69815473_919916181721916_6626912698372194304_n.jpg - Working Capital = Current Assets Current Liabilities May deduct Inventory to get more in depth view

69815473_919916181721916_6626912698372194304_n.jpg -...

This preview shows page 1 out of 1 page.

Image of page 1

You've reached the end of your free preview.

Want to read the whole page?

Unformatted text preview: Working Capital = ( Current Assets - Current Liabilities ) May deduct Inventory to get more in depth view - Working capital is a measure of both a company's operational efficiency and its short-term financial health. The working of ratio (current assets/current liabilities), of current ratio, indicates whether a company has enough short-term assets to cover its shone term seafood working capital ratio is considered anything between 1 2 and 2.0. A ratio inless than 10 indicates negative working capital, with potential fou dity problems. while a ratio above 2.0 might indicate that a company is not site is excess assets effectively to generate maximum possible revenue. the Capital Cycle = the continual flow of resources through various working capital accounts. Cash - Order Inv > Receive In 7 Pay formy self Goods/send Invoice > Collect on Credit Sales - Cash Goal: reduce idle inventory (sell faster), stretch payables, collect receivables faster How much working capital flow? - Excessively long WCC puts added financing pressure on the firm and can generate liquidity crisis Inventory + Having inventory reduces shortage risk, but adds Receivables > supplier financing (seller at disadvantage) as costs inventory is also cash tied up \m 30 receivables cannot be increasing more thanslime production aka demand flow Payables > Interest free financing since cost already build in price and should defer payment till last day > do pros and cons of taking trade discount by paying faster Decisions needed + 1) liquid reserves 2) distribut ation of debt optimal level of cash = Zero > idle cash brings no value - realistically reducing WCC to get cash faster and permanently reducing investment in we automatically reduces financing costs (most firms 2:1, retail/volatile firms 4-6:1, Utilities 1:1) Cash line Advanced Tools Cash holdings - 1) Transactions 2) Emergencies 3) Speculative 2 Cash Conversion Efficiency (CCE) = Operating Cut how } Op. CF = NI . Dep . (all non-cash items) + Int . Taxes "To see how much of our revenue is real Cash Ratio = Amvets when company is in distress Cash Traditional W/C Measures Cash Burn Ratio = C065 365 1 Current Ratio = Current Arleta = 2 healthy Current Liabilities 5 Net Liquid Balance = NWC-WCR + Can we still pay our obligations 2. Quick Ratio = Current Amsets-In Current Liabilities "When firm in financial distress, Inv. not liquid enough 6 Current Liquidity Index = - x - Beg Cash +E[OCF] Notes Payable Ability to pay ST debt with operations Net Working Capital NWC = Current Assets - Current Liabilities 7. Lambda 1= Cash + Unuse Credit Lines+E[OCF] + Considers risk of its cash ability W/C Requirement = (A/R + Inv + Prepayments) - A/P "Can firm self-sustain itself a ocf without external financing > Issues: 1) Focus on solvency 2) Assumes same liquidity 3) Interpretation Cash Management Tools Cash Conversion Period (CCP) = Cash Conversion Cycle (CCC) is a metric that expresses the Baumol = EOQ = (2)(F)(TCN) time (measured in days) it takes for a company to convert its investments in inventory and F= Fixed trans. cost, TCN= Total cash needed, i= Period opp cost other resources into cash flows from sales. "Optimum amount of debt needed with regards to transaction cost & opp cost TC = (F) (TCN / Z') - 01(2./2) CCP = DIH + DSO - DPO *To minimize CCP = Sell faster, collect faster, pay slower Miller-Orr = 2' = 3 5 5(@) a'= Daily variance of net CFs i= opp cost F= Fixed trans. cost Operating Cycle = DIH + DSO "=Optimal transfer amount DIH = Inventory . 365 COGS DSO = . 365 AIP . 10 Sales Sales Stone = The Stone Model is somewhat like the Miller-Orr Model insofar as it uses control limits. It incorporates, however, a look-ah ead forecast of cash flows when an upper or lower limit is hit to Days Inv Held Days Sales Outstanding Days Payables Outstanding consider the possibility that the surplus or deficit of cash may naturally correct itself. If the upper control limit is reached but is to be followed by cash outflow days that would down to an acceptable level, then nothing is done. If instead the surplus cash would substantially ing the cash balance NPV - COGS Revenues remain that way, then cash is withdrawn to get the cash balance to a predetermined return point. Of 1+ (365 )(DAD) [1+ ( 365 (DIH + DSO ) course, if cash were in short supply and the lower control limit was reached, the opposite would apply. In this way the Stone Model takes into consideration the cash flow forecast. Components of Credit Policy Credit Standards > Profile of mi ble creditworthy customer defines standard w Credit Terms -> 2/10 net est Rate = 365 / 10 . (0.02) = 73% credit Limit > Usually in level T Account Receivable Management: Collection Procedures - Detailed how and when collection occurs Trade Credit = A trade credit is a B28 agreement in which a customer can purchase goods on account Development of credit standards (without paying cash up front), paying the supplier later. 5 C's = Collateral, Character, Capital, Capacity, Conditions Gathering Information Credit bureaus (Dunn & Bradstreet), Banks, Reference Managing the Credit Function Suppliers, F/S, Field data Why give TC? - more sales, better schedule of operations, reduce costs with scale, coordinate fix pricing Credit analysis -> > ratios Scoring models Components of Policy > 1) Credit Standards 2) Terms 3) Limit 4) Collection procedure Risk analysis Granting Policy: Trade Credit > Bank Credit: Financial Motives: 1) Charge higher price 2) Lower probability of default, buyer must keep coming to us to Standards run his business 3) Value of collateral worth more to seller than bank Info + Credit bureaus (Dunn & Bradstreet), Banks, Reference Suppliers, F/S, Field data Operating Motives: Suppliers can respond to variances and uncertain demand by loosening the credit policy more responsive to market changes Credit Analysis (Ratios): Contracting Cost Motives: 1) Quality of goods can be inspected to reduce cost 2) Goods less liquid than cash, Leverage Risk: also less theft Times Interest Earning = EBIT / Interest Debt-to-Equity = Debt / Equity Asset Utilization: Pricing Motives: Credit-constrained buyers can get same terms as creditworthy client 2) Unpublished Asset Turnover = Sales / Assets variations in credit policy allow seller to charge any price Days Turnover = A/R / Sales "(365) Fixed Asset Turnover = Sales / Fixed Assets Liquidity Ratios A/P / COGS . (365) Inventory/ COGS .(365) _S- EXP(S) 1)Current Rati NPV = 2 - VCR(S) Solvency Ratios 2) Quick Ratio 3) Cash Ratio 1 + i(CP) 1)Cash Conversation Efficiency Profitability Ratios: 2) Cash Conversion Period 3) Current Liquidity Index S = $ of Credit VCR = Variable cost ratio ROA = EBIT / Assets EXP = Expense for administration Margins: "How profitable for all stakeholders ROE = NI / Equity "How profitable for SHs CP = Collection period GM = Gross Profit / Sales T Rev- COGS Operating Income / Sales NI / Sales = Interest or opp. cost T Gross Profit - Op. Expenses T Op. Profit - Interest & Taxes "if NPV > 0 - extend credit Financial Models Risk analysis...
View Full Document

  • Summer '14
  • N/A

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors