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Cash Receivables And Inventory Management Pdf

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Businesses require adequate capital to succeed in business environment. There are two types of capital required by business; fixed capital and working capital. Businesses require investment in asset, which has to be utilized over a longer period of times.

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Inventory Management Pdf

Accounts Receivable 3 Understand the financial costs and benefits of Managing the Firm s Investment in managing the firm s investment in inventory.

If Disney could have freed up only 1 day s worth of sales and invested it in 3-month U. That is a significant sum, and it demonstrates why firms like to have efficient treasury management departments in place. Shareholders enjoy the added profits that should, in turn, increase the market value of their common stock holdings. Now, if Disney s managers felt it could bear just a tad more risk, then the freed-up cash might be invested in bank certificates of deposit CDs of a similar maturity yielding 1.

That difference of a mere 20 basis points 1. This might be enough for the firm to hire a new business school graduate or two just like you. Managing the cash and the marketable-securities portfolio are important tasks for the financial executive. This chapter teaches you about sophisticated cash management systems and about prudent places to park the firm s excess cash balances so they earn a positive rate of return and are liquid at the same time.

We also explore sound management techniques that relate to the other asset components of the firm s working capital accounts receivable and inventory. In this chapter, we explore the management of the asset components of the working-capital equation. Accordingly, we focus on the alternatives available to managers for increasing shareholder wealth with respect to the most important types of current assets: 1 cash and marketable securities, 2 accounts receivable, and 3 inventory.

These are listed in order of declining liquidity. Such alternatives include 1 techniques available to management for favorably influencing cash receipt and disbursement patterns, 2 investments that allow a firm to employ excess cash balances productively, 3 critical decision formulas for determining the appropriate amount of investment in accounts receivable, and 4 methods, such as those pertaining to order quantity and order point issues, for evaluating the most suitable levels of inventory.

These issues are important to the financial manager for several reasons. For example, judicious management of cash and near-cash assets allows the firm to hold the minimum amount of cash necessary to meet the firm s obligations in a timely manner.

As a result, the firm is able to take advantage of the opportunity to earn a return on its liquid assets and increase its profitability. With this in mind, we begin the study of current asset management by exploring the various aspects of the management of cash and marketable securities. Afterward, we analyze the important issues related to the management of accounts receivable and inventory. Managing the Firm s Investment in Cash and Marketable Securities Before proceeding to our discussion of cash management, it will be helpful to distinguish among several terms.

Cash is the currency and coin the firm has on hand in petty cash drawers, in cash registers, or in checking accounts demand deposit accounts at various commercial banks. Marketable securities, also called near cash or near-cash assets, are security investments that the firm can quickly convert into cash balances.

Generally, firms hold marketable securities with very short maturity periods less than 1 year. Together, cash and marketable securities constitute the most liquid assets of a firm. Also known as near cash or near-cash assets. Why a Company Holds Cash A thorough understanding of why and how a firm holds cash requires an accurate look at how cash flows into and through the enterprise. Figure depicts the process of cash generation and disposition in a typical manufacturing setting. The arrows designate the direction of the flow that is, whether the cash balance increases or decreases.

The Cash-Flow Process The irregular increases in the firm s cash holdings can come from several external sources. Funds can be obtained in the financial markets from the sale of securities such as bonds, preferred stock, and common stock, or the firm can enter into W These irregular cash inflows do not occur on a daily basis.

The reason is that external financing contracts, or arrangements, usually involve huge sums of money stemming from a major need identified by the company s management, and these needs do not occur every day.

For example, a new product might be in the launching process, or a plant expansion might be required to provide added productive capacity. In most organizations the financial officer responsible for cash management also controls the transactions that affect the firm s investment in marketable securities. As excess cash becomes temporarily available, marketable securities are purchased. By contrast, when cash is in short supply, a portion of the marketable-securities portfolio is liquidated.

Whereas the irregular cash inflows are from external sources, the other main sources of cash arise from internal operations and occur on a more regular basis. Over long periods, the largest receipts come from accounts-receivable collections and, to a lesser extent, from direct cash sales of finished goods.

Many manufacturing concerns also generate cash on a regular basis through the liquidation of scrap or obsolete inventory. At various times fixed assets may also be sold, thereby generating some cash inflow. Apart from the investment of excess cash in near-cash assets, the cash balance experiences reductions for three key reasons.

First, on an irregular basis, withdrawals are made to 1 pay cash dividends on preferred and common stock shares, 2 meet interest requirements on debt contracts, 3 repay the principal borrowed from creditors, 4 buy the firm s own shares in the financial markets for use in executive compensation plans or as an alternative to paying a cash dividend, and 5 pay tax bills. Again, by an irregular basis, we mean items not occurring on a daily or frequent schedule. Second, the company s capital expenditure program designates that fixed assets be acquired at various intervals.

Third, inventories are purchased on a regular basis to ensure a steady flow of finished goods rolls off the production line. Note that the arrow linking the investment in fixed assets with the inventory account is labeled depreciation.

This indicates that a portion of the cost of fixed assets is charged against the products coming off the assembly line. This cost is subsequently recovered through the sale of the finishedgoods inventory.

This is because the product s selling price will be set by managers to cover all of the costs of production, including depreciation. Motives for Holding Cash The influences that affect the firm s cash balance can be classified in terms of the three motives put forth by economist John Maynard Keynes: 1 the transactions motive, 2 the precautionary motive, and 3 the speculative motive. In Figure , cash would be used to meet the irregular outflows as well as the planned acquisition of fixed assets and inventories.

