Working Capital Management
|
|
- Charlene Erin Palmer
- 8 years ago
- Views:
Transcription
1 Working Capital Management Gitman and Hennessey, Chapter 14 Spring 2004
2 14.1 Net Working Capital Fundamentals In 2002, current assets accounted for 31.7% of non-financial Canadian corporations total assets. Of this 31.7%, 46.1% were accounts receivable, 37.8% were inventories and 16.1% was cash. See Figure
3 14.1 Net Working Capital Fundamentals Short-term management managing current assets and liabilities is one of the financial manager s most important activities. Too large an investment in current assets can reduce profitability, whereas too little investment increases liquidity risk. Too little current liability financing can reduce profitability whereas too much increases liquidity risk. 3
4 14.1 Net Working Capital Fundamentals Current assets are often referred to as the firm s working capital. Current liabilities represent the firm s short-term financing. The conversion of current assets from inventory to receivables to cash provides the source of cash to pay the current liabilities. The timing of cash outlays for current liabilities is easily predictable but the inflows from current assets are not. This is a source of risk. 4
5 14.1 Net Working Capital Fundamentals A tradeoff exists between a firm s profitability and its risk. Profitability is the relationship between revenues and costs generated by using the firm s assets. Risk, in the context of short-term financial management, is the probability that the firm be unable to pay its bill when they come due. 5
6 14.1 Net Working Capital Fundamentals The greater the firm s net working capital, the lower the risk but the lower the firm s profitability. Current assets, however, includes assets that are not very productive (cash, for example). A firm s productive assets are its long-term assets. An increase in current liabilities, on the other hand, increases profitability but also increases risk. 6
7 14.2 The Cash Conversion Cycle Cash is not a productive asset but is needed to pay bills. What is a reasonable level of cash to keep on hand? How much should the firm borrow short-term? How much credit should be extended to customers? How much inventory should the firm carry? 7
8 14.2 The Cash Conversion Cycle From the balance sheet identity Cash + non-cash CA + NFA = CL + LTD + E, we find Cash = CL + LTD + E non-cash CA NFA. Hence an increase in liabilities is a source of cash and an increase in assets is a use of cash. 8
9 14.2 The Cash Conversion Cycle Before selling goods, the firm needs to buy raw materials (inventory). Then it has to pay for the raw material (cash out). Then it sells the goods produced out of the raw material. Then it receives payment for the goods sold (cash in). 9
10 14.2 The Cash Conversion Cycle How long does it take, on average, to recover the cash used to purchase raw material? Consider a firm with an average age of inventory (AAI, days sales in inventory) of 110 days, an average payment period (APP, days sales in payables) of 30 days and an average collection period (ACP, days sales in receivables) of 45 days. 10
11 14.2 The Cash Conversion Cycle The firm s operating cycle is the average length of time between the moment raw material is acquired and the moment customers pay for the goods they buy: Operating Cycle (OC) = AAI + ACP = = 155 days. 11
12 14.2 The Cash Conversion Cycle The firm s cash cycle is the average length of time between the moment raw material is paid for and the moment customers pay for the goods they buy: Cash Conversion Cycle (CCC) = OC APP = AAI + ACP APP = = 125 days. 12
13 14.2 The Cash Conversion Cycle The Cash Budget The cash budget is a primary tool of short-term financial planning. It allows managers to identify short-term financing needs. It helps identify when short-term borrowing will be needed. The cash budget basically records estimates of cash receipts and disbursements. 13
14 The Cash Budget The cash budget describes the firm s planned inflows and outflows of cash. This statements aims at determining when the firm will experience surpluses and shortages of cash. The cash budget covers a 6- to 12-month period divided into shorter intervals, usually months. The more seasonal or uncertain the firm s cash flows, the shorter these intervals (weeks or days). 14
15 The Cash Budget The Sales Forecast The starting point of financial planning, whether short- or long-term, is the firm s sales forecast. Sales forecast may come from past sales, economic conditions, sales expectations about new products, etc. These are usually provided by the marketing department. External forecasts come from key external economic indicators. Internal forecasts come from the firm s own channels. 15
16 The Cash Budget Using sales forecast, the firm can determine the fixed assets necessary to achieve these sales, variable costs can be evaluated, and cash inflows and outflows can be estimated. For example, some of the firm customers will pay immediately while others will pay after 30, 60 or 90 days. Some customers may not even pay at all. Cash inflows occur when customers pay, not when they buy. Similarly, some of the firm s cash outflows depend on its credit arrangements with suppliers. 16
