《ACCA考試之財務(wù)管理-FINANCIAL-MANAGEMENT》課件-6-Working-Capital-Finance

PaperF9

FinancialManagement

AccountingSchool

1PaperF9

FinancialManagementWorkingcapitalfinanceChapter62Chapter62TopiclistThemanagementofcashCashflowforecastsTreasurymanagementCashmanagementmodelsInvestingsurpluscashWorkingcapitalfundingstrategies3TopiclistThemanagementofcaExamguideThematerialcoveredinthischapterishighlyexaminable.Anyofthecalculationcouldformpartorallofaquestionandyouneedtoalsobeabletoexplainthemeaningofyouranswers.4ExamguideThematerialcovered1ThemanagementofcashThetermCashmaybedefinedascurrencyheldbythefirmplusthefirm’sdemanddeposits

Cash,whichcanbebroadlydefinedasencompassingnear-cashsuchasmarketablesecuritiesandunusedshort-termborrowingcapacity,maybeheldforvariousreasonMarketablesecuritiesaredefinedasshort-term,highlyliquid,interest-bearingfinancialassets,suchasTreasurybillsorhigh-gradecommercialpaper51ThemanagementofcashThete1.1Whyorganizationholdcash(Motivesforholdingcash)Transactionmotive–tomeetcurrenttransactions(payingitsA/P,employees’wages,tax;dividend)Precautionarymotive–thismeansthatthereisaneedtomaintaina‘buffer’ofcashforunforeseencontingencies.Themorepredictabletheinflowsandoutflowsofcashforafirm,thelesscashthatneedstobeheldforprecautionarymotiveneed.Readyborrowingpower(overdrafts)Speculativemotive–takeadvantageofspecialsituations(salepriceonrawmaterial–buymorenow)61.1Whyorganizationholdcash1.1Whyorganizationholdcash(Motivesforholdingcash)Cashmanagementinvolves:determiningthecashbalancesthatwilladequatelysustainthefirm’soperationefficientpaymentandcollectioninvestingtemporarysurplusfundsinliquidassets.

objectives:reducetheopportunitycostofholdingidlecash(investinSTmarketablesecurities)ensureallobligationsarepaidontime/duedate(notearly)collectmoneyowedassoonasitbecomesdue71.1WhyorganizationholdcashThecashManagementActivityShort-TermfinancingstrategiesforcashshortagesMarketablesecurityinvestmentstrategiesforcashsurplusesEstablishinganoptimalcashbalanceManagementofcashflowCashbudgetingSpeedingupreceiptsSlowingdowndisbursementsMaintainingsoundbankingrelationship8ThecashManagementActivityShFlowoffundsMarketablesecuritiesCashbalanceReceivableInventoryFixedassetsDepreciationCreditsalespurchaseLaborandmaterialpurchase

salesalecashsalescollectionsCreditorsShareholdersCreditorsShareholdersGovernments9FlowoffundsMarketablesecuri1.1WhyorganizationholdcashliquidityvprofitabilityProfitabilityvariesinverselywithliquidity.Increasedliquiditygenerallycomesattheexpenseofreducedprofitability.Thereisatrade-offbetweenliquiditywithprofitability101.1Whyorganizationholdcash1.2CashflowproblemsMakinglossesInflationGrowthSeasonalbusinessOne-offitemsofexpenditure111.2CashflowproblemsMakingl2CashflowforecastsFastforwardCashflowforecastsshowtheexpectedreceiptsandpaymentsduringaforecastperiodandareavitalmanagementcontroltool,especiallyduringtimesofrecession.Keyterm

acashflowforecastisadetailedforecastofcashinflowsandoutflowsincorporatingbothrevenuesandcapitalitems.122CashflowforecastsFastforw

