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A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses

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Working Capital Management

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1.Speculative motive-hold cash in order to take advantage of bargain purchase opportunities, attractive interest rates, or international exchange rate fluctuations. 2. Precautionary motive-the need to hold cash as a safety margin/financial reserve 3. Transaction Motive-the need to hold cash to satisfy normal disbursements and collection activities associated with a firms ongoing operations-to pay bills, disbursements, wages, salaries, trade debts, taxes and dividends. -cash inflows and outflows never perfectly match so there is a need for a buffer

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3 Reasons for holding Cash: S P & T

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-when holding cash a firm incurs opportunity cost, which is the interest income that could be earned in the next best use=investing -a firm holds a cash balnce to provide liquidity necassary for transaction needs-bill payments -if a firm pays bills and has 0 cash on hand it would have to engage in short-term cash generation=selling of marketable securities.

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Benefits of holding cash:

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-a firms balance recorded in its own books

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Book/ledger Balance

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-a firms balance shown in its bank account

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Available/collected balance

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-the difference between available and ledger balance, and represents the net effect of checks clearing (moving through the banking system)

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Float

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-checks written by a firm generate disbursement float, causing a decrease in the firms book balance but no change in its available balance.

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Disbursement Float-

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-collections of AP's generate collection float -increases book value. does not change available balance

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Collection Float-

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Sum of total collection and disbursement float -overall difference between a firms available and book balance.

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Net Float-

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-available balance<book balance

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Negative float

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-disbursement float>collections float

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Positive Float

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-controlling the collection and disbursement of cash.

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Float Management

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=>speed up collections and reduce the lag between time customers pay their bills and the time cash becomes available.

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Objective of Cash Collection

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=>to control payments and minimize the firms costs associated with making payments.

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Objective of Cash Disbursements

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The time where checks are trapped in postal system

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Mailing Time

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time it takes receiver of check to process the payment and deposit it to bank for collection

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Processing Time

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the time required to clear a check through the banking system

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Availability Delay

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payment at the time of sale

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Over the Counter Collection

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special post office boxes set up to intercept and speed up accounts receivables collections

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Lockbox System

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pooling different accounts into one. A firm may have number of collection points, so there is a need to move all those points into one master account.

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Cash Concentration

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to slow down disbursements as much as possible

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Managing Cash Disbursements goal:

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a disbursement account in which the firm maintains a zero balance, transferring funds in from a master account only as needed to cover checks presented for payments. -having a master and sub accounts=draw from sub accounts when cash is needed for bill payments

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Zero Balance Account

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-when a firm has a temportary cash surplus it can invest in short term securities (one year or less)

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Investing Idle Cash

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1. financing seasonal/cyclical activities. -Toys r us during the summer 2. planned or possible expenditures-accumulate temporary investments in securities to fund expansion, construction, dividend payments, or other large expenditures.

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Reasons for having temporary cash surplus:

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:Maturity :Default risk-probability that principal and interest will not be paid in full by due date :Marketability-liquidity :Taxability-interest earned on money market securities that are not some kind of government obligation is taxable on state or federal levels. (t-bills are not taxable)

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Characteristics of Short term Securities:

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Disbursements Float-obviously you would want to speed up collections bc more money, conversely you would want to reduce disbursement so as to have a larger available balance in bank.

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Which of these would a firm be more interested in reducing: collection float or disbursement float? Why?

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An example of a concentration bank can be a company which has multiple chain stores across the country and each store deposits its cash into local banks. The company can set it up so that these funds can be concentrated or deposited into one account, usually called a concentration account, at a concentration bank.

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What is a concentration bank? How is one used?

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It is sound, in that it creates lag in checks sent out to pay bills between available balances, but it is an ethical questions since one could spend money they don't have.

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Is maximizing disbursement float a sound business practice

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T-bill, Commercial Paper, Certificate of Deposit, Banker's Acceptances

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What are some types of money market securities?

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The length of time for which credit is granted.

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Credit Period

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written account of merchandise shipped to a buyer

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Invoice

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a discount given to induce prompt payment

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Cash Discounts

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the evidence of indebtedness, usually the invoice. sometimes promissory note

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Credit Instrument

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In principle, the optimal amount of credit is determined by the point at which the incremental cash flows from increased sales are exactly equal to the incremental costs of carrying the increased investment in accounts receivable.

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Optimal Credit Policy

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1. Terms of sale 2. credit analysis 3.Collection Policy

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What are the basic components of credit policy?

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3% discount if paid in full within 45 days, full due in 90 days. Ear=90-45=45------365/45=8.11 .03/.97=3.093 -ear=1.03093^8.11=1.2802-1=28.02%

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Explain what terms of "3/45, net 90" mean. What is the effective interest rate?

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character, capacity, capital, collateral, conditions

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What are the five C's of credit?

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The restocking quantity that minimizes the total inventory cost

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Economic Order Quanitity

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the minimum level of inventory a firm keeps on hand. Inventories are reordered whenever the level of inventory hits the safety stock. (firm does not go to zero)

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Safety Stock

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times when firms will place an order of inventory, usually a fixed number of days/weeks/months before the firms level hit zero.

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reorder times

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procedures used to determine inventory for demand dependent inventory types such as work in progress and raw materials

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Materials requirement planning

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