17 The Cash Budget Suppose a firm expects to sell for $1,000 in January. Then, assuming that 20% of its customers pay cash at the time of the sale, 50% pay one month later, 28% pay two months later and 2% never pay, the cash inflows arising from January sales are expected to be $200 in January, $500 in February and $280 in March. Note that the missing $20 could be recovered at some point in time but it may be more conservative not to count on it. 17
18 The Cash Budget Cash Receipts Cash receipts include all of the firm s inflows of cash. These are mainly cash sales and collections of accounts receivable. Accounts receivable collected in a month come from sales that took place in preceding months. 18
19 Example Coulson Industries is developing its cash budget for October, November and December. Expected sales for these months are (in thousands of $) 400, 300 and 200, respectively. Sales in August and September were 100 and 200, respectively. Month August September October November December Sales (forecast)
20 Example (continued) Coulton s sales are expected to convert to cash as follows: 20% of its customers pay at the time of sales, 50% pay one month later and 30% pay two months later (assume that every customer is expected to pay). On top of that, the firm expects to receive $30,000 from a subsidiary in December. The table below summarizes the cash inflows. 20
21 Coulton s Cash Receipts ($000) Month Aug. Sept. Oct. Nov. Dec. Forecast sales Cash sales (20%) Collections of A/R: Lagged one month (50%) Lagged two months (30%) Other cash receipts 30 Total cash receipts
22 The Cash Budget Cash Disbursements The most common cash disbursements are Cash purchases Payments of accounts payable Rent (and lease) payments Wages and salaries Tax payments Fixed asset outlays Interest payments Cash dividend payments Principal payments (on loans) Repurchases of common shares 22
23 Example (continued) Purchases: Coulton s purchases are 70% of sales, 10% of which are paid in cash, 70% of which are paid one month later and 20% of which are paid two months later. That is, if Coulton sells for $S J in January, it will pay 10% 70% $S J =.07 S J in January, 70% 70% $S J =.49 S J in February, 20% 70% $S J =.14 S J in March. Note: This is not the case in this example, but very often some of the purchases will occur in months preceding the sales month. 23
24 Coulton Payments of A/P ($000) Month Aug. Sept. Oct. Nov. Dec. Sales (S) Purchases (.7 S) Cash purchases (10%) Payments of A/P: Lagged one month (70%) Lagged two months (20%)
25 Coulton s Other Cash Disbursements Rent payments: $5,000 each month. Wages and salaries: For Coulton, these are usually 10% of sales plus fixed salaries of $8,000 per month. Tax payments: $25,000 in December. Fixed asset outlays: New machinery costing $130,000 will be purchased in September and paid for in November. Interest payments: $10,000 in December. Cash dividends: $20,000 in October. Principal payments: $20,000 in December. Repurchases of shares: $0 for the rest of the year. 25
26 Coulton s Cash Disbursements ($000) Month Aug. Sept. Oct. Nov. Dec. Sales (S) Purchases (.7 S) Cash purchases (10%) Payments of A/P: Lagged one month (70%) Lagged two months (20%) Rent payments Wages and salaries Tax payments 25 Fixed asset outlays 130 Interest payments 10 Cash dividends 20 Principal payments 20 Total disbursements
27 The Cash Budget Net Cash Flow, Ending Cash and Excess Cash Net Cash Flow = Cash Receipts Cash Disbursements Ending Cash = Beginning Cash + Net Cash Flow Required Financing = Minimum Cash Balance Ending Cash Excess Cash = Ending Cash Minimum Cash Balance Suppose Coulton has $50,000 in cash at the beginning of October and suppose its minimum cash balance is $25,
28 Coulton s Cash Budget ($000) Month Oct. Nov. Dec. Total cash receipts Less: Total cash disbursements Net cash flow (3) (98) 35 Add: Beginning cash (51) Ending cash 47 (51) (16) Less: Minimum cash balance Required financing Excess cash 22 28
29 The Cash Budget Evaluating the Cash Budget Using the information obtained so far, it is possible to determine, for each period, the balance in cash, in marketable securities and in notes payable. Note that a firm should liquidate its marketable securities before dipping into its line of credit. A firm may have both items at the same time but this should be temporary. 29
30 Coulton s End-of-Month Balances ($000) October November December Cash Marketable securities Line of credit Coulton s management must ensure that a line of credit of at least $76,000 is secured before November. 30
31 The Cash Budget Coping with Uncertainty in the Cash Budget Many items in the cash budget vary with sales. The cash budget thus depends on the level of sales expected. What financing will be needed if sales are 10% less than expected in each month? What financing will be needed if sales are 10% more than expected in each month? 31
32 The Cash Budget Coping with Uncertainty in the Cash Budget Cash flows are also affected by the time customers take to pay for their purchases. What would the cash budget look like if only 10% of the sales were paid cash, 50% paid after one month and 40% paid after two months? What if 5% of the sales are never paid? 32