2CashflowforecastsCashreceiptsCashdisbursementsNetcashflowCashshortfallsandsurplusesBeginningcashbalance+Netcashflow=EndingcashbalanceMinimumcashbalanceShort-termfinancingrequiredorrepayment(minimumcashbalanceminusendingcashbalance).OrInvestmentorpurchaseatmarketablesecurities(endingcashbalance-minimumcashbalance)132CashflowforecastsCashrec2.1Theusefulnessof

cashflowforecastsOneofthemostimportantplanningtoolsGivingmanagementanindicationofpotentialproblemsthatcouldariseandallowsthemtheopportunitytotakeactiontoavoidsuchproblems.142.1Theusefulnessof

cashfl2.1Theusefulnessof

cashflowforecastsManagementwillneedtotakeappropriateactiondependingonthepotentialpositionCashpositionAppropriatemanagementactionShorttermsurplusPayA/Pearlytoobtaindiscount;AttempttoincreasesalesbyincreasingA/Randinventories;MakeshortterminventionShorttermdeficitIncreaseA/P;ReduceA/R;ArrangeanoverdraftlongtermsurplusMakelongterminvestment;expand;diversify;Update/replacenon-currentassetsLongtermdeficitRaisinglongtermfinanceConsidershutdown/disinvestmentopportunities152.1Theusefulnessof

cashfl2.2whattoincludein

acashflowforecastAcashflowforecastispreparedtoshowtheexpectedreceipts,andpaymentsofcashduringabudgetperiod.ProfitvcashflowNotallcashflowreceiptsaffectincomestatementincome.NotallcashpaymentaffectincomestatementexpenditureSomecostsintheincomestatementsuchasprofitorlossonsalesofnon-currentassetsordepreciationarenotcashitemsbutarecostsderivedfromaccountingconventionsThetimingofcashreceiptsandpaymentsmaynotcoincidewiththerecordingofincomestatementtransactions.Toensurethatthereissufficientcashinhandtocopeadequatelywithplannedactivities,managementshouldprepareandpaycloseattentiontoacashflowforecastratherthanaincomestatement.162.2whattoincludein

acash2.6MethodofeasingcashshortagesFastforwardCashshortagecanbeeasedbypostponingcapitalexpenditure,sellingassetstakinglongertopayA/PandpressingA/Rforearlierpayment.172.6Methodofeasingcashshor2.6MethodofeasingcashshortagesMeasuresPostponingcapitalexpenditureAcceleratingcashinflowsReversingpastinvestmentdecisionsbysellingassetspreviouslyacquiredNegotiatingareductionincashoutflows,topostponeorreducepayment.LongercreditLoanrepaymentsDeferralcorporatetaxReducingdividendpayment182.6Methodofeasingcashshor2.7Deviationsfromexpectedcashflow

AcashflowforecastmodelSensitivityProbabilitydistribution192.7DeviationsfromexpectedcBoardofdirectorsChiefExecutiveofficerVicepresidentoperationsVicepresidentmarketingChieffinanceofferControllersCostaccountingCostmanagementDataprocessingGeneralprocessingInternalcontrolPreparingfinancialstatementsPreparingbudgetsPreparingforecastTreasurerCapitalbudgetCashmanagementCreditmanagementDividenddisbursementFinanceanalysis&planningInvestorrelationPensionsmanagementRiskmanagement20BoardofdirectorsChiefExecut3Treasurymanagement

FastforwardAlargeorganizationwillhaveatreasurydepartmenttomanageliquidity,shortterminvestment,borrowings,foreignexchangeriskandother,specialized,areassuchasforwardcontractsandfutureetc.KeytermTreasurymanagementcanbedefinedas:‘thecorporatehandingofallfinancialmatters,thegenerationofexternalandinternalfundsforbusiness,themanagementofcurrenciesandcashflowsandthecomplexstrategies,policiesandprocedureoffinance.’213TreasurymanagementFastfor3.1Centralizationonthe

treasurydepartment

Advantageofcentralization

:CentralizedliquiditymanagementAvoidhavingamixofcashsurplusesandoverdraftsindifferentlocalizedbankaccountsFacilitatesbullcashflows,sothatlowerbankchargescanbenegotiated.Largervolumesofcashflowareavailabletoinvest,givingbettershortterminvestmentopportunity.Anyborrowingcanbearrangedinbulk,atlowerinterestratesthanforsmallerborrowings,andperhapsontheEurocurrencyorEurobondmarkets.223.1Centralizationonthe

