WorkingCapitalManagement Ch02 C4

Working Capital Management
UIBS
Cash and marketable securities management

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Motives for holding cash

3 reasons:
Motives for holding cash Cash management system Speeding up cash receipts Slowing down cash payouts Electronic commerce Cash balances to maintain Investment in marketable securities Compound interest and capital budgeting Marketable securities portfolio Highlights to remember
Transactions motive: to meet payments Speculative motive: to take advantage of temporary opportunities Precautionary motive: to maintain a safety cushion
More predictable less needs Can be replaced by ready borrowing power (bank lines of credit)
Not all the firms need for cash call for cash balances exclusively
Can be cash-equivalent assets or ... By maintaining bank lines of credit

Cash management:
Efficient collection, disbursement, temporary investment of cash Responsibility of the treasurer: cash budget
Working Capital Management -- Jan Vanherck -- UIBS, Spring 2012
46
47
Cash management system
Speeding up cash receipts

Why speeding up cash receipts?
To have the use of the money sooner

Methods:
Funds flow Information flow
Request advanced payments Earlier billing (computerized) Expedite preparing the invoice e-mailing the invoice Accelerate mailing of payments from customer to firm Collecting float (checks, see next slide) Preauthorized debit Wire transfer between banks (generic term for electronic funds transfer)
48
49
(c) prof. ir. Jan Vanherck, February 2012

UIBS
Speeding up cash receipts (2)
Invoice cash discounts

To encourage prompt payments of invoices, many
manufacturers and wholesalers offer cash discounts for payments in advance of the final due date
2/10, n/30 = Cash discount of 2% if paid within 10 days; otherwise full amount must be paid within 30 days from the date of invoice
INFO
50
51
Invoice cash discounts (2)

Exercise: Homework:
Homework
A company receives an invoice of 100.000 with payment conditions 2/10 n/60. 60 days from now, a 1 year deposit ends. The principal of this deposit is 130.000, and the simple interest is 7%. As described in the contract of this deposit, there is a 1% penalty of the principal if repayment is asked before the due date. Additional information: interest rate for short term loans is 10%, for short term deposits is 3%. The most obvious strategy is to wait 60 days and use the repayment of the deposit to pay the invoice. But is this the optimal solution? Answer:
See: Exercise_14_Solution.xlsx
A merchant receives an invoice of a computer system (server) for 25000 with payment terms 5/10, n/45.
What is the highest simple interest rate at which he can afford to borrow money (90-day loan) in order to take advantage of the discount? Why would he do so? Use the same spreadsheet to analyze the situation of the computer vendor. Suppose the current rate for short term loans is 8%. Is the discount that he is offering realistic? Suppose again that the current rate for short term loans is 8%. What is the maximum payment term the merchant can realize without paying more than the foreseen 25000?
Answer:
See: Exercise_WCM_01_Solution.xlsx
52
53

UIBS
Slowing down cash payouts

Why slowing down cash payouts?
Electronic commerce
Electronic commerce is the generic name for exchanging all
To have longer use of the money To optimize the deposits

Methods:
kind of business information in an electronic format

Alternative to the paper based system Unstructured ...
Fax, e-mail
Tightly controlling disbursements If cash discounts are taken (see previous example), payment should be done at the end of the cash discount period Else: pay at final due date
Multiple banks: shift funds quickly
... or highly structured messaging

EDI: Electronic Data Interchange Invoices, purchase orders, shipping information Involves computer-to-computer data movement Electronic funds transfer: e.g. SWIFT Society for Worldwide Interbank Financial Telecommunication
54
55
Electronic commerce (2)

Benefits of electronic commerce:
Cash balances to maintain

Most firms establish a target level of cash balances to maintain
Information and payments move faster Greater reliability Manual: Mod 97 Improved cash forecasting better cash management lower safety levels Less costs: reduce paperwork, mail, document storage costs
Excess cash marketable securities The greater the interest rate (difference), the greater the opportunity General rule: longer term higher interest rate Good forecast is necessary (cash management)
Some banks ask for a minimum deposit
To compensate services provided by the bank Trend towards simply paying these services
56
57

UIBS
Investments in marketable securities

3 segments in the marketable securities portfolio:
Investments in marketable securities (2)

