FIN+4414+-+Current+Asset+Management+-+Chapters+22%2C+27%2C+and+28

FIN+4414+-+Current+Asset+Management+-+Chapters+22%2C+27%2C+and+28

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Current Asset Management
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Working Capital Gross working capital = total current assets. Net working capital = current assets less current liabilities. Working capital management = the controlling of cash, inventories, accounts receivable, and current
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Working Capital Working Capital Policy : Determining the appropriate level for each type of current asset (how much to invest). Determining how the current assets will be financed
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Current Asset Investment Policies Aggressive (Restricted) Moderate Conservative (Relaxed) Current Assets Sales
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Cash Conversion Cycle CCC = ICP + RCP - PDP ICP = Inventory conversion period RCP = Receivables conversion period PDP = Payables deferral period
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Motives for Holding Cash Transaction motive Precautionary motive Compensating balance motive Speculation motive
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Goal of Cash Management To meet the firm’s prior cash objectives, especially to have sufficient cash for transaction purposes, but without holding excess cash. To minimize transaction balances.
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Cash Budget Purpose : To forecast cash inflows, outflows, and ending cash balances. It is used to plan for loans that will be needed or excess funds that will be available to invest.
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Cash Budget Timing : This may be daily, weekly, or monthly, depending on the purpose of the cash budget or forecast. Usually monthly for planning purposes and daily for actual cash management.
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Cash Budget Data Required : Sales forecast. Forecast of purchases and collection patterns. Forecast of cash expenses, taxes, etc. Initial cash on hand. Firm’s targeted cash
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Cash Budget Example - Assumptions : Currently end of June. Firm has forecasted sales and expenses for July, August, and September. Purchases and wages are lagged one month.
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Cash Budget Example - Assumptions : Firm knows its historical collection pattern: 5% in month of sale, 80% in the month following sale, and 15% in 2 months following sale. Cash at the start of July is equal to $550.
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Cash Budget Example - Assumptions : Firm’s desired, minimum cash balance is $375. What is the firm’s projected cash budget for July, August, and September?
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Cash Budget May June July August September $750.00 $750.00 $1,500.00 $2,250.00 $3,000.00 (0) 5% $37.50 $37.50 $75.00 $112.50 $150.00 (1) 80% $600.00 $600.00 $1,200.00 $1,800.00 (2) 15% $112.50 $112.50 $225.00 $787.50 $1,425.00 $2,175.00 Total Collections Monthly Sales Collections Actual Sales Projected Sales
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Cash Budget May June July August September $375.00 $375.00 $525.00 $3,675.00 $1,275.00 $375.00 $375.00 $525.00 $3,675.00 Salaries $112.00 $112.00 $112.00 Lease Payments $37.00 $37.00 $37.00 Miscellaneous $11.00 $11.00 $11.00 Tax Payments $0.00 $0.00 $262.00 Progress Payments $0.00 $50.00 $0.00 $535.00 $735.00 $4,097.00 Payments Actual Projected Total Payments
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Cash Budget July August September Collections $787.50 $1,425.00 $2,175.00 Payments -$535.00 -$735.00 -$4,097.00
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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FIN+4414+-+Current+Asset+Management+-+Chapters+22%2C+27%2C+and+28

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