Professional Documents
Culture Documents
The Contemporary Elements
The Contemporary Elements
- Primary objective: LIQUIDITY (ability to settle STL immediately when in it falls due)
- LIQUIDITY:
o Must have sufficient cash to pay dues andOPEX
o Not healthy to maintain excessive cas
o CASH IS NOT A PRODUCTIVE ASSET
o Cash must be invested in order to grow
- How much cash is considered efficient?
o It might be POSITIVE or NEGATIVE depending on business requirement
o CASH is ENOUGH when it is in its OPTIMUM LEVEL: ability to pay dues at the same
time no excess amount remains idle
- HOW TO ACHIEVE OPTIMUM LEVEL: CASH MANAGEMENT TOOL
- CMT: financial mgt that determine EXPECTED cash IF and cash reqts and assists in obtaining
CMT
(variable cash pmt – varies with sales volume; fx cash pmt – fxd monthly)
3. Cash Management Model (cash level = cash reqd) **not too much, not too little cash
o Baumol model
o Miller-orr model
o Stone model
*assumptions
Cash reqts - certain
cash pay-off – uniform applied and regular intervals
opportunity cost – known and the same
transaction cost – same
a. Baumol model:
Answers the question: what is the optimal level of cash balance where holding
and transaction cost of holding cash are at their lowest level?
𝟐 (𝑻)(𝑭)
C* = √
𝒌
TCC = HC + TC
TCC = (Cr/2)k + (T/Cr)Cpt
**HC = (Cr/2) x k
1. Granting of Credit
*credit standards
Liberal credit policy – relaxed
Optimal credit policy – strict
**5Cs:
Character – reputation
Capacity – ability to repay
Collateral – assets to be pledged
Capital – financial position if stable and solvent
Condition – industry of the business
* credit terms
Standard or negotiated conditions offered by the seller
Credit period – length of time for the pmt
Discount period – time to avail cash discount
Discount – amt deducted from invoice if availed
2. Collection of Receivable
*collection efforts and program
Monitoring of receivable – making of AR to full collection
-preparing of AGING SCHEDULE
-must concentrate on the PAST DUE ACCTS
Sending Billings – billing of invoice
Charges on overdue account – imposition of INTEREST
UNDERLYING QUESTION: SHOULD THE COMPANY CHANGE OR MODIFY ITS CURRENT RMP?
Yes or No thru MARGINAL ANALYSIS OF CREDIT POLICY
RECEIVABLE MANAGEMENT TOOL:
o MARGINAL ANALYSIS OF CREDIT POLICY
a. Incremental profit > incremental cost = ADOPT
b. Incremental profit < incremental cost = REJECT
c. Incremental profit = incremental cost = RETAIN
INVENTORY MANAGEMENT TOOLS
UNDERLYING CONCEPT: to determine appropriate level or quantity to be maintained
to reduce the cost to its optimum level. Inventory should not be too high or too low