FLOATS - Finance Concepts PDF

FLOATS A float takes advantage of the discrepancies between the company books and bank book due to clearing of checks. Three Categories of Floats 1) Mail Float 2)Processing Float 3)Clearing Float Mail Float – refers to the period the check was issued up to the time it was received by the payee P...

FLOATS A float takes advantage of the discrepancies between the company books and bank book due to clearing of checks. Three Categories of Floats 1) Mail Float 2)Processing Float 3)Clearing Float Mail Float – refers to the period the check was issued up to the time it was received by the payee Processing Float – the interval from which the check was received by the payee until the time it was deposited in the payee’s bank account. Clearing Float – the period beginning with the time the check was deposited up to the time it was cleared and made available for use. Corporation has a mailing time of three days, check processing of two days, and clearing time of five days. How long is the float of Summit Corporation? Processing float 2 days Clearing float 5 days Total float days 10 days Stretching of Payables - a process in which the company slows down the disbursement. Stretching of Payables - a process in which the company slows down the disbursement. Deliberately done to make use of cash that should have been paid for a certain number of days. Example: The company practice is to Formulas for Stretching Payables Payable Turnover Ratio = Average Accounts Payable = x DPO Accelerating Collection of Receivables - the process where collections are sped up to reduce the cash conversion cycle. Some ways of accelerating collection: 1) shortening of credit terms and offering special discounts to customers 2) lockbox system What is a lockbox system? - helps businesses collect payments more quickly and easily by letting the bank manage the payment process. Some ways of accelerating collection: 3) direct sends in which the customers are requested to send their payments to the payee’s bank for deposit to the account of the payee. Some ways of accelerating collection: 4) Concentration banking in which the payee maintains several bank accounts where it has sales outlets. Some ways of accelerating collection: 3) direct sends in which the customers are requested to send their payments to the payee’s bank for deposit to the account of the payee. Some ways of accelerating collection: 3) direct sends in which the customers are requested to send their payments to the payee’s bank for deposit to the account of the payee. Some ways of accelerating collection: 3) direct sends in which the customers are requested to send their payments to the payee’s bank for deposit to the account of the payee. Possible Placements for Excess Cash 1) Savings or current accounts 2) Certificate of time deposits 3) Treasury Bills 4) Stocks 5) Bonds 6)Unit Investment Fund(UITF) 7)Mutual Funds 8)Commercial Papers Savings or current accounts – accounts are bank placements with no holding period. However, the interests earned in these kinds of placements are lower than those placed in time deposits. Certificate of time deposits – time deposits are placements with holding period. They are offered by banks with a higher interest than the savings account. Certificate of time deposits – time deposits are placements with holding period. They are offered by banks with a higher interest than the savings account. Treasury Bills – short term obligations issued by the government. They are usually offered with a maturity of 91 days Stocks – shares of stocks are traded in the formal stock exchange and are brought from stockbrokers. Investment in stocks is risky. Bonds – issued by companies who would like to raise money for the purpose of expansion, capital investment, or paying off obligations. UITF – an open-ended pooled trust fund denominated in peso or any acceptable currency. It is operated and administered by a trust entity and made available by participation. Mutual funds – refer to the pooling of the investors’ funds to purchase financial instruments. Commercial Papers – unsecured promissory notes issued by firms with high credit standing. The interest earned is normally higher than interest in a savings account.