Safety
Ready cash segment

Reserve for the companys cash account Instant liquidity Line of defense against unforeseen cash needs
Refers to the likelihood of getting back the same amount of euros you originally invested
Marketability
Controllable cash segment

Held to meet controllable (knowable) cash outflows (e.g. taxes, dividends, ...)
The ability to sell a significant volume of securities in a short time without significant price concessions
Yield
Free cash segment

Extra cash, not needed
Return, interest rate Some papers do not pay interest, but are sold for a value below the face value
58
59

Exercise:
Compound interest
A 26 week treasury bill with a face value of 1000$ might be purchased for 956$. Calculate the equivalent yield and the effective annual rate Answer:
Yield = (1000-956)/956 365/182 = 9.23% 1 + EAY = (1 + 0.0923 182/365) (365/182) 9.44%
Yield = (1000-950:956/(26x7/365)
Formula:
I = Principal x rate X time
10% interest Year 1 Begin 10000 %: 1000 P2 = 11000

60
Balance n Balance 0 1 i
10 000 (now) = 17 716 (at the end of yr 6)
Year 2 Working Capital Management -- Jan Vanherck -- UIBS, Spring 2012 Begin 11000 % 110 P3= 12100 = (1+ I)mu N (1+i)mu 2 = (1+ 9.23%x(26x7)/365 ) mu 365/26x7 i = 9.44% For a half year = (1+i)= 1+9.23%/2 P 4 = P1(1+ 9.23%/2) = P(1+ 9.23%/2)(1+9.23%/2)= P(9.23%/2) mu2
61
Effective i = J 1+J = (1+ 9.23%/2) P4 =P(1+9.23%/2) P(1+J)= P(1+9.23%/2)mu2 1+ J= (1+9.23%/2)mu2 J = (1+9.23%/2)mu2 -1

UIBS
Present value

Maturity:
The life of a security; the amount of time before the principal amount becomes due Money market instruments: All government securities and short-term (< 1 year) high quality corporate obligations Common money market instruments:
Formula:
PV Balance n / 1 i Balance n 1 i n
T-bills (Treasury bills) Repurchase agreements: flexibility increases Bankers acceptance
1 (at the end of yr 6) = 0.5645 (now)
62
63

T-bills (Treasury bills)
Marketable securities portfolio
Short-term, non-interest bearing obligations of the US Treasury issued at a discounted price and redeemed at maturity for the full face value
Repurchase agreements: flexibility increases
Agreements to buy securities and to resell them at a specified higher price at a later date
Bankers acceptances
Short-term promissory trade notes for which the bank (by having accepted them) promises to pay the holder the face value at maturity
Certificate of deposit:
Eurodollars: Deposits in $ in banks in Europe (e.g. London) Yankee CDs: issued by US branches of foreign banks
...
64
65

UIBS
Money market mutual funds

Funds that utilize pools of investors funds to invest in large
Highlights to remember (1)
money market instruments

Small companies and even individuals can hold a well diversified portfolio of marketable securities Reading: Financial week, page 243
Firms, as well as individuals, hold cash to meet transactions and for speculative and precautionary motives. Cash management involves efficient collection and disbursement of cash and any temporary and safe investment of cash while it resides with the firm. The firm will generally benefit from Speeding up cash receipts Slowing down cash payouts To accelerate collections, a firm can utilize partial invoicing, computerized billing and preauthorized debits. Large firms will concentrate cash to improve control. Electronic data interchange (EDI) is a key element of electronic commerce. All major areas of cash management can be outsourced.
66
67

WorkingCapitalManagement Ch02 C4

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

WorkingCapitalManagement Ch02 C4

Caricato da

Copyright:

Formati disponibili

Working Capital Management

Cash and marketable securities management

Motives for holding cash

Can be cash-equivalent assets or ... By maintaining bank lines of credit

Working Capital Management -- Jan Vanherck -- UIBS, Spring 2012

Working Capital Management -- Jan Vanherck -- UIBS, Spring 2012

Cash management system

Speeding up cash receipts

To have the use of the money sooner

Funds flow Information flow

Working Capital Management -- Jan Vanherck -- UIBS, Spring 2012

Working Capital Management -- Jan Vanherck -- UIBS, Spring 2012

(c) prof. ir. Jan Vanherck, February 2012