33 Coping with Uncertainty in the Cash Budget Suppose, for example, that the time at which accounts are paid is not expected to change but sales could be Month Aug. Sept. Oct. Nov. Dec. Best case (10% higher) Worst case (10% lower)
34 Scenario Analysis when only Sales Vary October November December Cash Most Likely Scenario Marketable securities Line of credit Best-Case Scenario Marketable securities Line of credit Worst-Case Scenario Marketable securities Line of credit
35 Coping with Uncertainty in the Cash Budget Suppose now that the best-case scenario is such that sales in the last three months of the year are 10% higher than the initial figures and, at the same time, 30% of sales are paid cash, 50% one month later and 20% two months later. The worst-case scenario, on the other hand, is such that sales are 10% lower than expected and cash sales are 10% of total sales, 50% of sales are paid one month later and 40% of sales are paid two months later. We will see that collection of receivables significantly affect the firm s cash flows. 35
36 Scenario Analysis when Sales and Collections of A/R Vary October November December Cash Expected Case Marketable securities Line of credit Best-Case Scenario Marketable securities Line of credit Worst-Case Scenario Marketable securities Line of credit
37 14.2 The Cash Conversion Cycle If a firm s sales are constant, its investment in operating assets will also be constant. This firm will only have permanent funding requirement. If a firm s sales vary over time, then its investment in operating assets will also vary over time. This firm will have seasonal funding requirements. 37
38 14.2 The Cash Conversion Cycle Funding Requirements of the Cash Conversion Cycle A firm may fund its seasonal needs with short-term debt and its permanent needs with long-term debt (aggressive funding strategy). A firm may fund all its needs, both seasonal and permanent with long-term debt (conservative funding strategy). 38
39 14.2 The Cash Conversion Cycle Funding Requirements: Example 1 Nicholson Company holds, on average, $50 in cash and marketable securities, $1,250 in inventory and $750 in accounts receivable. Nicholson s accounts payable of $425 are stable over time. Nicholson has a permanent investment in operating assets (net operating working capital) of , = $1,
40 14.2 The Cash Conversion Cycle Funding Requirements: Example 2 Semper Pump Company, which produces bicycle pumps, has seasonal funding needs. It holds, at minimum, $25 in cash and marketable securities, $100 in inventory and $60 in accounts receivable. At peak times, inventory increases to $750 and accounts receivable increase to $400. Semper s accounts payable remain $50 throughout the year. 40
41 14.2 The Cash Conversion Cycle Funding Requirements: Example 2 Semper permanent funding requirement for its operating assets is = $135, and its maximum funding requirement is = $1,125. Hence Semper s seasonal funding requirement is 1, = $
42 14.2 The Cash Conversion Cycle Funding Strategies: Semper Semper s permanent funding requirement is $135 and its seasonal needs vary between $0 and $990, for an average of $ Semper can borrow short-term funds at 6.25% and long-term funds at 8%, and it can earn 5% on any surplus balance. 42
43 14.2 The Cash Conversion Cycle Funding Strategies: Semper If Semper follows an aggressive funding strategy, all its seasonal needs will be funded with short-term debt. There will not be any surplus to invest throughout the year. If it follows a conservative strategy, all its needs will be funded with long-term debt. In this case, there will be surpluses whenever funding requirements are below $1,125 and these surpluses will be invested at the rate of 5%. 43
44 14.2 The Cash Conversion Cycle Funding Strategies: Semper Suppose Semper follows an aggressive funding strategy. Then it uses long-term debt for its permanent funding requirement only, which costs 8% 135 = $10.8. Seasonal needs, which average $ will be funded with short-term debt, the cost being 6.25% = $
45 14.2 The Cash Conversion Cycle Funding Strategies: Semper The total cost of the aggressive funding strategy is then = $
46 14.2 The Cash Conversion Cycle Funding Strategies: Semper Suppose now that Semper follows a conservative funding strategy. Then long-term debt is used to finance all operating assets needed throughout the year, which means that $1,125 is borrowed at the rate of 8%. This implies a cost of 8% 1,125 = $90. 46
47 14.2 The Cash Conversion Cycle Funding Strategies: Semper The cash raised with long-term debt is not used all the time. More specifically, the average excess funding during the year is 1, = $888.75, which will be invested at the rate of 5%, creating a revenue of 5% = $
48 14.2 The Cash Conversion Cycle Funding Strategies: Semper The net cost of the conservative funding strategy is then = $ Note that the aggressive funding strategy is less expensive than the conservative strategy. The former, however, is more risky than the latter. 48
