Reference:STFM Chapter 1

1
Introduction

• ReferenceSTFM Chapter 1
• ETM Chapter 1

2
An Overview of Financial Management

• Role of financial management
• Goals of the corporation
• Issues of the new millenium

3
What three questions do financial leaders seek to
answer?

• What causes a company to have a particular stock
  value?
• How can managers make choices that add value to
  their companies?
• How can managers ensure that their companies
  dont run out of cash while executing their plans?

4
Corporate Financial Decisions

• Capital Structure Decisions
• Investment Decisions
• Financing Decisions
• Dividend Decisions

5
Treasury Management Factors that Affect Stock
Price

• Amount of cash flows expected by shareholders
• Timing of the cash flow stream
• Risk of the cash flows

6
Treasury ManagementsOverall Objective

• Efficient utilization of cash in a manner
  consistent with the overall strategic objectives
  of the firm.

7
Operating Cycle
8
Major Objectives of Treasury Management

• Maintaining liquidity
• Optimizing cash resources
• Establishing and maintaining access to short-term
  financing
• Maintaining access to medium- and long-term
  financing (capital budgeting)
• Maintaining shareholder relations
• Managing risk
• Coordinating financial functions and sharing
  financial information

9
Cash Flows and theTimeline

• Cash Concentration
  Cash
• Inflows And Liquidity
  Outflows
• Management
• Flows

10
Three Determinants of Cash Flows

• Sales
• Current level
• Short-term growth rate in sales
• Long-term sustainable growth rate in sales
• Operating expenses
• Capital expenses

11
Factors that Affect the Level and Risk of Cash
Flows

• Decisions made by financial managers
• Investment decisions (product lines, production
  processes, geographic market, use of technology,
  marketing strategy)
• Financing decisions (choice of debt policy and
  dividend policy)
• The external environment

12
Cash ManagementvsTreasury Management

• Liquid assets vs financial assets
• Short term vs long term
• Functional vs strategic

13
Functions andResponsibilities of aTreasury
Manager

• System Design, Implementation, and Evaluation
• Funds Management
• Banking System Administration
• Forecasting
• Risk Management
• Financing

14
Daily Cash Management

• Daily funds management
• Prepare cash position worksheet
• Monitor cash balances
• Mobilize funds
• Research and reconcile exception items
• Coordinate finance functions with A/R, A/P and
  accounting

• Banking system administration
• Liquidity management
• Forecasting
• Systems design, implementation and evaluation
• Financial risk management

15
Factors Affecting TreasuryManagement Practices

• Banking Structure
• Mail System
• Payment Conventions
• Interest Rates
• Regulatory Environment
• Tax Status
• Risk Appetite
• IT Capabilities

16
Treasury Linkages Interfaces
17
Key to Success for aTreasury Manager

• Cooperation with other functions

18
Differences Between theU.S. and Other Countries

• Large number of banks
• Lack of nationwide banking
• Extensive use of mail for payment
• Bills paid by check

19
Bank and Treasury Management Prior to 1950
20
Cash Management Evolution 1950s

• First Lockbox
• The Accord and the Government Securities Market

21
Cash Management Evolution 1960s

• Short Term Investment Vehicles
• Managing Banking Balances
• Lockbox Models

22
Cash Management Evolution 1970s

• Remote Disbursement
• Controlled Disbursement
• Funds Concentration
• Bank Balance Reporting
• Electronic Payment
• Commercial Paper

23
Cash Management Evolution 1980s

• DIDMCA of 1980
• Noon Presentment/Payor Services
• Electronic Commerce and Data Interchange

24
1980s Developments (continued)

• Personal Computers
• Internalization of Financial Markets
• Bank Creditworthiness
• Cash Management Ethics

25
Cash Management Evolution 1990s

• Derivatives
• Electronic Payment of State and Federal Taxes
• Interstate Banking
• Internet
• Financial Deregulation
• EMU

26
Financial ManagementIssues of the New Millenium

• Use of computers and electronic transfers of
  information and value
• The globalization of business
• Financial Regulation ?