The relative amount of cash needed to satisfy transaction requirements is affected by a number of factors, including the industry in which the firm operates. It is well known that utilities can forecast cash receipts quite accurately because of stable demand for their services. Computer software firms, however, have a more difficult time predicting their cash flows. In this industry, new products are brought to market at a rapid pace, thereby making it difficult to project cash flows and balances precisely.

The Precautionary Motive Precautionary balances serve as a buffer. This motive for holding cash relates to the maintenance of balances used to satisfy possible, but as yet unknown, needs. The cash-flow predictability of the firm has a material influence on this precautionary motive.

The airline industry provides a typical illustration. Air passenger carriers are plagued with a high degree of cash-flow uncertainty. The weather, rising fuel costs, and continual strikes by operating personnel make cash forecasting difficult for any airline.

The upshot of this problem is that because of all of the things that might happen, the minimum cash balances desired by air carriers tend to be large. In actual business practice, the precautionary motive is met to a large extent by the holding of a portfolio of liquid assets, not just cash.

Notice in Figure the two-way flow of funds between the company s holdings of cash and marketable securities. In large corporate organizations, funds may flow either into or out of the marketable-securities portfolio on a daily basis.

The Speculative Motive Cash is held for speculative purposes in order to take advantage of potential profit-making situations. Construction firms that build private dwellings will, at times, accumulate cash in anticipation of a significant drop in lumber costs.

If the price of building supplies does drop, the companies that built up their cash balances stand to profit by purchasing materials in large quantities. This will reduce their cost of goods sold and increase their net profit margins. Generally, the speculative motive is the least important component of a firm s preference for liquidity. The transactions and precautionary motives account for most of the reasons why a company holds cash balances.

Cash Management Objectives and Decisions The Risk Return Trade-Off A company-wide cash management program must be concerned with minimizing the firm s risk of insolvency. In the context of cash management, the term insolvency describes the situation in which the firm is unable to meet its maturing liabilities on time. In such a case the company is technically insolvent in that it lacks the necessary liquidity to make prompt payment on its current debt obligations.

A firm could avoid this problem by carrying large cash balances to pay the bills that come due. The financial manager must strike an acceptable balance between holding too much cash and too little cash.

This is the focal point of the risk return trade-off. A large cash investment minimizes the chances of insolvency, but it penalizes the company s profitability. A small cash investment frees up excess balances for investment in both marketable securities and longer-lived assets; this enhances profitability and the value of the firm s common shares, but it also increases the chances of the firm running out of cash. Objectives The risk return trade-off can be reduced to two prime objectives for the firm s cash management system.

Enough cash must be on hand to meet the disbursal needs that arise in the course of doing business. Investment in idle cash balances must be reduced to a minimum. Evaluating these objectives and meeting them gives rise to the need for some typical cash management decisions. Cash-flow forecasting is the initial step in any effective cash management program. Given that the firm will, as a matter of necessity, invest in some cash balances, certain types of decisions related to the size of those balances dominate the cash management process.

These include decisions that answer the following questions: 1. What can be done to speed up cash collections and slow down or better control cash outflows? What should be the composition of the firm s marketable-securities portfolio? Collection and Disbursement Procedures The efficiency of the firm s cash management program can be improved by 1 accelerating cash receipts and 2 improving the methods used to disburse cash.

In simple terms the firm improves its cash management system by speeding up collections and slowing down disbursements. Managing the Cash Inflow Speeding Up Collections Figure illustrates the cash collection system for a firm that does not utilize any advanced methods to enhance the speed of its collections.

Note that there are three key events that delay the time it takes the firm to actually get the customer s money. These delays are referred to as float. First, the customer sends the payment to the firm through the mail. The time required to receive the check is called mail float.

Second, the firm processes the check internally to record the account to which the payment belongs and then sends the check on to the firm s bank to begin the process of transferring funds from the customer to the company. The time required to process the check by the company is called processing float. Finally, the company s bank sends the check through the check-clearing system used by banks to actually transfer funds from the customer s account to the firm s account.

The time required to accomplish this is referred to as transit float.

Cash, Receivables, and Inventory Management

Accounts Receivable Accounts receivable refer to amounts owed to the firm by customers who bought its goods or enjoyed its services on credit. Credit Policy and credit standard Terms of credit Evaluation of credit applicant It is a component of current assets and as such a working capital. It is also referred to as trade debtors or simply receivables. Essel-Anderson Feb 6, 4. Credit Policy A firms credit policy is a set of decisions that include the following: Credit standards, Terms of credit, and Collection policy and procedures.

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PDF | This article examines cash, receivables and inventory management in small businesses and their associations with financial.


Management of Cash, Receivables, Inventory and Current Liabilities

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Accounts Receivable 3 Understand the financial costs and benefits of Managing the Firm s Investment in managing the firm s investment in inventory. If Disney could have freed up only 1 day s worth of sales and invested it in 3-month U. That is a significant sum, and it demonstrates why firms like to have efficient treasury management departments in place. Shareholders enjoy the added profits that should, in turn, increase the market value of their common stock holdings.

In managing financial growth of company, Cash, receivables and inventory jointly form working capital of a firm. It is imperative for experts to keep good balance of these factors. Cash is considered as vital asset and its proper management support company development and financial strength.

4 Tips for Effectively Managing Working Capital

In managing financial growth of company, Cash, receivables and inventory jointly form working capital of a firm. It is imperative for experts to keep good balance of these factors.

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3 Comments

CalГ­ope A. 10.06.2021 at 10:27

Control system-wide inventory to manage your distribution process efficiently and without losing track of costs.

Gloria K. 11.06.2021 at 02:54

important issues related to the management of accounts receivable and inventory​. Managing the Firm's Investment in Cash and. Marketable Securities.

Frank G. 13.06.2021 at 20:35

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