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PA 546 Constantine Hadjilambrinos Managing Short-Term Resources Lecture 3 September 13, 2005 PA 546 Constantine Hadjilambrinos Working capital: Current assets – Current liabilities Current assets: Cash and highly liquid assets (money market accounts, very short term bonds, etc.)

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PA 546 Constantine Hadjilambrinos

Working capital:

Current assets – Current liabilities

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

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

cash management

PA 546 Constantine Hadjilambrinos

Cash Management

Cash reserves Line of credit

Investment

short term cash investments

PA 546 Constantine Hadjilambrinos

Short-term cash investments

Liquidity

Capital risk

  • Checking account
  • Savings account
  • Certificate of deposit
  • Treasury notes
  • US Govt. bonds
  • Other govt. notes
  • Other govt. bonds
  • Corporate notes
  • Corporate bonds
cash budgeting

PA 546 Constantine Hadjilambrinos

Cash budgeting
  • Match projected expenditures with projected revenues
  • Estimate appropriate level of emergency funds
  • Balance safety with investment opportunities
bank services

PA 546 Constantine Hadjilambrinos

Bank Services
  • Account services

Processing deposits, checks, and reconciling accounts

Concentration/zero balance accounts

Daily account notification

Electronic funds transfer

  • Collection services

Wire transfers

Lockboxes

Night depository

Armored cars

Counting depositing funds

bank services7

PA 546 Constantine Hadjilambrinos

Bank Services
  • Safeguarding services

Safe deposit boxes

Storage of stocks, bonds, and cancelled checks

  • Credit services

Lines of credit

Note purchases

Lease-purchase financing

Long-term bond underwriting

  • Investment services

Investment instruments

Investment advice

Sweep facility

Registration of bonds

marketable securities

PA 546 Constantine Hadjilambrinos

Marketable securities
  • Debt

Money market, notes, bonds — principal risk yield risk

  • Equity

Stock — principal riskyield risk

  • Derivatives

Options — principal risk

accounts receivable

PA 546 Constantine Hadjilambrinos

Accounts Receivable

Invoice

received

Invoice

paid

Payment

received

Payment

deposited

Payment

clears

value of speed in billing collection process

PA 546 Constantine Hadjilambrinos

Value of speed in billing/collection process

Value of collections = 300 million per year

r = 9% (0.09)

Increase speed of billing/collection by 3 days

So, for 3 days:

short term obligations

PA 546 Constantine Hadjilambrinos

Short Term Obligations
  • Accounts payable

Get discounts for early payment

Avoid penalties for late payments (pay on time)

*Typical terms 2/10 N/30 (No penalty if paid in 30 days and 2% discount if paid in 10 days or less.

  • Payroll payable

Consider reducing frequency of payroll

Delay in payment (when do benefits get paid?)

  • Short term debt

Interest = Loan amount X Interest rate/yr X Fraction of yr.

  • Taxes payable