Working Capital Management

Working Capital Management (WMC)

INVENTORY RELATED BENEFITS AND COSTS

As indicated earlier inventories include stocks of raw materials, semi-manufactured or semi-processed goods or work-in-process and finished products. While trading businesses carry inventories of the merchants they offer for sale, manufacturing businesses carry inventories of all three kinds.

 

Raw materials inventories are maintained so that there remains some flexibility in purchasing and in production scheduling. Inventories of semi-manufactured goods ensure flexibility in production scheduling and utilization of resources, and inventories of finished products endures products scheduling and marketing.

 

By carrying inventories a firm can address to a large extent demand and lead time uncertainties. The principle followed is that of carrying what we call a “buffer”. Inventories can also ease out the flow of production when there are time lags in deliveries. Inventories may also help achieve some economies of scale in purchasing and help tide over the problems of seasonal variations. It follows from the above that there are several advantages to be derived from holding a large inventory, such as economies in production and purchasing and flexibility in operations. However, there are several disadvantages and costs associated with carrying large inventories and that is why we must devote our attention to the question of inventory management.

January 23, 2009 Posted by | Business Flow, Business management, holding inventories, inventory management, investment, managment, online business, product management, small business | , , , , , , , , , , , , , , , | Leave a comment

Inventory Management-2

MOTIVE FOR HOLDING ENVENTORIES 

It is possible to identify three major movies for holding inventories.

  • The transaction motive peoples a business to maintain inventories so that there are no bottlenecks in production and/or sales. It is natural for a business to plan inventory investment commensurate with the level of transactions in the business. The business seeks to ensure that on the shop floor production does not get stalled for want of materials, etc., and sales do not suffer on account of not-availability of finished goods.
  • The precautionary motive is also at work. Inventories are held so that there is a cushion against unpredictable events. For instance, there may be a sudden and unforeseen spurt in demand for finished goods or there may occur a sudden and unforeseen slump or delay of raw materials or other components needed for production. An enterprise would surely like to have some cushion to tide over such situations.
  • Inventories may also be held so that advantage can be taken of price fluctuations. For instance, if the price of a particular raw material in expected to go up rather steeply, an enterprise may decide to hold a larger than necessary stock of this item (acquired prior to escalation).

January 17, 2009 Posted by | Business management, Capital, Current Assets, Finance, holding inventories, inventory management, investment, managment, online business, plan inventory, raw materials, small business, Working Capital, Working Capital Management | , , , , , , , , , , | Leave a comment

Inventory Management-1

Today we continue out talk on inventory management. Therefore, return investment can improve if the return on sales improves and/or if the turnover ratio improves. Since, the two major components, of total investment are fixed capital or fixed assets (like, land and buildings, plant and machinery, furniture and fixture, motor vehicles, etc.) and working capital, proper management of working capital so as to avoid unnecessary blockage of funds in this area and to ensure that the optimum level of investment is made will make room for reduction in the investment and thus pave the way for a higher return on investment. (This would happen when the turnover of investment improves as the denominator declines.)

 

MOTIVE FOR HOLDING ENVENTORIES 

It is possible to identify three major movies for holding inventories.

  • The transaction motive peoples a business to maintain inventories so that there are no bottlenecks in production and/or sales. It is natural for a business to plan inventory investment commensurate with the level of transactions in the business. The business seeks to ensure that on the shop floor production does not get stalled for want of materials, etc., and sales do not suffer on account of not-availability of finished goods.

January 13, 2009 Posted by | Capital, inventory management, investment, Working Capital, Working Capital Management | , , , , | Leave a comment

INVENTORY MANAGEMENT

NATURE AND IMPORTANCE 

Working capital as net concept, is defined as the difference between current assets and current liabilities. Current assets being those assets that are likely to be converted into liquidity within an year’s time or so and include items like inventories of raw materials, semi-manufactured articles or work-in-process, and finished goods, accounts receivable or dues from customers, hundies or bills receivable, bank balance and cash balance, etc.

 

Current liabilities are in essence short-term liabilities which have to be settles in a year’s time, e.g., accounts payable or amount payable to suppliers of goods and services delivered on credit, bills payable, bank overdraft, etc. Since inventories constitute a major item of current assets, the management of inventories is crucial to successful working capital management. Working capital requirements are influences by inventory holding-the period during which raw materials remain in store, that during which processing takes place and that during which finished goods lie in the warehouse prior to sale. The level of inventory investment affects the total investment in working capital. Thus, operating ratios, such as the ratio of Turnover or sales to Working Capital are affected by it as well.

