FINA274 lecture 3

FINA274 lecture 3 - Short-term financing Topic 3.a. FINA...

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Short-term financing Topic 3.a. FINA 274 1 Lecture 3: Methods of Firm
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What is short-term finance? Near term financing needs of the firm Associated with short-term operating activities Buying inventory Pay worker wages Selling products Obligations that are generally measured in less than one year A component of net working capital FINA 274 Lecture 3: Methods of Firm 2
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Components of net working capital Current assets – can be converted into cash within one year Cash Marketable securities Accounts receivable Inventory Current liabilities – require cash within one year Accounts payable Accrued wages Taxes FINA 274 Lecture 3: Methods of Firm 3
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Net working capital FINA 274 Lecture 3: Methods of Firm 4 How much short- term cash flow does a company need to pay its bills? Net Working Capital Current Assets Fixed Assets 1. Tangible 2. Intangible Shareholders’ Equity Current Liabilities Long-Term Debt
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Operating and cash cycles FINA 274 Lecture 3: Methods of Firm 5 Time Accounts payable period Cash cycle Operating cycle Cash received Accounts receivable period Inventory period Finished goods sold Firm receives invoice Cash paid for materials Order Placed Stock Arrives Raw material purchased
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Float The difference between the book cash and the bank cash You know you have a few days after writing a check before the money is removed from your account Components of float Mail – time the payment takes to get from buyer to seller Processing – time between receiving and depositing payment Clearing – time required for the funds to show up A firm can control float through… Accounts receivables – accelerate collection Accounts payable – delay disbursement Whoever is holding the cash is earning the interest FINA 274 Lecture 3: Methods of Firm 6
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Financing policies Firm needs to decide how much to invest in current assets More inventory held and more liberal sales collection policies require a greater investment in current assets The size of investment is generally measured in terms of operating revenue A flexible financing policy entails higher ratio of current assets to sales Firm needs to decide how current assets are financed Using long term debt is safer, but more costly than short term financing A flexible financing policy uses more long-term debt FINA 274 Lecture 3: Methods of Firm 7
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An ideal world Net working capital is zero Short term assets are financed by short term financing Long term assets are financed by long term financing But cash short falls occur Accounts payable and receivables may not align Inventory may not turnover as planned How do firms manage that short fall? FINA 274
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This note was uploaded on 02/29/2012 for the course FINA 274 taught by Professor Williamhandorf during the Fall '11 term at GWU.

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FINA274 lecture 3 - Short-term financing Topic 3.a. FINA...

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