Name : Arief Taufiqqurrakhman

Class : A Management 2018

NPM : C1B018115

Chapter 16 – Working Capital Management and

Short-term Financing

Working-Capital Management

 Current Assets (cash, marketable securities, inventory, accounts receivable)

 Long-Term Assets (equipment, buildings, land)

Risk-Return Trade-off:

Current assets earn low returns, but help reduce the risk of illiquidity.

 Current Liabilities (short-term notes, accrued expenses, accounts payable)

 Long-Term Debt and Equity (bonds, preferred stock, common stock)

Risk-Return Trade-off:

Current liabilities are less expensive, but increase the risk of illiquidity.

The Hedging Principle

 Permanent Assets (those held > 1 year)

should be financed with permanent and spontaneous sources of financing

 Temporary Assets (those held < 1 year)

 should be financed with temporary sources of financing

 Permanent Financing

intermediate-term loans, long-term debt, preferred stock, common stock

 Spontaneous Financing

accounts payable that arise spontaneously in day-to-day operations (trade credit, wages
payable, accrued interest and taxes)

 Short-term financing

unsecured bank loans, commercial paper, loans secured by A/R or inventory

Cost of Short-Term Credit

Interest = principal x rate x time

Sources of Short-term Credit

 Unsecured

accrued wages and taxes

trade credit

bank credit

commercial paper

 Secured

accounts receivable loans

inventory loans
 Chapter 17 - Cash and Marketable Securities Management

Cash Management

1. Liquid Asset Management

 Transactions: to meet cash needs that arise from doing business.
 Precautionary: having cash on hand for unexpected needs.
 Speculative: to take advantage of potential profit-making situations.
2. Cash Management
 Trade Off: cash decreases risk of insolvency, but earns no returns!
 Objectives: have enough cash on hand to meet disbursal needs and minimize
investment in idle cash balances.

Managing Cash Inflow

Reducing Float can speed up cash receipts.

 Mail Float: length of time from the moment a customer mails a check until the
firm begins to process it.
 Processing Float: the time required by a firm to process a check before it can be
deposited in a bank.
 Transit Float: time required for a check to clear through the banking system and
become usable funds.
 Disbursing Float: occurs because funds are available in a firm’s bank account
until its payment check has cleared through the banking system.

Lockbox System

 Instead of mailing checks to the firm, customers mail checks to a nearby P.O.
Box.
 A commercial bank collects and deposits the checks.
 This reduces mail float, processing float and transit float.

Lockbox System benefits:

 Increased working cash - reduces time required to convert receivables to

cash.
  Elimination of clerical functions - bank handles receiving, endorsing,
totaling and depositing.
 Early knowledge of dishonored checks - firm learns of customers’ bad
checks faster.

Preauthorized Checks (PACs)

Arrangement that allows firms to create checks to collect payments directly from
customer accounts. This reduces mail float and processing float.

PAC System benefits:

 Highly predictable cash flows.

 Reduced expenses - eliminates billing and postage costs; reduces clerical
processing costs.
 Customer preference - eliminates regular billing for customers.
 Increased working cash - dramatically reduces mail float and processing
float.

Depository Transfer Checks (DTCs)

Moves cash from local banks to concentration bank accounts.

Firms avoid having idle cash in multiple banks in different regions of the country.

DTC System benefits:

 Lower levels of excess cash.

 Reduced expenses - eliminates billing and postage costs; reduces
clerical processing costs.
 Customer preference - eliminates regular billing for customers.
 Increased working cash - dramatically reduces mail float and processing
float.

Managing Cash Inflow

Wire Transfers

 Moves cash quickly between banks.

 Eliminates transit float.
 Managing Cash Outflow

Zero Balance Accounts (ZBAs)

 Different divisions of a firm may write checks from their own ZBA.
 Division accounts then have negative balances.
 Cash is transferred daily from the firm’s master account to restore the
zero balance.
 Allows more control over cash outflows.

Payable-Through Drafts (PTDs)

 Allows the firm to examine checks written by the firm’s regional units.
 Checks are passed on to the firm, which can stop payment if necessary.

Remote Disbursing

 Firm writes checks on a bank in a distant town.

 This extends disbursing float.
 (Discouraged by the Federal Reserve System)

Marketable Securities

Considerations:

 Financial Risk - uncertainty of expected returns due to changes in issuer’s ability to

pay.
 Interest rate risk - uncertainty of expected returns due to changes in interest rates.
 Liquidity - ability to transform securities into cash.
 Taxability - taxability of interest income and capital gains.
 Yield - influenced by the previous four considerations.

Types:

 Federal Agency Securities - Debt issued by agencies, including:

o Federal National Mortgage Association (Fannie Mae)
o Federal Home Loan Banks
o Federal Land Banks
o Federal Intermediate Credit Banks
o Banks for the Cooperatives
 Commercial Paper - short-term unsecured “IOUs” sold by large reputable firms to raise
cash.
 Repurchase Agreements - an investor acquires short-term securities subject to a
commitment from a bank to repurchase the securities on a specific date.
 Money Market Mutual Funds - a pool of money market securities, divided into shares,
which are sold to investors.