managing short-term resources lecture 3 september 13, 2005 pa 546 constantine hadjilambrinos

Managing Short-Managing Short-Term ResourcesTerm Resources

Lecture 3Lecture 3

September 13, 2005September 13, 2005

PA 546 Constantine Hadjilambrinos

Working capital:Working capital:

Current assets – Current liabilitiesCurrent assets – Current liabilities

Current assets:Current assets: Cash and highly Cash and highly liquid assets (money market accounts, liquid assets (money market accounts, very short term bonds, etc.)very short term bonds, etc.)

Liquidity has a “cost”:Liquidity has a “cost”: High liquidity High liquidity means that investment opportunities means that investment opportunities offering better rates of return cannot offering better rates of return cannot be utilized.be utilized.


Cash ManagementCash Management

Transactions

Safety

Investment

Cash reserves Line of credit


Short-term cash Short-term cash investmentsinvestments

Checking accountChecking account Savings accountSavings account Certificate of Certificate of

depositdeposit Treasury notesTreasury notes US Govt. bondsUS Govt. bonds Other govt. notesOther govt. notes Other govt. bondsOther govt. bonds Corporate notesCorporate notes Corporate bondsCorporate bonds


Liquidity

Capital risk

Cash budgetingCash budgeting Match Match projected expendituresprojected expenditures

with with projected revenuesprojected revenues

Estimate appropriate level of Estimate appropriate level of emergency fundsemergency funds

Balance Balance safetysafety with investment with investment opportunitiesopportunities


Bank ServicesBank Services Account servicesAccount services

Processing deposits, checks, and Processing deposits, checks, and reconciling accountsreconciling accounts

Concentration/zero balance accountsConcentration/zero balance accountsDaily account notificationDaily account notificationElectronic funds transferElectronic funds transfer

Collection servicesCollection servicesWire transfersWire transfersLockboxesLockboxesNight depositoryNight depositoryArmored carsArmored carsCounting depositing fundsCounting depositing funds


Bank ServicesBank Services Safeguarding servicesSafeguarding services

Safe deposit boxesSafe deposit boxesStorage of stocks, bonds, and cancelled Storage of stocks, bonds, and cancelled

checkschecks Credit servicesCredit services

Lines of creditLines of creditNote purchasesNote purchasesLease-purchase financingLease-purchase financingLong-term bond underwritingLong-term bond underwriting

Investment servicesInvestment servicesInvestment instrumentsInvestment instrumentsInvestment adviceInvestment adviceSweep facilitySweep facilityRegistration of bondsRegistration of bonds


Marketable securitiesMarketable securities DebtDebt

Money market, notes, bonds — Money market, notes, bonds — principal risk principal risk yield riskyield risk

EquityEquity

Stock — Stock — principal riskprincipal risk yield riskyield risk DerivativesDerivatives

Options — Options — principal riskprincipal risk


Accounts ReceivableAccounts Receivable

Invoiceissued


Invoicereceived

Invoicepaid

Paymentreceived

Paymentdeposited

Paymentclears

Value of speed in billing/collection Value of speed in billing/collection processprocess

Value of collections = 300 million per yearValue of collections = 300 million per yearr = 9% (0.09)r = 9% (0.09)Increase speed of billing/collection by 3 daysIncrease speed of billing/collection by 3 days

day

yrdays

yr/000,74$

365

$000,000,2709.0yr

$ 0300,000,00


So, for 3 days:

000,222$ 3/000,74$ daysday

Short Term ObligationsShort Term Obligations Accounts payableAccounts payable

Get discounts for early paymentGet discounts for early paymentAvoid penalties for late payments (pay on time)Avoid penalties for late payments (pay on time)*Typical terms 2/10 N/30 (No penalty if paid in *Typical terms 2/10 N/30 (No penalty if paid in

30 days 30 days and 2% discount if paid in 10 days or less.and 2% discount if paid in 10 days or less. Payroll payablePayroll payable

Consider reducing frequency of payrollConsider reducing frequency of payrollDelay in payment (when do benefits get paid?)Delay in payment (when do benefits get paid?)

Short term debtShort term debtInterest = Loan amount X Interest rate/yr X Interest = Loan amount X Interest rate/yr X

Fraction of yr.Fraction of yr. Taxes payableTaxes payable


managing short-term resources lecture 3 september 13, 2005 pa 546 constantine hadjilambrinos

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