49 14.2 The Cash Conversion Cycle Strategies for Managing the Cash Conversion Cycle 1. Turn over inventory as quickly as possible without stockouts resulting in lost sales. 2. Collect account receivable as quickly as possible without losing sales from high-pressure collection techniques. 3. Pay accounts payable as slowly as possible without damaging the firm s credit rating. 49
50 14.3 Inventory Management The ABC System This concept suggests that 20 percent of the firm s products account for 80 percent of the firm s sales and thus 80 percent of the firm s inventory. The products within this 20 percent are classified as A items and are actively managed. The B group consists of items that account for the next largest investment in inventory. The C group consists of a large number of items that require a relatively small investment. 50
51 14.3 Inventory Management The Economic Order Quantity (EOQ) Model The EOQ is an appropriate model for the management of A and B items. Let S = usage in units per period, O = order cost per order, C = carrying cost per unit per period, Q = order quantity in units. 51
52 14.3 Inventory Management The Economic Order Quantity (EOQ) Model The number of orders per period is the number of units used, S, divided by the size of an order, Q, and thus total order cost per period is Order cost = O S Q. Inventory is assumed to deplete at a constant rate and thus the carrying cost of an order per period is Carrying cost = C Q 2. 52
53 14.3 Inventory Management The Economic Order Quantity (EOQ) Model The total cost of inventory is then the sum of the order cost and the carrying cost, which gives Total cost = O S Q + C Q 2 the quantity minimizing this cost, the economic order quantity (EOQ), is 2 S O EOQ =. C 53
54 14.3 Inventory Management The Economic Order Quantity (EOQ) Model: Example MAX Company has an A group of inventory item that is vital for the production process. This item costs $1,500 and MAX uses 1,100 units of the item per year. The order cost per order of this item is $150 and the carrying cost per unit per year is $200. The optimal order strategy for this item is then EOQ = 2 1, = 41 units. 54
Working Capital Management
Working Capital Management Gitman and Hennessey, Chapter 14 Spring 2004 14.1 Net Working Capital Fundamentals In 2002, current assets accounted for 31.7% of non-financial Canadian corporations total assets.
More informationShort-Term Financial Decisions
Part 5 Short-Term Financial Decisions Chapter 13 Working Capital and Current Assets Management Chapter 14 Current Liabilities Management 492 Chapter 13 Working Capital and Current Assets Management LG1
More informationCASH FLOW STATEMENT. On the statement, cash flows are segregated based on source:
CASH FLOW STATEMENT On the statement, cash flows are segregated based on source: Operating activities: involve the cash effects of transactions that enter into the determination of net income. Investing
More informationUnderstanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions
Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 6 Working Capital Management Concept Check 6.1 1. What is the meaning of the terms working
More informationChapter 14 Working Capital and Current Assets Management
Chapter 14 Working Capital and Current Assets Management Solutions to Problems P14-1. LG 2: Cash Conversion Cycle Basic (a) Operating cycle (OC) = Average age of inventories + Average collection period
More informationCash Flow and Financial Planning
86 Chapter 3 Cash Flow and Financial Planning LG1 LG2 LG3 LG4 LG5 LG6 LEARNING GOALS Understand the effect of depreciation on the firm s cash flows, the depreciable value of an asset, its depreciable life,
More informationInventory period: The length of time required to produce and sell the product.
FIN 301 Class Notes Chapter 19: Short-Term Financial Planning Operating Cycle Purchasing resources from suppliers Producing the product Distributing the product to customers Create cash flows: Unsynchronized:
More informationCASH FLOW STATEMENT (AND FINANCIAL STATEMENT)
CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset
More informationChpater-4: Solutions to Problems
Chpater-4: Solutions to Problems P4-1. Depreciation LG 1; Basic Year Depreciation Schedule Percentages Cost(1) from Table 4.2 (2) Depreciation [(1) (2)] (3) Asset A 1 $17,000 33% $ 5,610 2 $17,000 45 7,650
More informationThe Nature, Elements and Importance of Working Capital
C. WORKING CAPITAL MANAGEMENT 1. The nature, elements and importance of working capital 2. Management of inventories, accounts receivable, accounts payable and cash 3. Determining working capital needs
More informationWorking Capital Management
Working Capital Management Helena SůvovS vová Guest lecture for the Czech University of Agriculture November,, 2009 1 Content of the lecture Working Capital Terminology Working Capital Decisions Cash Conversion
More informationLecture 13 Working Capital Management and Credit Issues
Lecture 13 - Working Capital Management Gross working capital: Net working capital: BASIC DEFINITIONS Total current assets. Net operating working capital (NOWC): Operating CA Operating CL = Current assets
More informationTopic 4 Working Capital Management. 1. Concept of Working Capital 2. Measuring Working Capital and Net Working Capital. 4.
