Copyright 2004 McGraw-Hill Australia 12.1 The Investments Involved 12.2 The Operating Cycle and the Cash Cycle 12.3 Some Aspects of Short-term Financial Policy 12.4 The Cash Budget 12.
Trang 1Copyright 2004 McGraw-Hill Australia
Trang 2Copyright 2004 McGraw-Hill Australia
12.1 The Investments Involved
12.2 The Operating Cycle and the Cash Cycle
12.3 Some Aspects of Short-term Financial Policy
12.4 The Cash Budget
12.5 A Short-term Financial Plan
12.6 Summary and Conclusions
Chapter Organisation
Trang 3Copyright 2004 McGraw-Hill Australia
• Explain the key issues in a firm’s short-term financial policy.
• Understand and apply the inventory model.
• Prepare a cash budget.
Trang 4Copyright 2004 McGraw-Hill Australia
Current Investment Decisions
• Involve the administration of the company’s current assets (cash and marketable securities, receivables and inventory), and the financing needed to support these assets
• Problems in using discounted cash flow techniques
to evaluate these decisions:
– identification of all relevant cash inflows and outflows
– determining the size and timing of these cash flows
– determining the correct discount rate.
Trang 5Copyright 2004 McGraw-Hill Australia
Operating Cycle versus Cash Cycle
• Operating cycle—the time period between the
acquisition of inventory and the collection of cash from receivables
Operating cycle = Inventory period + A/cs receivable period
• Cash cycle—the time period between the outlay of
cash for purchases and the collection of cash from receivables
Cash cycle = Operating cycle – A/cs payable period
Trang 6Copyright 2004 McGraw-Hill Australia
Time
Inventory sold
Inventory
purchased
Inventory period
Accounts payable period
Cash paid for inventory
Operating cycle
Cash cycle
Trang 7Copyright 2004 McGraw-Hill Australia
Trang 8Copyright 2004 McGraw-Hill Australia
times 65
3 365
turnover Inventory
365 period
Inventory
times 65
3
2
000 102
000 90
000 350
inventory Avg.
COGS turnover
Trang 9Copyright 2004 McGraw-Hill Australia
times 6.8
365
t/o s Receivable
365 period
s Receivable
times 6.8
2
000 78
000 72
000 510
s receivable Avg.
sales Credit
t/o s Receivable
Trang 10Copyright 2004 McGraw-Hill Australia
53.7100
periods
Receivableperiod
Inventory cycle
Trang 11Copyright 2004 McGraw-Hill Australia
54
times 73
6 365
turnover Payables
365 period
Payables
times 73
6
2
000 55
000 49
000 350
payables Avg.
COGS t/o
Payables
.
Trang 12Copyright 2004 McGraw-Hill Australia
54.2 153.7
period
Payables cycle
Operating cycle
Trang 13Copyright 2004 McGraw-Hill Australia
Short-term Financial Policy
• Size of investments in current assets
-Flexible policy—maintain a high ratio of current assets to sales
-Restrictive policy—maintain a low ratio of current assets to sales
• Financing of current assets
- Flexible policy—less short-term debt and more long-term debt
- Restrictive policy—more short-term debt and less long-term debt
Trang 14Copyright 2004 McGraw-Hill Australia
Short-term Financial Policy
• The size of the firm’s investment in current assets is determined by its short-term financial policies.
• Flexible policy actions include:
– keeping large cash and securities balances
– keeping large amounts of inventory
– granting liberal credit terms.
• Restrictive policy actions include:
– keeping low cash and securities balances
– keeping small amounts of inventory
– allowing few or no credit sales.
Trang 15Copyright 2004 McGraw-Hill Australia
• Carrying costs increase with the level of investment in current
assets, and include the costs of maintaining economic value and opportunity costs.
• Shortage costs decrease with increases in the level of
investment in current assets, and include trading costs and the costs related to being short of the current asset For example, sales lost as a result of a shortage of finished goods inventory.
Trang 16Copyright 2004 McGraw-Hill Australia
Trang 17Copyright 2004 McGraw-Hill Australia
Trang 18Copyright 2004 McGraw-Hill Australia
Trang 19Copyright 2004 McGraw-Hill Australia
Y/X YP
TC
2
++
=
The economic quantity (EOQ) is the optimal quantity of inventory ordered that minimises the costs of purchasing and holding the inventory.
Where TC = total cost X = order size
EOQ = economic order qty A = acquisition costs
Y = total demand C = carrying costs
P = price per unit
Trang 20Copyright 2004 McGraw-Hill Australia
rolls 1000
$0.20
$10.00 000
10 2
2 EOQ YA/C
Trang 21Copyright 2004 McGraw-Hill Australia
Trang 22Copyright 2004 McGraw-Hill Australia
3
$10 500
000/3 10
$3.17 000
10 units
2
$10 000
000/2 10
$3.18 000
10 units
1
$10 000
000/1 10
$3.20 000
10 units
000
1
=
+ +
×
=
=
+ +
×
=
=
+ +
×
=
Calculate the total cost for each quantity:
Smile Camera Shop would be better off purchasing in lots of 2000
to reduce the total cost.
Trang 23Copyright 2004 McGraw-Hill Australia
Trang 24Copyright 2004 McGraw-Hill Australia
EOQ Example Under Uncertainty
Smile Camera Shop’s EOQ (with quantity discounts)
is 2000 rolls of film and five orders are placed eachyear Determine the reorder point if it takes 30 days
to fill an order, a safety stock of 100 is desired anddaily usage is 30 rolls
Trang 25Copyright 2004 McGraw-Hill Australia
EOQ Example Under Uncertainty
Safety stock
Reorder point
Trang 26Copyright 2004 McGraw-Hill Australia
• Primary tool in short-term financial planning
• Helps determine when the firm should experience cash surpluses and when it will need to borrow to cover working-capital costs
• Allows a company to plan ahead and begin the
search for financing before the money is actually needed
Trang 27Copyright 2004 McGraw-Hill Australia
• Analysis of collection of accounts receivable:
– collected in month following sale 60%
– collected in second month following sale 20%
• Actual sales for November and December were $125 000 and $120 000 respectively.
Trang 28Copyright 2004 McGraw-Hill Australia
• Wages and other expenses are 30 per cent of total monthly sales.
• Purchases are 50 per cent of the month’s estimated sales, all paid for in the month of purchase.
• Monthly interest payments are $15 000 (interest rate is 1.5 per cent per month).
• An annual dividend of $60 000 is payable in March.
• The beginning cash balance is $30 000.
• The minimum cash balance is $20 000.
Trang 29Copyright 2004 McGraw-Hill Australia
Trang 30Copyright 2004 McGraw-Hill Australia
Trang 31Copyright 2004 McGraw-Hill Australia
Trang 32Copyright 2004 McGraw-Hill Australia