FIN%204260%20Chap%207%20SLIDES

FIN%204260%20Chap%207%20SLIDES - PartIIMgmtofWorkingCapital...

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Part II  – Mgmt of Working Capital Chapter 4 Inventory Management Chapter 5 Accounts Receivable Management Chapter 6 Chapter 7 Accruals 1
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C a s h   F l o w T i m e n The cash conver sion period is the time betwee n when cash is receive d versus paid. The firm is a system of cash flows. These cash flows are unsynchronized and uncertain. 2
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A/P Timing In Chapter 4, we studied optimal  inventory levels and considered the impact  on NPV from quantity and cash discounts.   In this chapter, we take it a step further  and decide  when to pay  A/P . 3
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Managing A/P and Accruals Most firms buy inventory on credit, creating an  Accounts Payable. The inventory is subsequently sold to customers on  credit, creating an  Accounts Receivable . In the meantime, the firm incurs expenses (e.g.:  salaries, wages, taxes) for which payment has not yet  been made, creating an  Accrual . A/P and Accruals are generally due before A/R  are received. 4
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Managing A/P and Accruals A/P (also called Trade Credit) and Accruals  represent spontaneous sources of financing for  a firm,  allowing the working capital cycle to continue  without making initial cash disbursements. Trade credit is effectively a free source of financing. Firms establish policies on how to manage these  accounts. 5
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Accounts Payable There are several types of  purchase terms : Open Credit Once credit is approved, the firm may repeatedly submit orders  without reapplying for credit. Cash Discounts Seasonal Dating Used in seasonal businesses (e.g.: toys). “2/10, net 30, dating 90”  allows customers to take the 2%  discount within 10 days or pay the invoice in full within 30  days after the 90 day period ends (120 days from purchase  date). 6
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Accounts Payable The concept of A/P is the same as A/R, but from the  opposite perspective. Say, a firm receives an invoice from a supplier  with the terms 2/10, net 30. Taking the discount requires the firm to part with  cash 20 days sooner, but it may deduct 2% from the  amount owed. Should the firm take the discount? 7
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Firm’s establish an A/P policy based on the number of  days payment is delayed from the purchase date ( DD ),  choosing from: 1. Date of purchase. DD  = 0 2. On or before end of cash discount period ( DP ). DD
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FIN%204260%20Chap%207%20SLIDES - PartIIMgmtofWorkingCapital...

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