Topic 4 Working Capital Management 1. Concept of Working Capital 2. Measuring Working Capital and Net Working Capital 3. Optimization i i of Working Capital 4. Applications 80 Learning objectives This
More informationWorking Capital and the Financing Decision C H A P T E R S I X
Working Capital and the Financing Decision C H A P T E R S I X Limited 2000 Figure 6-1a The nature of asset growth A. Stage I: Limited or no Growth PPT 6-1 Dollars Temporary current assets Capital assets
More informationChapter 6 Statement of Cash Flows
Chapter 6 Statement of Cash Flows The Statement of Cash Flows describes the cash inflows and outflows for the firm based upon three categories of activities. Operating Activities: Generally include transactions
More informationModule 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS
Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction
More information5.3.2015 г. OC = AAI + ACP
D. Dimov Working capital (or short-term financial) management is the management of current assets and current liabilities: Current assets include inventory, accounts receivable, marketable securities,
More informationWORKING CAPITAL MANAGEMENT
CHAPTER 9 WORKING CAPITAL MANAGEMENT Working capital is the long term fund required to run the day to day operations of the business. The company starts with cash. It buys raw materials, employs staff
More informationFinancial Statements
Financial Statements The financial information forms the basis of financial planning, analysis & decision making for an organization or an individual. Financial information is needed to predict, compare
More information1. Define the operating and cash cycles. Why are they important?
Short-Term Planning Learning Objectives 1. Define the operating and cash cycles. Why are they important? 2. Define the different types of short-term financial policy 3. Understand the essentials of short-term
More informationCHAPTER 21. Working Capital Management
CHAPTER 21 Working Capital Management 1 Topics in Chapter Alternative working capital policies Cash, inventory, and A/R management Accounts payable management Short-term financing policies Bank debt and
More informationAPPENDIX 1 The Statement of Financial Position
APPENDIX 1 The Statement of Financial Position 1. Assets: the resources of the organization which are used to provide service and generate value 2. Current assets: assets which can be converted to cash
More informationUNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements
UNDERSTANDING WHERE YOU STAND A Simple Guide to Your Company s Financial Statements Contents INTRODUCTION One statement cannot diagnose your company s financial health. Put several statements together
More informationWorking Capital Management. Guest lecture for the Czech University of Life Sciences November, 2010
Working Capital Management Helena Sůvová Guest lecture for the Czech University of Life Sciences November, 2010 1 Content of the lecture Working Capital Terminology Working Capital Decisions Cash Conversion
More informationUnderstanding Cash Flow Statements
Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The
More informationChapter 12 Forecasting and Short- Term Financial Planning
Chapter 12 Forecasting and Short- Term Financial Planning LEARNING OBJECTIVES 1. Understand the sources and uses of cash in building a cash budget. 2. Explain how companies use sales forecasts to predict
More informationNote. Corporate Finance Fundamentals. FN1 Module 8. Operating Decisions: Working Capital Management
Corporate Finance Fundamentals FN1 Module 8 Operating Decisions: Working Capital Management Lectures and handouts by: Ruth Heathcote 1 FN1 Module 8 FN1 Module 8 Part 1: Net Working Capital Part 2: Cash
More informationCashflow Management. What is cashflow
Cashflow Management This Fact File Information Sheet looks at the key elements of cashflow, and how effective cashflow management will help protect the financial security of a business. It outlines the
More informationCHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW
CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring
More information9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle
9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no
More informationNotes. CIMA Paper P1. Performance Operations
Chapter 5 extract from our ExPress notes for use with the current video. A full set of P1 ExPress notes can be downloaded free of charge at www.. CIMA Paper P1 Performance Operations For exams in 2011
More informationShort-term Financial Planning and Management.
Short-term Financial Planning and Management. This topic discusses the fundamentals of short-term nancial management; the analysis of decisions involving cash ows which occur within a year or less. These
More informationConstruction Economics & Finance. Module 6. Lecture-1
Construction Economics & Finance Module 6 Lecture-1 Financial management: Financial management involves planning, allocation and control of financial resources of a company. Financial management is essential
More informationHaving cash on hand is costly since you either have to raise money initially (for example, by borrowing from a bank) or, if you retain cash out of
1 Working capital refers to liquid funds used to purchase materials and pay workers. This is in contrast to long term capital such as buildings and machinery. Part of working capital management is cash
More informationManaging The Firm s Assets
CHAPTER OUTLINE Spotlight: The United Companies (http://www.uniteddc.com) 1 The Working-Capital Cycle Describe the working-capital cycle of a small business. Working-capital management Define working capital
More informationFinancial Statement Consolidation
Financial Statement Consolidation We will consolidate the previously completed worksheets in this financial plan. In order to complete this section of the plan, you must have already completed all of the
More informationFinancial Projections. Making sense of the money
Financial Projections Making sense of the money The Burning Questions What are your capital needs? Projections How will you get that capital? Structure: Equity or debt? Ownership structure Up-front or
More information7 Management of Working Capital
7 Management of Working Capital BASIC CONCEPTS AND FORMULAE 1. Working Capital Management Working Capital Management involves managing the balance between firm s shortterm assets and its short-term liabilities.
