discount rate is the minimal acceptable rate of return on an investment

Discount rate is the minimal acceptable rate of

This preview shows page 2 - 4 out of 5 pages.

discount rate is the minimal acceptable rate of return on an investment. Assuming a 10% return is satisfactory and not competing with other projects, the business would accept this project. To determine the exact rate of return earned, a manager would use the internal rate of return (IRR) method to figure out at what discount rate, the sum of the discounted cash flows is just zero. This means the present value of the cash outflows equals the present value of the cash inflows. The IRR is usually computed using a computer (including Excel spreadsheets). In this presentation, we examine how managers handle key short-term decisions facing their companies on a regular basis. Specifically, we examine the management of working capital, or current assets, and management of short-term financing. Management of Working Capital Working capital is another name for current assets -assets that can be liquidated rather quickly. Examples include cash, inventory, and receivables. We also have what is called net working capital (NWC); or current assets minus current liabilities. NWC is a measure of solvency and financial strength of an enterprise. One of a manager’s main tasks is to set effective working capital policies for her or his business. Such policies set optimum levels for key current asset items, such as cash, inventory, and receivables. They also map out ways that such items will be financed. Finally, working capital policy helps to design and implement certain administrative actions that are necessary for the effective operation of a business, such as collection actions and credit extension to new customers. Cash Management If there is one single management function that ties together all of the short-term decisions within a given company, it is this: cash management- or more specifically, the task of preparing and implementing cash budgets. A detailed cash budget maps out the cash status for a company during a forecast period-say over the next 12 months. By looking at a cash budget, a manager can tell how much money will be needed and when. Once this is an identified and known element, management can start thinking about the ways future needs could be financed. Management, for example, may ask for a bank loan, issue short-term notes, or even enter into strategic partnerships with its suppliers. In short, we can see how central cash budget is to a sound working capital policy. Receivables and Inventory
Image of page 2
Accounts receivable and inventories are among the main balance sheet items that could tie up a company’s limited funds-funds that could be used elsewhere for more productive purposes. Given all funds have a cost, such mismanagements can certainly hurt the bottom line at any company. As such, managers need to watch such accounts very closely and take corrective actions if required.
Image of page 3
Image of page 4

You've reached the end of your free preview.

Want to read all 5 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes