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Reasons for holding cash
Transactions, balances, compensation, precautionary needs, supplies, payrolls, taxes, planned acquisitions.
Benefits of major credit card purchases to companies
Visa, MC, etc will pay the retailer with 7-10 days as opposed to the companies individual offerings of credit (i.e. store credit cards that allow customer to pay in 30 days).
Typical uses and needs of cash for businesses
When there's an excess of cash: invest in marketable securities. When there's a need: sell the marketable securities or borrow from short term lenders.
The difference between the amount credited to the company by the bank and the amount of cash on record at the company. (2 major cash balances)
Time lag + Check clearing time creates a float between the time the company lists the cash on its books and when the funds actually arrive in their account.
Difference of time it takes to have a check cleared.
Check Clearing for the 21st Century Act of 2003
Fed made electronic payments possible so that large businesses rely less on check payments lessening the burden of Float.
Service offered by banks to companies in which the company receives payments by mail to a post office box and the bank picks up the payments several times a day, deposits them into the compa…
Cost Benefit Analysis
Comparing the expenses associated with collecting invoices compared to the value of the invoices. These can be expenditures like collection centers, lockboxes, salaries, etc.
Types of electronic payments
EFT: $ moved between computer terminals (credit cards use this method). ACH: $ moved between financial institutions to credit others' accounts. SWIFT: Int'l EFT (24/7, highly secure).
Allows companies to maintain 0 balances and any excess cash will earn interest in a separate account. Checks can be written from the Sweep and the funds will automatically transfer from the interest bearing acco…
Types of Short Term Investments for Marketable Securities
Treasuries, CDs, Commercial Paper, Banker's Acceptances, Eurodollar Deposits, Savings Accounts, Money Market Funds, Money Market Deposit Accounts: All low risk, interest bearing investments. Things to consider are: timeframe, risk, yield, maturity, marketability, safety, and minimum investment required.
USD held on deposit in foreign banks and lent by those banks to anyone seeking them. Eurodollar CDs have higher rates of return than treasuries and domestic CDs.
Money Market Funds vs.Money Market Account
Money Market Funds are purchased (like mutual funds) by investors in increments of $500. The Fund will invest in low risk high quality assets (high yield CDs, commercial paper, etc.) Interest proceeds credited dail…
5 Cs of Credit
Character, Capital, Capacity, Conditions, Collateral. Indicators of whether a loan will be paid on time. Capital= debt:equity analysis and understanding firm's capital structure. Capacity= availability and sustainability of firm's cash flow. Conditions= sensitivity of opera…
Dun & Bradstreet
Prominent source of business information. Used to evaluate credit of businesses.
Terms of Trade
The stated terms of credit extension. Ex: 2/10 Net 30= 2% discount if paid in 10 days or full payment by 30 days.
Return on Investment: Annual Incremental Income after taxes ÷ Accounts Receivable
Calculating Annual Incremental Income After Taxes
Additional Sales - Accounts Uncollectible = Annual Incremental Revenue. - Collection Costs - Production and Selling Costs = Annual Income Before Taxes. - Taxes = Annual Incremental Income After Taxes.
ROI as it relates to Inventory
Amount saved ÷ the amount you need to invest to save this amount. Ex: by stepping up inventory production $30,000 to have level production, you could save $10,000 after tax. ROI= 33%.
Interest of funds tied up in Inventory. Costs of warehouse space, insurance, and material handling. Also, rapid price change, perishability, and obsolescence are critical.
Shipping and labor.
Economic Ordering Quantity: The most advantageous amount of inventory for the firm to order each time. √((2SO)÷C). S= Total Sales in Units. O= Ordering costs for each order. C= Carrying costs per unit in $. Measured in Units.
= EOQ ÷ 2. If you order EOQ and wait to run out completely, you will have half EOQ on avg.
Discretionary. = (EOQ÷2)+Safety Stock
Just In Time: Inventory Management. 1. Satisfies customer requirements. 2. Close ties b/n suppliers and customers. 3. Minimizes level of inventory.