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Cash Management Strategies and Analysis

This document discusses various working capital and cash management strategies including collection banking, lockbox systems, and optimal transaction sizes for marketable securities. It also covers receivable management strategies like trade credit terms and cash discounts. Inventory management concepts like economic order quantity, reorder points, and safety stock are outlined. Short-term financing options are briefly mentioned including trade credit, accruals, and calculating effective interest rates on different loan types. The optimal strategies depend on factors like rates of return, carrying costs, order and transaction costs, sales levels, and required collection or replenishment periods.

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Vrix Ace Mangilit
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123 views3 pages

Cash Management Strategies and Analysis

This document discusses various working capital and cash management strategies including collection banking, lockbox systems, and optimal transaction sizes for marketable securities. It also covers receivable management strategies like trade credit terms and cash discounts. Inventory management concepts like economic order quantity, reorder points, and safety stock are outlined. Short-term financing options are briefly mentioned including trade credit, accruals, and calculating effective interest rates on different loan types. The optimal strategies depend on factors like rates of return, carrying costs, order and transaction costs, sales levels, and required collection or replenishment periods.

Uploaded by

Vrix Ace Mangilit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

WORKING CAPITAL & CASH MANAGEMENT

Collecting Center Concentration Banking


Amount cash collection (per day/week/month) xxx Monthly ave. cash bal xxx
Multiply: Number of days freed x multiply: rate (based on month) x%
Less/add: Increase or decrease in comp. bal. xxx Monthly return xxx
Increase in cash flow xxx
multiply: Rate of return x% Cost of Discount
Incremmental Income xxx Discount % 360
1-Discount %
x Final due date - Discount Period
Also same with lockbox system, the main difference
is comp. bal & cost of the system Cost Benefit Analysis
Market Borrowing Rate > Cost of Discount Don't avail
Optimal Transaction Size Market Borrowing Rate < Cost of Discount Avail
MS = amount of marketable securities sold each time the cash Borrowing rate - Cost of discount = Net Advantage
balance is replenished
FC = fixed cost associated with transaction Average Cash Balance
CR = total cash required for a given period of time MS/2
I = rate of return on the marketable securities
Total Relevant Cost
(FC x CR) / MS = Transaction Cost (FC x CR) / MS + (I x MS) / 2
(I x MS) / 2 = Opportunity Cost
Transaction Cost + Opportunity Cost = Relevant Cost Decision: The entity must borrow an amount equal to the MS
everytime the cash balance is replenished.
Optimal Transaction Size
MS = Square root of 2 x (FC x CR) / I
RECEIVABLE MANAGEMENT
TRADE CREDIT
AVERAGE A/R Advantage/Disadvantage = Exp. Return - Cost of discount
Days from sale date to Past due date (Exp. Ret. = Reduction in A/R x Rate of return)
x Annual Credit Sales
360 or 365 (Cost of discount = % customers avail x Credit sales x Discount %)

A/R to the collection period Break Even Analysis


Annually: Discount % to offer = Exp. Return / (Credit Sales x % customer avail)
Annual Credit Sales x (collection period / 360)
Desired Level of Receivable
Monthly: Desired Receivable = (Net Credit Sales / 360) x Required Collection Period
(Credit Sales per month x 12) x (collection period / 360)

Cash Discount
Reduction in A/R = Credit Sales x time reduced

INVENTORY MANAGEMENT
Economic Order Quantity Optimum Number of Orders
*Square root of (2 x S x OC) / CC Sales usage / EOQ
S = Sales usage (Units needed)
OC = Cost per Order Total Carrying Cost Cost
CC = Carrying cost per Unit (EOQ / 2) x CC
EOQ is the total number of units should order when ordering
Total Ordering Cost
Re-order Point Optimum no. of orders x OC
ROP = Leadtime x usage per day (unit)
TCC + TOC = Total Inv. Cost
Safety Stock
Safety Stock = Maximum usage - Minimum usage Every what month should place the order?
(12 / optimum no.)
SHORT-TERM FINANCING
Source of short-term financing
Trade Credit Accruals
Average A/P = (Annual Purchase / 360) x Credit Period I = prt

Compensating Balance on Bank Credits


Amount to be borrowed = Amount needed / (1-compensating balance %)

Effective Rates
On add-on Interest:
ER = (Interest / Principal) x (Days in year / Days loan is o.s)

with compensating balance:


ER = Interest rate / (1-C)

On installment loan:
2 x Annual no. of payments x Total annual interest
(Total no. of payments + 1) x Principal

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