tre3.1Centralizationonthe

treasurydepartment

Advantageofcentralization

:Foreignriskmanagementislikelytobeimprovedinagroupofcompany.EmployingexpertsReducingthecashneedofprecautionarypurpose.Throughhavingaseparateprofitcentre,attentionwillbefocusedonthecontributiontogroupprofitperformancethatcanbeachievedbygoodcash,funding,investmentandforeigncurrencymanagement.233.1Centralizationonthe

tre3.1Centralizationonthe

treasurydepartment

Advantageofdecentralized:Sourceoffinancecanbediversifiedandcanmatchlocalassets.GreaterautonomyMoreresponsiveMorelimitedopportunitiestoinvestsuchbalancesonashorttermbasis.243.1Centralizationonthe

tre4CashmanagementmodelsFastforwardOptimumcashholdinglevelscanbecalculatedfromformalmodels,suchastheBaumolmodelandMiller-Orrmodel.Cashmanagementmodelsattempttominimizingthetotalcostsassociatedwithcashmovementsbetweenacurrentaccountandshortterminvestment–the‘opportunity’costoflostinterestplustransactioncosts-bydeterminingwhen,andhowmuch,cashflowshouldbetransferredeachtime.254CashmanagementmodelsFastf4.1TheBaumolmodelTheBaumolmodelassumesthatcashissteadilyconsumedovertimeandafirmholdsastockofmarketablesecuritiesthatcanbesoldwhencashisneeded.Thecostofholdingcashistheopportunitycost,i.e.foregonefromnotinvestingthatcash.Thecostofplacinganorderistheadministration(conversion)costincurredwhensellingthesecurities.264.1TheBaumolmodelTheBaumol4.1TheBaumolmodelDrawbacksoftheBaumolmodelInreality,itisunlikelytobepossibletopredictamountsrequiredoverfutureperiodwithmuchcertainty.Nobufferinventoryofcashisallowedfor.Theremaybecostsassociatedwithrunningoutofcash.Theremaybeothernormalcostsofholdingcostwhichincreasewiththeaverageamountheld.TheproblemwiththeMaumolmodelisitsunrealisticassumptionthatfirmsfaceaconstantdemandforcash.274.1TheBaumolmodelDrawbacks4.2TheMiller-OrrmodelCashbalanceThefirmbuyssecuritiesThefirmsellssecuritiestimeABUpperlimitReturnpointLowerlimitTheMiller-Orrmodelcontrolsirregularmovementsofcashbyusesofupperandlowerlimitsoncashbalance.284.2TheMiller-OrrmodelCashb4.2TheMiller-OrrmodelTheformulaofMiller-OrrmodelWheretransactioncosts=transferredcostsforeachbuyingandsellingsecuritiesvarianceofcashflow=expecteddailyvarianceofcashflowbalanceinterestrate=dailyinterestrateofsecurity294.2TheMiller-OrrmodelThefo5Investingsurpluscash

FastforwardTemporarysurplusesofcashcanbeinvestedinavarietyoffinancialinstruments.Longtermsurplusesshouldbereturnedtoshareholdersifthereisalackofinvestmentopportunities.305InvestingsurpluscashFast5Investingsurpluscash

TheobjectivesofinvestingsurpluscashLiquidity:thecashmustbeavailableforusewhenneededSafety:noriskofcapitallossmustbetakenProfitability:subjecttotheabove,theaimistoearnthehighestpossibleaftertaxreturns.315InvestingsurpluscashTheo5Investingsurpluscash

Otherfactorsneededtobeconsidered:fixedorfloatinginterestratesTermtomaturityMarketabilityMinimumamountWhethertoinvestoninternationalmarkets325InvestingsurpluscashOther5Investingsurpluscash

Surpluscashlackofinvestmentopportunitymaybereturnedtoshareholdersby:increasingtheusualleveloftheannualdividendMakingaone-offspecialdividendpaymentBuyingbackitsownshares335InvestingsurpluscashSurpl5.1shortterminvestments

