MGMT_130_Lecture_4

MGMT_130_Lecture_4 - MGMT 130 Lecture 4 Cash Flow and...

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MGMT 130 Lecture 4 Cash Flow and Working Capital Cash Management
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Short Term Financing and Cash What are our short-term sources and uses for cash? Conflicting costs: carrying costs and shortage costs. Need to find optimal tradeoff Net working capital as a buffer that allows firms to meet their short term obligations Opportunity costs of holding cash: Baumol model can determine optimal cash holdings Ways to manage cash collections,
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Liquidity An important aspect of short-term finance is the liquidity of the assets; that is, the ease at which they can be converted to cash at a fair price and the time it takes to do so. Current assets are cash and cash equivalents, and other assets that are expected to be converted to cash within one year or within the operating cycle. Generally listed on the balance sheet in order of liquidity – cash, marketable securities, accounts receivable, inventories. Current liabilities: accounts payable, accrued wages, accured taxes, accrued expenses, notes
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Cash on the Balance Sheet 1. Current assets + fixed assets = current liabilities + long term debt + equity 2. Net working capital + fixed assets = long term debt + equity 3. Cash + other current assets – current liabilities = long term debt + equity – fixed assets 4. Cash = long term debt + equity - net working capital (ex cash) – fixed assets
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Sources and Uses of Cash Statement of Cash Flows: shows all the transactions that affect a firm’s cash positions. Increasing debt or equity increases cash Decreasing net working capital or fixed assets increases cash Net income provides cash Depreciation increases cash (but offset by decrease in value of fixed assets) Paying dividends reduces cash
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Operating cycle and Cash cycle Operating cycle and cash cycle are not exactly synchronized. Operating cycle: buy raw materials > pay cash for purchase > manufacture product > sell the product > collect cash Operating cycle starts when order is placed for raw inputs. Accounts payable increases. Operating cycle ends when cash is collected on
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MGMT_130_Lecture_4 - MGMT 130 Lecture 4 Cash Flow and...

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