27
The Role of Working Capital
Sales
Inv
A /R
Cash
28
Objectives

• View firm as a system of cash flows
• How WC and depreciation create disparities
  between profit and cash flow
• Management aspects of various WC accounts

29
The Cash Flow Timeline
Order Order Sale
Cash Placed Received
Received

Accounts Collection lt
Inventory gt lt Receivable gt lt Float
gt

Time gt Accounts Disbursement
lt Payable gt lt
Float gt Invoice
Payment Cash
Received Sent
Disbursed
30
...in the beginning
Balance Sheet - June
1 Cash 1,000 Debt 500
Common Stock 500 Total
1,000 Total
1,000
31
The Next Day, June 2
Balance Sheet - June 2 Purchase Fixed
Assets and Inventory Cash 400 A/P
300 Inventory 300 Debt 500 Fixed
Assets 600 Common
Stock 500 Total 1,300 Total 1,300
32
End of June
Balance Sheet - June 30 Sale of
product, incur operating expenses, incur
depreciation, and generate profit Cash
325 A/P 300 A/R 700 Accruals
200 Inventory 0 Debt
500 Fixed Assets 600
Common Stock 500 (Accum Depr)
(100) Retained Earnings
25 Total 1,525 Total 1,525
33
July 1
Balance Sheet - July 1 Pay
operating accruals with cash Cash
125 A/P 300 A/R 700 Accruals
0 Inventory 0 Debt
500 Fixed Assets 600
Common Stock 500 (Accum Depr)
(100) Retained Earnings
25 Total 1,325 Total 1,325
34
July 15
Balance Sheet - July 15
Pay payables with cash Cash (
175) A/P 0 A/R 700 Accruals
0 Inventory 0 Debt
500 Fixed Assets 600
Common Stock 500 (Accum Depr)
(100) Retained Earnings
25 Total 1,025 Total 1,025
35
July 31
Balance Sheet - July 31
Collect accounts receivable Cash
525 A/P 0 A/R
0 Accruals 0 Inventory
0 Debt 500 Fixed Assets 600
Common Stock 500 (Accum
Depr) (100) Retained Earnings
25 Total 1,025 Total 1,025
36
Profit versus Cash Flow

• Question Why did the firm end up with 125 in
  additional cash while earning a profit of 25?
• Answer Some expenses are not cash expenses.
• Question Why did the firm run out of cash during
  its operating cycle?
• Answer The cash deficit was due to the
  differences between the timing of cash
  disbursements and cash receipts.

37
Important Points

• The firm must manage its cost structure to
  generate a profit
• WC accounts must be managed so that liquidity is
  maintained.

38
Relationship Between Accrual Income and Cash Flow
Income Statement Adjustment Account Cash Flow
Account Sales - Change in accounts
receivable Cash collected Cost of goods sold -
Change in accounts payable Change in
inventory Cash paid to suppliers Operating
expenses - Change in operating accruals
Depreciation Cash paid for
operating expenses Interest - Change in
accrued interest Cash paid to
creditors Taxes - Change in accrued taxes -
Change in deferred taxes Cash paid for
taxes _________________ ___________________ Ne
t Profit Operating Cash Flow
39
Managing the Cash Cycle

• Managing Inventory
• Managing Receivables
• Managing Payables
• Electronic Commerce

40
Managing Inventory

• JIT
• Trade-offs between
• stock out costs
• cost of excess inventory
• ordering costs

41
Managing Receivables

• Who should receive credit and how much?
• Credit terms
• Monitoring the outstanding balance
• Speeding up the receipt of payments through
  lockboxes

42
Managing Payables

• Search for terms that match with cash receipts
• Timing of payment
• Controlled disbursement

43
Electronic Commerce

• Revolutionizing management of cash cycle
• Proprietary systems
• Impact of Internet

44
How Much WC is Enough

• One view
• optimal level is zero
• WC is an idle resource
• Provides little value
• How much in resources to commit?
• Why inventory?
• Why receivables and payables?
• Why short-term investments?

45
How Management of Working Capital is Changing