193x Filetype PPTX File size 0.15 MB Source: csbweb01.uncw.edu
Short-Term Financial Planning A. Two Important “Cycles” 1. Operating Cycle = Inventory Conversion Period + Accounts Receivable Period 2. Cash Cycle = OC – Payables Deferral Period Dr. David P Echevarria All Rights Reserved 2 CASH FLOW CYCLE (Cash Conversion Cycle) A. The Cash Cycle (CC) = ICP + RCP - PDP 1. The Inventory Conversion Period (ICP) ICP = Average Inventory / (COGS / 365) 2. Receivables Collection Period (RCP) RCP = Average Receivables / (Cr. Sales / 365) 3. Payables Deferral Period (PDP) PDP = Payables / (COGS / 365) Dr. David P Echevarria All Rights Reserved 3 CASH [FLOW] CYCLE 4. CC are shortened by a. Reducing the ICP. b. Reducing the RCP. c. Lengthening the PDP. d. The CC Equation (using a 360-day year) Inv A/R A/P CC = COGS SALES COGS 365 365 365 Dr. David P Echevarria All Rights Reserved 4 OPERATING CYCLE CASH FLOW CYCLE H. Working Capital Requirements. 1. Cash {WC} must be sufficient to cover the CC. 2. Cash {WC} provided by Profits, Borrowing, and/or Trade Credit. I. The Liquidity Paradox. 1. Cash and equivalents are the least profitable assets. 2. Returns on other asset investments much greater. 3. Consider investment returns on; a. inventory. b. receivables. c. fixed assets. Dr. David P Echevarria All Rights Reserved 5 Working Capital Management A. How do we finance seasonal variations? 1. Conservative a. High Current Ratios: > 3.0x b. Draw on excess cash 2. Moderate a. Industry Average CR’s: ~ 2.0x b. Use some cash and some trade credit 3. Aggressive a. Low Current Ratios: ~ 1.0 – 1.3x b. Rely on trade credit and borrowing S-T Dr. David P Echevarria All Rights Reserved 6 c. Zero WC strategy
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