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Chapter18-20 Workingcapitalmanagement2023/4/2整理课件MaintopicsSomeAspectsofShort-TermFinancialPolicyCashBudgetandliquiditymanagementCreditpolicyandaccountsreceivablemanagementInventorymanagementShort-TermBorrowing18-22023/4/2整理课件Short-TermFinancialPolicySizeofinvestmentsincurrentassetsFlexible(conservative)policy–maintainahighratioofcurrentassetstosalesRestrictive(aggressive)policy–maintainalowratioofcurrentassetstosalesCompromisepolicy-maintainatradeoffratioofcurrentassetstosales18-32023/4/2整理课件Carryingvs.ShortageCostsManagingshort-termassetsinvolvesatrade-offbetweencarryingcostsandshortagecostsCarryingcosts–increasewithincreasedlevelsofcurrentassets,thecoststostoreandfinancetheassetsShortagecosts–decreasewithincreasedlevelsofcurrentassetsTradingorordercostsCostsrelatedtosafetyreserves,i.e.,lostsalesandcustomers,andproductionstoppages18-42023/4/2整理课件Temporaryvs.PermanentAssetsTemporarycurrentassetsSalesorrequiredinventorybuild-upmaybeseasonalAdditionalcurrentassetsareneededduringthe“peak”timeThelevelofcurrentassetswilldecreaseassalesoccurPermanentcurrentassetsFirmsgenerallyneedtocarryaminimumlevelofcurrentassetsatalltimesTheseassetsareconsidered“permanent”becausethelevelisconstant,notbecausetheassetsaren’tsold18-52023/4/2整理课件Figure18.418-62023/4/2整理课件FinancingofcurrentassetsFlexible(conservative)policy–lessshort-termdebtandmorelong-termdebtRestrictive(aggressive)policy–moreshort-termdebtandlesslong-termdebtCompromisepolicy-long-termdebtforpermanentcurrentassetsandshort-term-debtfortemporarycurrentassets2023/4/2整理课件Figure18.618-82023/4/2整理课件ChoosingtheBestPolicyCashreservesHighcashreservesmeanthatfirmswillbelesslikelytoexperiencefinancialdistressandarebetterabletohandleemergenciesortakeadvantageofunexpectedopportunitiesCashandmarketablesecuritiesearnalowerreturnandarezeroNPVinvestmentsMaturityhedgingTrytomatchfinancingmaturitieswithassetmaturitiesFinancetemporarycurrentassetswithshort-termdebtFinancepermanentcurrentassetsandfixedassetswithlong-termdebtandequityInterestRatesShort-termratesarenormallylowerthanlong-termrates,soitmaybecheapertofinancewithshort-termdebtFirmscangetintotroubleifratesincreasequicklyorifitbeginstohavedifficultymakingpayments–maynotbeabletorefinancetheshort-termloansHavetoconsiderallthesefactorsanddetermineacompromisepolicythatfitstheneedsofthefirm18-92023/4/2整理课件CashmanagementWhyshouldfirmholdcash?Howmuchcashshouldafirmhold?Howtoforecastandmanagementcash?2023/4/2整理课件ReasonsforHoldingCashSpeculativemotive–holdcashtotakeadvantageofunexpectedopportunitiesPrecautionarymotive–holdcashincaseofemergenciesTransactionmotive–holdcashtopaytheday-to-daybillsTrade-offbetweenopportunitycostofholdingcashrelativetothetransactioncostofconvertingmarketablesecuritiestocashfortransactions19-112023/4/2整理课件CostsofHoldingCashOpportunityCostsTradingcostsTotalcostofholdingcashC*CostsindollarsofholdingcashSizeofcashbalanceTheinvestmentincomeforegonewhenholdingcash.Tradingcostsincreasewhenthefirmmustsellsecuritiestomeetcashneeds.19A-12整理课件TheBATModelF=ThefixedcostofsellingsecuritiestoraisecashT=ThetotalamountofnewcashneededR=Theopportunitycostofholdingcash,i.e.,theinterestrateTimeC123C2–Ifwestartwith$C,spendataconstantrateeachperiodandreplaceourcashwith$Cwhenwerunoutofcash,ouraveragecashbalancewillbeC2–Theopportunitycostofholding isC2–C2–×R19A-13整理课件TheBATModelTimeCAswetransfer$CeachperiodweincuratradingcostofF.123C2–Thetradingcostis ×F

–TC–TCIfweneed$Tintotalovertheplanningperiodwewillpay$F times.19A-14整理课件TheBATModelC*SizeofcashbalanceOpportunityCostsTradingcosts19A-15整理课件TheBATModelOpportunityCosts=TradingCostsTheoptimalcashbalanceisfoundwheretheopportunitycostsequalsthetradingcosts.MultiplybothsidesbyC19A-16整理课件TheMiller-OrrModelThefirmallowsitscashbalancetowanderrandomlybetweenupperandlowercontrollimits.$TimeUCLWhenthecashbalancereachestheuppercontrollimitU,cashisinvestedelsewheretogetustothetargetcashbalanceC.Whenthecashbalancereachesthelowercontrollimit,L,investmentsaresoldtoraisecashtogetusuptothetargetcashbalance.19A-17整理课件TheMiller-OrrModelMathGivenL,whichissetbythefirm,theMiller-OrrmodelsolvesforC*andUwheres2isthevarianceofnetdailycashflows.TheaveragecashbalanceintheMiller-Orrmodelis:19A-18整理课件ImplicationsoftheMiller-OrrModelTousetheMiller-Orrmodel,themanagermustdofourthings:Setthelowercontrollimitforthecashbalance.Estimatethestandarddeviationofdailycashflows.Determinetheinterestrate.Estimatethetradingcostsofbuyingandsellingsecurities.19A-19整理课件ImplicationsoftheMiller-OrrModelThemodelclarifiestheissuesofcashmanagement:Theoptimalcashposition,C*,ispositivelyrelatedtotradingcosts,F,andnegativelyrelatedtotheinterestrateR.C*andtheaveragecashbalancearepositivelyrelatedtothevariabilityofcashflows.19A-20整理课件OperatingCycleandCashCyclemethodOperatingcycle–timebetweenpurchasingtheinventoryandcollectingthecashfromsaleoftheinventoryInventoryperiod–timerequiredtopurchaseandselltheinventoryAccountsreceivableperiod–timerequiredtocollectoncreditsalesOperatingcycle=inventoryperiod+accountsreceivableperiod18-212023/4/2整理课件CashCycleCashcycleAmountoftimewefinanceourinventoryDifferencebetweenwhenwereceivecashfromthesaleandwhenwehavetopayfortheinventoryAccountspayableperiod–timebetweenpurchaseofinventoryandpaymentfortheinventoryCashcycle=Operatingcycle–accountspayableperiod18-222023/4/2整理课件Figure18.118-232023/4/2整理课件OtherFactorsInfluencingtheTargetCashBalanceBorrowingBorrowingislikelytobemoreexpensivethansellingmarketablesecurities.Theneedtoborrowwilldependonmanagement’sdesiretoholdlowcashbalances.19A-24整理课件CashBudgetForecastofcashinflowsandoutflowsoverthenextshort-termplanningperiodPrimarytoolinshort-termfinancialplanningHelpsdeterminewhenthefirmshouldexperiencecashsurplusesandwhenitwillneedtoborrowtocoverworking-capitalrequirementsAllowsacompanytoplanaheadandbeginthesearchforfinancingbeforethemoneyisactuallyneeded18-252023/4/2整理课件Example:CashBudgetInformationPetTreats,Inc.specializesingourmetpettreatsandreceivesallincomefromsalesSalesestimates(inmillions)Q1=500;Q2=600;Q3=650;Q4=800;Q1nextyear=550AccountsreceivableBeginningreceivables=$250Averagecollectionperiod=30daysAccountspayablePurchases=50%ofnextquarter’ssalesBeginningpayables=125Accountspayableperiodis45daysOtherexpensesWages,taxes,andotherexpenseare30%ofsalesInterestanddividendpaymentsare$50Amajorcapitalexpenditureof$200isexpectedinthesecondquarterTheinitialcashbalanceis$80,andthecompanymaintainsaminimumbalanceof$5018-262023/4/2整理课件Example:CashBudget–CashCollectionsACP=30days;thisimpliesthat2/3ofsalesarecollectedinthequartermadeandtheremaining1/3arecollectedthefollowingquarterBeginningreceivablesof$250willbecollectedinthefirstquarterQ1Q2Q3Q4BeginningReceivables250167200217Sales500600650800CashCollections583567633750EndingReceivables16720021726718-272023/4/2整理课件Example:CashBudget–

