’ ATTRIBUTES competitive interest rates, promoting the b. Capital Market – long term Visionary Decisive People-Oriented concept of thrift, and providing other types of 2. As to type of issue Inspiring Innovative Respected financial services. a. Primary Market – original issue Seasoned/Experienced Manager 2. Financial Intermediaries – acts as a middleperson b. Secondary Market – re-acquired or previously between two parties – the investors and borrowers. owned securities. (ex.: banks, insurance companies, brokerage and FINANCIAL ENVIRONMENT investment houses, broker-dealer, mutual funds, FINANCIAL INSTRUMENTS Composed of individuals and entities who need and pension funds) Contracts that give rise to the formation of financial financing in one form or the other and the financial 3. Mutual Fund – accumulate money by selling shared assets of one entity and creation of a financial liability markets and financial instruments that play a major role stocks or bonds of publicly-listed corporations to or an equity instrument in another entity. in the financial system of a country. individuals or corporate investors. The funds from Instruments or securities which are evidences of either Participants – all components that exist in the financial the proceeds of the sale are pooled together and debt (liability or obligation), bonds or equity (ownership), environment. channeled to the borrowers. or stock covering financial transactions in the different 4. Pension Fund – is set up by a business for the markets FINANCIAL INSTITUTIONS purpose of paying the pension requirement of all Most Common Financial Instruments Institutions that provide financial services in the form of private-sector employees who retire from the 1. Cash – financial asset (holder), financial liability loan, credit, fund administration, financing, depository, business organization upon reaching their (government). and safekeeping retirement age. 2. Check – financial asset (payee), financial liability 1. Depository Institutions - accept deposits (savings, 5. Insurance Companies – acts as a financial (drawer). current, and time deposits) from individual and intermediary by pooling together the proceeds of 3. Loan – financial asset (lender/creditor), financial liability corporate entities, extend loans to borrowers, insurance policies sold to the public and investing (borrower/debtor). transfer funds, and manage funds for investment the accumulated funds in highly-yield maturing 4. Bond – financial asset (holder/investor), financial purposes. securities from investment houses. (ex.: life, liability (issuing company). a. Banks – authorized to operate and regulated property/casualty, health, car, fire, crop, marine, and 5. Stock – financial asset (investor/shareholder), equity by BSP under General Banking Law of 2000. other insurance products) (issuing company). They accept bills payment, provide loans, and 6. Investment Institution – a company engaged in facilitate the transfer of funds domestically and buying securities of other companies which are Bond abroad. (ex.: universal, commercial, thrift, rural, listed in the stock exchange for investment purposes Represents a contractual debt of the party issuing the cooperative, and Islamic bank) only. bond. It is evidenced by a certificate called bond b. Savings and Loan Association – referred to as financing and mortgage loan company that indenture. engaged in the business of accumulating the savings of its members and stockholders and  o Term Bond – bond that has maturity. Can be single term or time drafts that mature on a certain date; most 6. Corporate Bonds – evidences of obligation of the lone bond or can be composed of several bonds banker’s acceptance is used in connection with letters issuing corporation. with the same maturity date. of credit. 7. T-notes and T-bonds – securities issued by the o Serial Bond – bond that has a series of several 5. Negotiable Certificates of Deposit – a negotiable time treasury of the country. maturity dates instead of a single maturity date. A deposit with a definite maturity date up to 1 year. 8. Municipal Bonds – securities issued by the portion of the total debt is paid out every maturity 6. Repurchase Agreement or Repos (RP’s) – municipalities. date. agreements involving the sale of securities by one party 9. Mortgage-backed Bonds – bonds issued o Secured Bond – a bond that is secured by the to another party with a promise to repurchase the collateralized by mortgages. issuing company. The security is issued in the form securities at a specified date and price. of real property which serves as the collateral in 7. Money Market Deposit Accounts (MMDAs) – a type TOOLS OF THE FINANCIAL MANAGER the event of default on the part of the issuer. of savings account with check writing privileges offered Financial Policy Making – selecting financial goals, o Debenture Bond – a bond that is not supported by by banks and other financial institutions which can pay developing financial policies, and