More informationChapter 002 Financial Statements, Taxes and Cash Flow
Multiple Choice Questions 1. The financial statement summarizing the value of a firm's equity on a particular date is the: a. income statement. B. balance sheet. c. statement of cash flows. d. cash flow
More informationCASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes
MODULE - 6A Cash Flow Statement 30 CASH FLOW STATEMENT In the previous lesson, you have learnt various types of analysis of financial statements and its tools such as comparative statements, common size
More informationShort Term Finance and Planning. Sources and Uses of Cash
Short Term Finance and Planning (Text reference: Chapter 27) Topics sources and uses of cash operating cycle and cash cycle short term financial policy cash budgeting short term financial planning AFM
More informationModule 2: Preparing for Capital Venture Financing Building Pro-Forma Financial Statements
Module 2: Preparing for Capital Venture Financing Building Pro-Forma Financial Statements Module 2: Preparing for Capital Venture Financing Building Pro-Forma Financial Statements TABLE OF CONTENTS 1.0
More informationChapter 9 Solutions to Problems
Chapter 9 Solutions to Problems 1. a. Cash and cash equivalents are cash in hand and in banks, plus money market securities with maturities of 90 days or less. Accounts receivable are claims on customers
More informationChapter 18 Working Capital Management
Chapter 18 Working Capital Management Slide Contents Learning Objectives Principles Used in This Chapter 1. Working Capital Management and the Risk-Return Tradeoff 2. Working Capital Policy 3. Operating
More information7 Management of Working Capital
7 Management of Working Capital UNIT I : MEANING, CONCEPT AND POLICIES OF WORKING CAPITAL Learning Objectives After studying this chapter you will be able to: Discuss in detail about working capital management,
More informationSolutions to Problems
Solutions to Problems P13-1. LG 2: CCC Basic a. OC = Average age of inventories + Average collection period = 90 days + 60 days = 150 days b. CCC = Operating cycle Average payment period = 150 days 30
More informationOn January 1, 2005, retailing giant Wal-Mart began requiring. Short-Term Financial Planning PART EIGHT SHORT-TERM FINANCIAL MANAGEMENT
SHORT-TERM FINANCIAL MANAGEMENT On January 1, 2005, retailing giant Wal-Mart began requiring its 100 largest suppliers to put radio-frequency identification (RFID) tags on cases and pallets shipped to
More informationhow to prepare a cash flow statement
business builder 4 how to prepare a cash flow statement zions business resource center zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business
More informationChapter 7. Special Journals and Subsidiary Ledgers
1 Chapter 7 Special Journals and Subsidiary Ledgers 2 Learning objectives 1. Explain the purpose of special journals 2. Explain the purpose of control accounts and subsidiary ledgers 3. Journalize transactions
More informationSHORT-TERM FINANCE AND PLANNING
19 SHORT-TERM FINANCE AND PLANNING Short-Term Financial Planning and Management PART 7 In the middle of 2006, with gasoline prices approaching $3 per gallon, sales of low-mileage automobiles slowed to
More informationGuide to Financial Statements Study Guide
Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation
More informationPreparing Financial Statements
Preparing Financial Statements Understanding financial statements is essential to the success of a small business. They can be used as a roadmap to steer you in the right direction and help you avoid costly
More informationChapter 14. 1 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Chapter 14 1 Identify the purposes of the statement of cash flows Distinguish among operating, investing, and financing cash flows Prepare the statement of cash flows by the indirect method Identify noncash
More informationCHAPTER 16 Current Asset Management and Financing
Copyright 2008 by the Foundation of the American College of Healthcare Executives 6/13/07 Version 16-1 CHAPTER 16 Current Asset Management and Financing Investment and financing policies Cash and marketable
More informationSOLUTIONS TO END-OF-CHAPTER PROBLEMS. Chapter 16 = $5,000,000. = $2,000,000.
SOLUTIONS TO END-OF-CHAPTER PROBLEMS Chapter 16 16-1 Net Float = Disbursement Float - Collections Float = (4 $10,000) - (3 $10,000) = $10,000. 16-2 Sales = $10,000,000; S/I = 2. Inventory = S/2 $10, 000,000
More information(Relevant to PBE Paper II Management Accounting and Finance) Eric Y.W. Leung, CUHK Business School, The Chinese University of Hong Kong
Cash Management (Relevant to PBE Paper II Management Accounting and Finance) Eric Y.W. Leung, CUHK Business School, The Chinese University of Hong Kong Cash is a vital part of working capital; therefore,
More informationPlanning your cash flow
Planning your cash flow Business Coach series Preparing the cash flow forecast Keeping on track Business Coach series The cash flow process The situation Money goes out earlier and faster than it comes
More informationForecasting Financial Requirements
CHAPTER OUTLINE Spotlight: Planning for Growth (http://www.builtny.com) 1 The Purpose and Need for Financial Forecasting Describe the purpose and need for financial forecasting. Purpose of pro forma financial
More informationChapter. Working capital
Chapter 10 Working capital 1 10.1 Working capital Working capital is the capital available for conducting the day-to-day operations of the business and consists of current assets and current liabilities.