DepositBankdepositMoneymarketlendingLocalauthoritydepositFinancehousedepositsShorttermdebtinstrumentCertificateofdepositsTreasurybillsLongertermdebtinstrumentShareoflistedcompanies345.1shortterminvestmentsDep5.1shortterminvestmentsCertificatesofdepositsACDisasecuritythatisissuedbyabank,acknowledgingthatacertainamountofmoneyhasbeendepositedwithitforacertainperiodoftime(usually,ashortterm)CDsarenegotiableandtradedontheCDmarket(amoneymarket),soifaCDholderwishestoobtainimmediatecash,hecanselltheCDonthemarketatanytime.TreasurybillsTreasurybillsareissuedweeklybythegovernmenttofinanceshorttermcashdeficienciesinthegovernment’sexpenditureprogram.Treasurybillshaveatermof91daystomaturity,afterwhichtheholderispaidfullvalueofthebill.355.1shortterminvestmentsCert6Workingcapitalfundingstrategies

FastforwardWorkingcapitalcanbefundedbyamixtureofshortandlongtermfunding.Businessshouldbeawareofthedistinctionbetweenfluctuatingandpermanentassets.366Workingcapitalfundingstra6.1Theworkingcapitalrequirement

Workingcapital

(overaoneyearperiod)

=currentassets–currentliabilities376.1Theworkingcapitalrequir6.3ThelevelofworkingcapitalAconservativeapproachAconservativeworkingcapitalmanagementpolicyaimstoreducetheriskofsystembreakdownbyholdinghighlevelsofworkingcapital.Thecumulativeeffectonthesepoliciescanbethatthefirmcarriesahighburdenofunproductiveassets,resultingafinancingcostthatcandestroyprofitability.Aperiodofrapidexpansionmayalsocauseseverecashflowproblemsasworkingcapitalrequirementsoutstripavailablefinance.Furtherproblemsmayarisefrominventoryobsolescenceandlackofflexibilitytocustomerdemands.386.3Thelevelofworkingcapit6.3ThelevelofworkingcapitalAnaggressiveapproachAnaggressiveworkingcapitalmanagementpolicyaimstoreducethisfinancingcostandincreaseprofitabilitybycuttinginventories,speedingupcollectionfromcustomer,anddelayingpaymenttosuppliers.Thepotentialdisadvantageofthispolicyisanincreaseinthechancesofsystembreakdownthroughrunningoutofinventoryorlossofgoodwillwithcustomersandsuppliers.396.3Thelevelofworkingcapit6.3ThelevelofworkingcapitalAnmoderateapproachAnmoderateworkingcapitalmanagementpolicyisamiddlewaybetweentheaggressiveandconservativeapproaches.Thedecisionregardingthelevelofoverallinvestmentinworkingcapitalisarisk/returntrade-off:-liquidityvprofitability;-profitabilityvriskLiquidity-theabilityofanassettobeconvertedintocashwithoutasignificantpriceconcession406.3Thelevelofworkingcapit6.3ThelevelofworkingcapitalliquidityvprofitabilityProfitabilityvariesinverselywithliquidity.Increasedliquiditygenerallycomesattheexpenseofreducedprofitability.profitabilityvriskProfitabilitymovestogetherwithrisk(i.e.thereisatrade-offbetweenriskandreturn).Insearchofhigherprofitability,wemustexpecttotakegreaterrisks.416.3Thelevelofworkingcapit6.3ThelevelofworkingcapitalCurrentassetsPolicyAPolicyBPolicyCAssetlevelOutputunit0426.3Thelevelofworkingcapit6.3Thelevelofworkingcapital436.3Thelevelofworkingcapit6.4Permanentandfluctuating

currentassetsNon-current(fixed)assetsarelongtermassetsfromwhichanorganizationexpectstoderivebenefitoveranumberofperiodsPermanentcurrentassetaretheamountrequiredtomeetlongtermminimumneedsandsustainnormaltradingactivity.Fluctuatingcurrentassetsarethecurrentassetswhichvaryaccordingtonormalbusinessactivity.Forexampleduetoseasonalvariations.446.4Permanentandfluctuating6.4Permanentandfluctuating

currentassetsPermanentcurrentassettogetherwithFluctuatingcurrentassetsformpartoftheworkingcapitalofthebusiness,whichmaybefinancedbyeitherlongtermfundingorbycurrentliabilities(shorttermfunding)456.4Permanentandfluctuating6.5WorkingcapitalfinancingShorttermsources

offundingareusuallycheaperandmoreflexiblethanlongterm.Howevershorttermsour