designing the finance any collateral or security. interest that are equivalent to and competitive with organization. o Convertible Bond – a bond that can be converted money market mutual fund. Financial Planning and Budgeting – preparing plans into a share of stock at a later date. 8. Money Market Mutual Funds (MMMFs) – investment to attain set goals, preparing forecast and budgets, and o Callable Bond – the issuing company has the pools that buy safe, short-term securities such as T- comparing actual performance with budgets to option to redeem the bond prior to its maturity date. bills, CD’s, and CP’s offered by investment companies; determine variances and actions needed to correct The company pays a higher amount when the yield is generally a little higher than those offered by such variances. bond is redeemed prior to its maturity date. MMDAs. Financial Analysis – evaluating results of operation 9. Securities of Assignment – an agreement that and financial condition, investing option and other Stocks transfer the right of the seller over a security in favor of finance-related activities. A financial security that signifies ownership of the the buyer; the underlying security carries a promise to assets of the corporation. The holders of the shares of pay a certain sum of money on a fixed date just like a FINANCIAL PLANNING PROCESS stock are evidenced by a stock certificate. promissory note; the underlying security is like a Step 1: Forecast settings on sales, cost, expenses, and o Common Stocks – have the least priority on the collateral to the certificate. capital expenditures. income of the corporation during dividend 10. Certificate of Participation – gives the buyer a share Step 2: Preparation of projected financial statements. distribution. Has no fixed rate of return. It is a voting in a security that promises to pay a certain sum of Step 3: Analysis and evaluation of the projected stock. money on a fixed date just as in a CA; the underlying financial statements. o Preference Stocks – priority for dividend security is of big amount and the CP is only a portion. Step 4: Review and evaluation of the projected plan distribution. Has a fixed rate of distribution. Do not have voting rights. Capital Market Instruments (Non-negotiable or non- marketable) BENEFITS OF BUDGET Money Market Instruments 1. Loans – result from one-to-one arrangement between 1. Forces managers to do planning 1. Cash Management Bills – government issued a lender or a borrower. 2. Realistic performance targets securities with maturities that are less than 91 days. 2. Leases – an arrangement where the owner of the 3. Basis for controlling what happens within the 2. Treasury Bills – government issued securities with property (lessor) leases the property out of the user of organization maturities of 91, 182, and 364 days. property (lessee) for a fixed monthly lease payment. 4. Helps coordinate the activities of the various centers 3. Commercial Papers (CPs) – marketable securities 3. Mortgages – involve using real properties as collateral that make up business issued by highly financially secure firms ranging 30-270 for a loan. 5. Communication – managers exchange information on days. 4. Letters of Credit – letters of a bank guaranteeing ideas 4. Banker’s Acceptance – bank drafts issued by banks to payment of a transaction. 6. Motivating tool – if the process involves staff help traders and other customers to raise funds to pay 5. Corporate Stocks – evidences of ownership in a for current expenditure’s using the bank’s credit; short corporation. LIMITATIONS OF BUDGET Budgeting is the process used to develop: direct materials, direct labor, and factory overhead 1. Only estimates, not statement of facts Formal written statement (variable costs). 2. No substitute for sound management practices Of management plans for the future 6. Fixed Budget – a budget prepared based only on one 3. Need to be amended if circumstances change Expressed in financial terms level production capacity. 4. Preparation does not guarantee success 7. Flexible Budget – a budget prepared showing the 5. Aspects of people’s behavior may undermine the value B. Developing the Budget projected cost at different levels of production capacity. of the process 1. Budget Committee – various budgets are 8. Budgeted Financial Statements (Master Budget) – approved by a budget committee that is composed show the estimated results and projected financial OVERVIEW OF BUDGETING of senior managers such as president, CFO, VP of position of a business. That is budgeted revenue, A. Stages of Budgeting operations, and the controller. Budgets may be balance sheet, and statement of cash flows. 