200910 Lecture 6: Financing enterprises- week 6 - Google Docs

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nellyxo20

6 Jun 2018

School

UWS

Department

University of Western Sydney

Course

200910

Professor

Neha

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Week6)Shortandlongtermsourcesoffinance(continued)Working

capital



maincomponentsCIRP

1)Cash

2)Inventory

3)Recievables

4)Payables



Operatingcycle(inventory+ARcycle)

averagetimebwwhenfirmpurchasesinventoryandwhenreceives

cashbackfromselling

product

longercyclegreaterneedforfinancialsupportindailyoperations



Cashcycle

lengthoftimebetweenwhenfirmsdecidestopaycashforpurchaseof

inventoryandwhenitreceivescashfromsaleoftheoutput.extends

APdaysshortencashcycle



OPERATINGCYCLELONGERTHANCASHCONVERSIONCCC=

operatingcycleAPdays



Cashcycleratio:

shorterbetter

CCC=Inventorydays+ARdaysAPdays



Inventorydaysinventory/cogs/365



ArdaysAR/averagedailysales(sales/365)Operatingcycleinventory

days



ApdaysAP/avergdailyCOGSsold(COGS/365)



CCC=businessreceivemoneyfirst,paysupplierslater(extraliquidity)

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+CCCfinancethatperiodoftimebyborrowingfrombank



Firmvalueandworkingcapital

anyfundsfromcompanyneedstoearnopportunitycostofcapital

workingcapitaltiesupfundsthatcouldbedeployedelsewherein

firmtoearnreturn(delayinconvertingmaterialearnreturns)reduce

timecustomerpaywithoutreducingsalesimp.rateofreturn



Overviewoffirmvalueandworkingcapital

Anyreductionincapitalrequirementsgeneratepositivefreecashflowthat

firmcaninvestsomewhereelseordistributeimmediatelyto

shareholdersallowmanagertomaximisefirmvalue.



TradeCredit

Creditfirmextendstoit’scustomers

diffbetweenrecievablesandpayablesnetamountoffirmscapital

consumedasaresultofthosecredittransactions

cashonlypolicylosecustomerstocompetition

delayb4moneycreditedtofirmproccessing,mailingpayment



Tradecreditterm2/10,net30

youget2%discountifyoupaywithin10days(discountperiod)oryoupay

fullamountin25days(creditperiod)



cashdiscount:2%

discountperiod:10days

creditperiod:30daystotallengthoftimecreditextendedtothebuyer



costoftradecredit

loanfromsellingfirmtocustomerpricediscountinterestrate



EAR=(1+r)m–1

ifdaily

Ear=e.g)25dayperiod=365/25



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Benefitsoftradecredit:

simpleandconvenienttouse,lowertransactioncoststhanalternative

sourecesoffunds

flexiblesourceoffunds,usedasneeded

sometimestheonlysourceoffundingavailabletofirms



Tradecreditvsstandardloans

providefinancingatlowmarketratesisindirectwayofloweringpricesto

spec.customers

suppliermayhaveongoingrelationshipwithitscustomer,moreinfo

aboutcreditqualitythanatraditionallender(bank)

ifbuyerdefaultsthesuppliermayseizetheinventoryascollateralthe

inventorylikelytobemorevaluabletocompanywithinindustrysuch

assupplierthanoutsiders



Managingfloat



factorscontributestolengthoftimebetweenrecievablesandpayablesis

delaybetweenwhenbillpaid,cashreceived.



Collectionfloatamountoftimeittakesafirmtouseitsfundsaftera

customerhaspaidforitsgoods

mailfloathowlongtakesfirmtoreceivepaymentchequeaftercustomer

hasmailedit



processingfloatlongittakesfirmtoprocesscustomerspaymentchequen

depsititinbank

availabilityfloatlongittakesbanktocreditfundsfromcustomer

paymentstofirmsaccount



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200910 Lecture 6: Financing enterprises- week 6 - Google Docs

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