More informationFINANCIAL MANAGEMENT (PART-6) WORKING CAPITAL MANAGEMENT
FINANCIAL MANAGEMENT (PART-6) WORKING CAPITAL MANAGEMENT 1. INTRODUCTION Dear Student Welcome to the lecture series on Financial Management. Today in this lecture we shall cover the topic Working Capital
More informationLearning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information.
0 Learning Objectives: 14.1 Describe the important of accounting and financial information. 14.2 Differentiate between managerial and financial accounting. 14.3 Identify the six steps of the accounting
More informationReporting and Analyzing Cash Flows QUESTIONS
Chapter 12 Reporting and Analyzing Cash Flows QUESTIONS 1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period. It helps users
More informationCH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS
C H 2 3, P a g e 1 CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS (note from Dr. N: I have deleted questions for you to omit, but did not renumber the remaining questions) 1. The primary purpose of
More informationQuestion Bank. Working Capital Management
Question Bank Working Capital Management UNIT-1-Basic concepts and overview of working capital Q1. What is meant by Working Capital Management? What are the determinants of Working Capital Management needs
More informationA guide to business cash flow management
A guide to business cash flow management Contents 01. Cash flow management 01 02. Practical steps to managing cash flow 04 03. Improving everyday cash flow 06 04. How to manage cash flow surpluses and
More informationWorking Capital. Learning Objectives. By the end of this chapter, you should be able to: List the five objectives of financial management.
Working Capital Learning Objectives By the end of this chapter, you should be able to: List the five objectives of financial management. Explain the operation of the operating cycle. Define the term net
More informationHow to Prepare a Cash Flow Forecast
The Orangeville & Area Small Business Enterprise Centre (SBEC) 87 Broadway, Orangeville ON L9W 1K1 519-941-0440 Ext. 2286 or 2291 sbec@orangeville.ca www.orangevillebusiness.ca Supported by its Partners:
More informationThis is Cash and Cash Conversion Cycle, chapter 17 from the book Finance for Managers (index.html) (v. 0.1).
This is Cash and Cash Conversion Cycle, chapter 17 from the book Finance for Managers (index.html) (v. 0.1). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/
More informationIt is concerned with decisions relating to current assets and current liabilities
It is concerned with decisions relating to current assets and current liabilities Best Buy Co, NA s largest consumer electronics retailer, has performed extremely well over the past decade. Its stock sold
More informationSTATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS
C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,
More informationFinancial. Management FOR A SMALL BUSINESS
Financial Management FOR A SMALL BUSINESS 1 Agenda Welcome, Pre-Test, Agenda, and Learning Objectives Benefits of Financial Management Budgeting Bookkeeping Financial Statements Business Financing Key
More informationChapter 13. Working Capital Management
Chapter 13 Working Capital Management Learning Objectives 1. Model the cash conversion cycle and explain its components. 2. Understand why the timing of accounts receivable is important and explain the
More informationThe Basic Framework of Budgeting
Master Budgeting 1 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of
More informationUNIT FIVE MANAGEMENT OF WORKING CAPITAL
UNIT FIVE MANAGEMENT OF WORKING CAPITAL UNIT FIVE CHAPTER ONE WORKING CAPITAL MANAGEMENT Lesson 34 Chapter-11 Working Capital Management Unit 5 Management of Working Capital After reading this lesson you
More informationtutor2u Cash Management How and Why Businesses Need to Manage their Cash AS & A2 Business Studies PowerPoint Presentations 2005
Cash Management How and Why Businesses Need to Manage their Cash AS & A2 Business Studies PowerPoint Presentations 2005 Importance of Cash (1) A business can exist for a while without making profits but
More informationCash is King. cash flow is less likely to be affected
Reading 27: Understanding Cash Flow Statements Relevance of Cash Flow The primary purpose of the statement of cash flows (SCF) is to provide: Info about a firm s cash receipts & cash payments during an
More informationChapter 4. Long-Term Financial Planning and Growth. Overview of the Lecture. September 2004. What Is Financial Planning. Financial Planning Models
Chapter 4 Long-Term Financial Planning and Growth September 2004 Overview of the Lecture What Is Financial Planning Financial Planning Models The Percentage of Sales Approach xternal Financing and Growth
More informationPreparing a Successful Financial Plan
Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements
More informationThis week its Accounting and Beyond