CashDisbursementsPayablesperiodis45days,sohalfofthepurchaseswillbepaidforeachquarterandtheremainingwillbepaidthefollowingquarterBeginningpayables=$125Q1Q2Q3Q4Paymentofaccounts275313362338Wages,taxesandotherexpenses150180195240Capitalexpenditures200Interestanddividendpayments50505050Totalcashdisbursements47574360762818-282023/4/2整理课件Example:CashBudget–NetCashFlowandCashBalanceQ1Q2Q3Q4Totalcashcollections583567633750Totalcashdisbursements475743607628Netcashinflow108-17626122BeginningCashBalance801881238Netcashinflow108-17626122Endingcashbalance1881238160Minimumcashbalance-50-50-50-50Cumulativesurplus(deficit)138-38-1211018-292023/4/2整理课件Short-TermFinancialPlanQ1Q2Q3Q4Beginningcashbalance801885050Netcashinflow108(176)26122Newshort-termborrowing38Interestonshort-terminvestment(loan)1(1)Short-termborrowingrepaid2513Endingcashbalance1885050159Minimumcashbalance(50)(50)(50)(50)Cumulativesurplus(deficit)13800109Beginningshort-termdebt003813Changeinshort-termdebt038(25)(13)Endingshort-termdebt03813018-302023/4/2整理课件CreditandReceivablesGrantingcreditincreasessalesCostsofgrantingcreditChancethatcustomerswon’tpayFinancingreceivablesCreditmanagementexaminesthetrade-offbetweenincreasedsalesandthecostsofgrantingcredit2023/4/231整理课件ComponentsofCreditPolicyTermsofsaleCreditperiodCashdiscountanddiscountperiodTypeofcreditinstrumentCreditanalysis–distinguishingbetween“good”customersthatwillpayand“bad”customersthatwilldefaultCollectionpolicy–effortexpendedoncollectingonreceivables2023/4/232整理课件TheCashFlowsfromGrantingCreditCreditSaleChequeMailedChequeDepositedCashAvailableCashcollectionAccountsReceivable2023/4/233整理课件TermsofSaleBasicForm:2/10net452%discountifpaidin10daysTotalamountduein45daysifdiscountnottakenBuy$500worthofmerchandisewiththecredittermsgivenabovePay$500(1-.02)=$490ifyoupayin10daysPay$500ifyoupayafter10days,mustbepaidby45days2023/4/234整理课件Example:CashDiscountsFindingtheimpliedinterestratewhencustomersdonottakethediscountCredittermsof2/10net45and$500loan$10interest(.02*500)Periodrate=10/490=2.0408%Period=(45–10)=35days365/35=10.4286periodsperyearEAR=(1.020408)10.4286–1=23.45%Thecompanybenefitswhencustomerschoosetoforegodiscounts2023/4/235整理课件LengthofCreditPeriodInfluencedbythefollowingfactors:PerishabilityandcollateralvalueConsumerdemandCost,profitability,andstandardizationCreditriskSizeoftheaccountCompetitionCustomertype2023/4/236整理课件AnalyzingCreditPolicyRevenueEffectsDelayinreceivingcashfromsaleMaybeabletoincreasepriceMayincreasetotalsalesCostEffects–costofsaleisstillincurredeventhoughthecashfromthesalehasnotbeenreceivedCostofdebt–mustfinancereceivablesProbabilityofnonpayment–somepercentagecustomerswillnotpayforproductspurchasedCashdiscount–somecustomerswillpayearlyandpaylessthanthefullsalesprice2023/4/237整理课件Example:EvaluatingaProposedPolicy–PartIYourcompanyisevaluatingaswitchfromacashonlypolicytoanet30policy.Thepriceperunitis$100andthevariablecostperunitis$40.Thecompanycurrentlysells1,000unitspermonth.Undertheproposedpolicythecompanywillsell1,050unitspermonth.Therequiredmonthlyreturnis1.5%.WhatistheNPVoftheswitch?Shouldthecompanyoffercredittermsofnet30?2023/4/238整理课件Example:EvaluatingaProposedPolicy–PartIIIncrementalcashinflow(100–40)(1,050–1,000)=3,000Presentvalueofincrementalcashinflow3000/.015=200,000Costofswitching100(1,000)+40(1,050–1,000)=102,000NPVofswitching200,000–102,000=98,000Yes,thecompanyshouldswitch2023/4/239整理课件OptimalCreditPolicyCarryingcostsRequiredreturnonreceivablesLossesfrombaddebtsCostsofmanagingcreditandcollectionsShortagecostsLostsalesduetoarestrictivecreditpolicyTotalcostcurveSumofcarryingcostsandshortagecostsOptimalcreditpolicyiswherethetotalcostcurveisminimized2023/4/240整理课件Figure20.1TheCostsofGrantingCredit2023/4/241整理课件CreditAnalysisProcessofdecidingwhichcustomersreceivecreditGatheringinformationFinancialstatementsCreditreportsBanksPaymenthistorywiththefirmDeterminingCreditworthiness5CsofCreditCreditScoring2023/4/242整理课件FiveCsofCreditCharacter–willingnesstomeetfinancialobligationsCapacity–abilitytomeetfinancialobligationsoutofoperatingcashflowsCapital–financialreservesCollateral–assetspledgedassecurityConditions–generaleconomicconditionsrelatedtocustomer’sbusiness2023/4/243整理课件CreditInformationFinancialstatementsCreditreportswithcustomer’spaymenthistorytootherfirmsBanksPaymenthistorywiththecompany2023/4/244整理课件CollectionPolicyMonitoringreceivablesKeepaneyeonaveragecollectionperiodrelativetoyourcredittermsUseanagingscheduletodeterminepercentageofpaymentsthatarebeingmadelateCollectionpolicyDelinquencyletterTelephonecallCollectionagencyLegalaction2023/4/245整理课件InventoryManagementInventorycanbealargepercentageofafirm’sassetsCostsassociatedwithcarryingtoomuchinventoryCostsassociatedwithnotcarryingenoughinventoryInventorymanagementtriestofindtheoptimaltrade-offbetweencarryingtoomuchinventoryversusnotenough2023/4/246整理课件TypesofInventoryManufacturingfirmRawmaterial–startingpointinproductionprocessWork-in-progressFinishedgoods–productsreadytoshiporsellRememberthatonefirm’s“rawmaterial”maybeanothercompany’s“finishedgood”Differenttypesofinventorycanvarydramaticallyintermsofliquidity2023/4/247整理课件InventoryCostsCarryingcosts–rangefrom20–40%ofinventoryvalueperyearStorageandtrackingInsuranceandtaxesLossesduetoobsolescence,deteriorationortheftOpportunitycostofcapitalShortagecostsRestockingcostsLostsalesorlostcustomersConsiderbothtypesofcostsandminimizethetotalcost2023/4/248整理课件EconomicOrderQuantity(EOQ)ModelTheEOQmodelminimizesthetotalinventorycostTotalcarryingcost=(averageinventory)x(carryingcostperunit)=(Q/2)(CC)Totalrestockingcost=(fixedcostperorder)x(numberoforders)=F(T/Q)TotalCost=Totalcarryingcost+totalrestockingcost=(Q/2)(CC)+F(T/Q)2023/4/249整理课件Example:EOQConsideraninventoryitemthathascarryingcost=$1.50perunit.Thefixedordercostis$50perorderandthefirmsells100,000unitsperyear.Whatistheeconomicorderquantity?2023/4/250整理课件ExtensionsSafetystocksMini