chapter 19 - COPYRIGHTZHULI 1 Chapter 19 Working capital...

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Unformatted text preview: COPYRIGHTZHULI 1 Chapter 19 Working capital management COPYRIGHTZHULI 2 Objectives 1. Measure the implicit interest rate on credit sales. 2. Decide whether it makes sense to grant credit to customers. 3. Cite the costs and benefits of holding inventories and cash balances. 4. Describe the methods firms use to manage cash efficiently. 5. Compare alternatives for investing excess funds over short horizons. COPYRIGHTZHULI 3 Content Accounts receivable and credit policy Inventory management Cash management Investing idle cash: the money market COPYRIGHTZHULI 4 Credit management involves the following five steps 1. Establish the terms of sale on which you propose to sell your goods. 1. Decide what evidence you require that the customer owes you money. 1. Determine which customers are likely to pay their bills. This is called credit analysis. 1. Decide on credit policy. 1. Collect the money when it becomes due. This is called collection policy. COPYRIGHTZHULI 5 Terms of sale Terms of sale: credit, discount, and payment terms offered on a sale. For example, a manufacturer may require payment within 30 days but offer a 5% discount to customers who pay within 10 days. These terms would be referred to as 5/10, net 30: COPYRIGHTZHULI 6 A firm that buys on credit is in effect borrowing from its supplier. It saves cash today but will have to pay later. This is an implicit loan from the supplier. If the firm pays within 10 days, it gets a 3% discount and pays only $97. If it waits the full 30 days, it pays $100. Therefore, the implicit interest charged to extend the trade credit is 3.09 percent per 20 days. There are 365/20 = 18.25 twenty-day periods in a year, so the effective annual rate of interest on the loan is (1.0309) 18.25 1 = .743, or 74.3%. COPYRIGHTZHULI 7 Credit agreements Most sales are made on open account. In this case the only evidence that the customer owes you money is the...
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This note was uploaded on 05/11/2010 for the course BUSINESS S 409 taught by Professor Terryryan during the Summer '10 term at Winthrop.

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chapter 19 - COPYRIGHTZHULI 1 Chapter 19 Working capital...

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