This week its Accounting and Beyond Monday Morning Session Introduction/Accounting Cycle Afternoon Session Tuesday The Balance Sheet Wednesday The Income Statement The Cash Flow Statement Thursday Tools
More informationCash Flow Statement. Introduction. Introd. Contd. Chapter 4
Cash Flow Statement Chapter 4 Introduction Management and other interested external parties have always recognized the need for a cash flow statement but it was never required until the FASB (Financial
More information5 BUSINESS ACCOUNTING STANDARD CASH FLOW STATEMENT I. GENERAL PROVISIONS II. KEY DEFINITIONS
APPROVED by Resolution No. 1 of 18 December 2003 of the Standards Board of the Public Establishment the Institute of Accounting of the Republic of Lithuania 5 BUSINESS ACCOUNTING STANDARD CASH FLOW STATEMENT
More information** Current Asset Management Principles and Practice
MHSA 8630 Health Care Financial Management Principles of Working Capital Management ** Up until this point, the majority of the financial management emphasis has been on sources and uses of long term capital
More informationSelf-test Comprehensive Problems II 综 合 自 测 题 II
Self-test Comprehensive Problems II 综 合 自 测 题 II Part One (30%) 1. Give the Chinese/English of the following terms: (5%) subsidiary ledger 统 制 账 户 purchase requisition 现 金 溢 缺 petty cash fund 永 续 盘 存 制
More informationCHAPTER 23. Statement of Cash Flows 1, 2, 7, 8, 12 3, 4, 5, 6, 16, 17, 19 9, 20 4, 5, 9, 10, 11 10, 13, 15, 16. 7. Worksheet adjustments.
CHAPTER 23 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Format, objectives purpose, and source of statement.
More informationMASTER BUDGET - EXAMPLE
MASTER BUDGET - EXAMPLE Sales IN UNITS for the previous two months (of last quarter), as well as the sales forecast for next quarter are as follows: Sales Budget Units May sales (ACTUAL) 20 June sales
More informationPlanning your cash flow
5 Planning your cash flow PROFITS ARE NOT CASH 80 OPERATING CYCLE 81 CASH FLOW BUDGETING 82 TRADE DEBTORS 87 TRADING STOCK 89 OVERCOMING CASH FLOW PROBLEMS 91 MINIMUM CASH RESERVE 92 If the cash flowing
More informationWorking Capital Concept & Animation
Working Capital Concept & Animation Meaning A measure of both a company's efficiency and its short-term financial health. The working capital is calculated as: Working Capital = Current Assets Current
More informationCFA Exam Level I Corporate Finance Module Working Capital Management. Dr. C. Bulent Aybar. Professor of International Finance
CFA Exam Level I Corporate Finance Module Working Capital Management Dr. C. Bulent Aybar Professor of International Finance Net Working Capital Working Capital includes a firm s current assets, which consist
More informationHow To Understand The Financial Philosophy Of A Firm
1. is concerned with the acquisition, financing, and management of assets with some overall goal in mind. A. Financial management B. Profit maximization C. Agency theory D. Social responsibility 2. Jensen
More informationMCQ on Financial Management
MCQ on Financial Management 1. "Shareholder wealth" in a firm is represented by: a) the number of people employed in the firm. b) the book value of the firm's assets less the book value of its liabilities
More informationManagement of Working Capital
7 Management of Working Capital UNIT I : MEANING, CONCEPT AND POLICIES OF WORKING CAPITAL Learning Objectives After studying this chapter you will be able to: Discuss in detail about working capital management,
More informationChapter- 3B Statement of Changes in Financial Position and Working Capital (Fund
Chapter- 3B Statement of Changes in Financial Position and Working Capital (Fund BSNL, India For Internal Circulation Only 1 Statement of Changes in Financial Position and Working Capital (Fund) I. Statement
More informationGVEP Workshop Finance 101
GVEP Workshop Finance 101 Nairobi, January 2013 Agenda Introducing business finance Understanding financial statements Understanding cash flow LUNCH Reading and interpreting financial statements Evaluating
More informationCHAPTER 26. Working Capital Management. Chapter Synopsis
CHAPTER 26 Working Capital Management Chapter Synopsis 26.1 Overview of Working Capital Any reduction in working capital requirements generates a positive free cash flow that the firm can distribute immediately
More informationIn this chapter, we build on the basic knowledge of how businesses
03-Seidman.qxd 5/15/04 11:52 AM Page 41 3 An Introduction to Business Financial Statements In this chapter, we build on the basic knowledge of how businesses are financed by looking at how firms organize
More informationChapter 18 Working Capital Management
Chapter 18 Working Capital Management Slide Contents Learning Objectives Principles Used in This Chapter 1. Working Capital Management and the Risk- Return Tradeoff 2. Working Capital Policy 3. Operating
More informationDealing With Your Banker &
Dealing With Your Banker & Other Lenders Your financing The success or failure of your business will depend on whether or not you have enough capital to: buy the equipment and inventory you need; pay overhead
More information