1. Planning – the budget process forces managers developed with either a top-down or bottom-up to consider carefully their goals and objectives and approach. BUDGET FORMULAS to specify means of achieving them. 2. Budget Time Period – budgets may cover a 1. Sales Budget Steps in financial planning: variety of time periods including a month, quarter, 𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 a. Set goals or objectives year, or even longer. Generally, longer budget × 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 b. Identify resources periods provide less detail. = 𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 c. Identify goal-related tasks long term – 5-10 years 2. Production Budget d. Establish responsibility centers for medium term – 1-5 years 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 accountability and timeline short term – up to 1 year + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑒𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 e. Establish an evaluation system for monitoring 3. Zero-Base Budgeting – budgets are often = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑒𝑒𝑑𝑠 and controlling adjusted up or down on the bass of a previous − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 f. Determine contingency plans = 𝑼𝒏𝒊𝒕𝒔 𝒕𝒐 𝒃𝒆 𝒑𝒓𝒐𝒅𝒖𝒄𝒆𝒅 period adjusted for current conditions. Zero-based The planning cycle 3. Direct Materials Budget budgeting requires that all budget amounts be currently justified even if they were supported in 𝑈𝑛𝑖𝑡𝑠 𝑡𝑜 𝑏𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 PLAN × 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑝𝑎𝑟𝑡𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 prior budgets. Due to the cost of the process, this = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑝𝑎𝑟𝑡𝑠 𝑛𝑒𝑒𝑑𝑒𝑑 𝑓𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑜𝑛 zero-base budgeting is often not used in business. + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑒𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑓 𝑝𝑎𝑟𝑡𝑠 REVISE ACTION = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑒𝑒𝑑𝑒𝑑 TYPES OF BUDGET − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑓 𝑝𝑎𝑟𝑡𝑠 1. Cash Budget – a budget that reflects the expected = 𝑪𝒐𝒔𝒕 𝒐𝒇 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔 cash receipts and the expected cash disbursements on 4. Direct Labor Budget payments. This cash budget should reflect the projected 𝐷𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑟 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 REMEDY RESULTS cash balance at the end of the period. × 𝐿𝑎𝑏𝑜𝑟 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 2. Capital Budget – a long-range that incorporates the = 𝐷𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 2. Control – budgets provide a means of evaluating major expenditures for plant and machineries. × 𝑈𝑛𝑖𝑡𝑠 𝑡𝑜 𝑏𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 performance. 3. Revenue or Sales Budget – estimates of the income = 𝑻𝒐𝒕𝒂𝒍 𝒅𝒊𝒓𝒆𝒄𝒕 𝒍𝒂𝒃𝒐𝒓 𝒄𝒐𝒔𝒕 Potential causes of significant deviations from of an organization from the sale of goods and services 5. Overhead Budget budgets include: for a specific period. 𝑈𝑛𝑖𝑡𝑠 𝑡𝑜 𝑏𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 Budget was poorly conceived 4. Operating Budget – estimate activities that will affect × 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 Conditions have changed since the budget profit. This budget reflects the sales and production = 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 was prepared budget. + 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑓𝑖𝑥𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 Managers have done a particularly good or 5. Production Budget – a budget that shows the cost of = 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 poor job producing the product. The cost of production includes − 𝑁𝑜𝑛𝑐𝑎𝑠ℎ 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 = 𝑪𝒂𝒔𝒉 𝒅𝒊𝒔𝒃𝒖𝒓𝒔𝒆𝒎𝒆𝒏𝒕𝒔 𝒇𝒐𝒓 𝒐𝒗𝒆𝒓𝒉𝒆𝒂𝒅  6. Cash Receipts and Disbursements Budget ▪ Determine the collection pattern for credit 𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 WORKING CAPITAL MANAGEMENT sales; then add cash sales − 𝐶𝑎𝑠ℎ 𝑑𝑖𝑠𝑏𝑢𝑟𝑠𝑒𝑚𝑒𝑛𝑡𝑠 Businesses require adequate capital to succeed in ▪ Monitor closely slow and nonpayers = 𝐸𝑥𝑐𝑒𝑠𝑠 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑜𝑣𝑒𝑟 𝑑𝑖𝑠𝑏𝑢𝑟𝑠𝑒𝑚𝑒𝑛𝑡 business environment. 2 types of capital required by the o Forecast cash disbursements + 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑐𝑎𝑠ℎ 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 business: fixed capital and working capital. ▪ Record disbursements when you expect to = 𝑬𝒏𝒅𝒊𝒏𝒈 𝒄𝒂𝒔𝒉 𝒃𝒂𝒍𝒂𝒏𝒄𝒆 Working Capital – company’s investment in short term make them assets ▪ Start with those disbursements that are fixed BUDGET PROCESSES Net Working Capital – difference between the firm’s amount due on certain dates Zero-base Budgeting – sets the initial figures for each current assets and current liabilities. ▪ Review the business checkbook to ensure activity to zero Working Capital Management – the efficient accurate estimates Period Budgets – developed for a specific period of management of the firm’s current assets and current ▪ Add a cushion to the estimate to account for time liabilities. “Murphy’s Law” Rolling (Continuous) Budgets – continually updated Operating Cycle o Estimate end-of-month cash balance by periodically adding a new incremental time period Time it takes from one point of raw material purchases ▪ Take beginning cash balance and dropping the period that just completed to the point when finished goods are sold. ▪ Add cash receipts 𝐴𝑔𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ▪ Subtract cash disbursements CASH MANAGEMENT + 𝐴𝑔𝑒 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 ▪ Result is cash surplus or shortage Forecasting, collecting, disbursing, investing, and = 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒄𝒚𝒄𝒍𝒆 planning for the cash a company needs to operate Cash Conversion Cycle CAUSES OF CASH FLOW PROBLEMS IN A BUSINESS smoothly Time it takes from the point when cash outflows are Difficulty in collecting accounts receivables Cash Management Roles of an Entrepreneur made for material purchases to the point when cash is Seasonal sales patterns 1. Cash finder recovered through collection of receivables. Unexpected variations on sales 2. Cash planner 𝐴𝑔𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 Weak sales 3. Cash distributor + 𝐴𝑔𝑒 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 4. Cash collector − 𝐴𝑔𝑒 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 CASH MANAGEMENT 5. Cash conserver = 𝑪𝒂𝒔𝒉 𝒄𝒐𝒏𝒗𝒆𝒓𝒔𝒊𝒐𝒏 𝒄𝒚𝒄𝒍𝒆 Involves the maintenance of the appropriate level of cash and investment in marketable securities to meet CASH FLOW THE CASH BUDGET the firm’s cash requirements and to maximize income in A “cash map” showing the amount and the timing of a idle funds. firm’s cash receipts and cash disbursement over time. Reasons for holding cash: Preparing a Cash Budge o Transaction purposes o Determine a minimum cash balance o Compensating balance requirement o Forecast sales o Precautionary measures ▪ The heart of cash budget o Potential investment opportunities ▪ Sales are ultimately transformed into cash o Speculations receipts and cash disbursements ▪ cash forecast is only accurate as the sales FLOAT MANAGEMENT forecast from which it was derived Float – difference between the bank’s balance for a ▪ “lumpy” sales pattern are common firm’s account and the balance that the firm shows on o Forecast cash receipts its own books. ▪ Record all cash receipts when actually Delays that help the payer hurt the recipients. received (cash method of accounting) Recipients try to speed-up collections. Payers try to  slow down disbursements. Both attempt t to minimize Accounts Payable ECONOMIC ORDER QUANTITY float Stretch out payment times as long as possible The quantity to be ordered, which minimizes the sum of Types of float: mail, processing, and clearing float without damaging your credit rating ordering and carrying costs Verify all invoices before paying them 𝟐𝑨𝑫 Take advantage of cash discounts 𝑬𝑶𝑸 = √ 𝑲 Negotiate the best possible terms with your suppliers A – cost of placing one order (for ordering cost) Be honest with creditors D – annual demand in units Schedule controllable cash disbursements to come K – annual cost of carrying one unit in inventory for due at different times one year Use credit cards wisely. WHEN TO REORDER: EFFECTIVE INTEREST RATE Lead Time – period between the time order is 𝒊 𝒏 placed and received 𝒓 = (𝟏 + ) −𝟏 Normal Usage Time- normal lead time x average 𝒏 r = effective interest usage i = stated interest rate Safety stock – (maximum lead time – normal lead n = number of compounding periods time) x average usage Reorder point if there is no safety stock required BENEFITS OF CASH MANAGEMENT = normal lead time usage INVENTORY MANAGEMENT Increase amount and speed of cash flowing into the Involves formulation and administration of plans and company AVOIDNG CASH CRUNCH policies to efficiently and satisfactorily meet production Reduce the amount and speed of cash flowing out Consider bartering, exchanging goods and services and merchandising requirements and minimize costs Make the most efficient use of available ash for other goods and services to conserve cash relative to inventories Take advantage of money-saving opportunities such as o Separating custodial functions from recording Trim overhead costs cash discounts functions Be on the lookout for employee theft Finance seasonal business needs o Aging of inventories Keep your business plan current Develop a sound borrowing and repayment program o ABC Analysis Invest surplus cash Impress lenders and investors Inventory Class Reduce borrowing costs by borrowing only when A B C necessary Money value High Medium Low Provide funds for expansion Quality of Very Strict Not too Plan for investing surplus cash control strict strict Inventory Slow Relatively Fast BEATING THE CASH CRISIS movement slow Accounts Receivable Establish a firm credit-granting policy Screen credit customers carefully When an account becomes overdue, take action immediately Add finance charges to overdue accounts Develop a system of collecting account