 

Return on investment can be reviewed as follows:

Return/Investment = (Return/Sales) X (Sales/Investment)

January 8, 2009 Posted by | Assets, Business management, Capital, Credit Analysis, Current Assets, current liabilities, inventory management, investment, liquidity, managment, raw materials, returns, sales working, short-term liabilities, turnover, Working Capital, Working Capital Management | , , , , , , , , , , , , , | Leave a comment

CASH MANAGEMENT IN PRACTICE-1

Concentration banking is the most popular technique employed by business firms to intensify cash inflows. Usually the local sales office or branch of the company performs this function. Many of the firms which adopt concentration banking technique issue standing instructions to local banks that all funds above a certain limit be transferred to the centralized bank account of the company which is generally at the head office/registered office on the company. The management at the heal office utilized these funds on the basis of daily collection reports.

 

As regards the control of cash outflows, firms have a tendency to defer payment till the last moment. Funds are arranged only on the day cheques are expected to be presented by the payee and or the amount necessary to honor the cheques.  In the case of local payments, cheques are many a time handed over after the banking hours.

 

A wide variation in practice regarding the maintenance of minimum cash balance is observed. Some firms manage their cash needs within the predetermined limits of bank overdraft; some keep a minimum bank balance to need contingencies; some determine cash levels based on the information about daily cash requirements of all sections or divisions or units of the organization; some maintain cash balance of one month’s salary bills plus an amount to meet contingencies; and so on.

January 5, 2009 Posted by | Business Flow, Capital, cash flows, Working Capital, Working Capital Management | , , , , , , , , , | Leave a comment

CASH MANAGEMENT IN PRACTICE

We now present some evidence with regard to cash management practices. This is based on few studies that been carried out in the Indian context.

 

The evidence suggest that the practices of cash inflows and outflows predictions remain much to be desired, The ‘gut feeling’ approach to cash flow forecasting is very much in vogue in Indian corporate sector; a few firms make use of quantitative forecasting models (including simulation technique). The sales price, production quantity, raw material cost, power and fuel costs, and credit collection are usually considered as critical variables fro cash flow forecasting. The most frequently cited causes of forecast errors are government control and regulations, internal management decision and the external causes like the change product demand, competitive pressure, actions of suppliers, etc.

Firms usually operate on the basis of cash budgets and most of them prepare cash flow statements separately for capital and revenue operations. Firms also prepare regular cash reports. Some prepare daily cash reports; others prepare it every month. Some of the firms prepare cash reports at more than one point of time, namely, daily as well as weekly and monthly. Utilizes these funds on the basis of daily collection reports

January 3, 2009 Posted by | Business Flow, Capital, cash flows, corporate sector, product management, production quality, Working Capital, Working Capital Management | , , , , , , , | Leave a comment

OPTIMIZATION MODELS

Many firms have small surpluses available for short periods of time; we need, therefore, to address the problem of trade-off between investment income and transaction costs of investing and disinvesting. In this regard, we may mention about four models that provide optimum strategies for investment and disinvestment when transaction costs play an important part. These models are the Baumol model, the Beranek model, the Miller-Orr model, and the Stone model. Each of these models provides optimum strategies for a given time pattern of cash flows.

The miller-Orr and Stone models explicitly address the risk in the net cash flows, while the Baumol and Beranek models assume certainty. To choose among these models, the first step is to match the time pattern of the firm’s cash flows to the time patterns assumed in the models. This match should be based on the specific of the firm’s business policies that affect cash flows (how often payments are made to suppliers, the firm’s terms of sale, and so forth) and on empirical investigations of the time pattern of cash flow. The latter investigations might include time plots of net cash flow and statistical comparisons of net cash flows with known probability distributions.

December 31, 2008 Posted by | Business Flow, Capital, Working Capital, Working Capital Management | , , , , , | Leave a comment

OPTIMIZATION MODELS FOR SHORT TERM INVESTMENTS-1

In addition, cash managers are responsible for keeping the firm in a liquid position. If an unexpected need for cash should arise, the cash manager may need to investments before maturity. Thus, an important criterion for a short-term investment strategy is instrument’s marketability.

 

Firms take a variety of approaches to investment policies. Some firms give the cash manager a loose reign on short-term investment decision. Others carefully spell out what types on investments can be made at certain maturities and at what risk. Policies often relate how a firm’s top management views the role of short-term investments. Is short-term investing seen as liquidity management or portfolio management? A company that takes a liquidity management approach to its short-term investments focuses on the recording, control, and prediction of daily receipts and disbursements. Any excess cash is places in very short period (may be even overnight) investments.

 

On the other hand, a company with a true portfolio management approach to investing considers the explicit income to be gained from sophisticated strategies. To some, sophisticated means having a model-based decision support system. At either end of the spectrum, investment guidelines define the cash manager’s investment task. Typically, guidelines are formulated based on the firm’s definition of allowable risk, given sensitively to investment-instrument’s safety, marketability and yield.

December 30, 2008 Posted by | Business Flow, Capital, Credit Analysis, Working Capital, Working Capital Management | , , , , , , | Leave a comment

Market Update

Weekly Recap – Week ending 26-Dec-08

From an investor’s standpoint, Wall Street didn’t bring any Christmas cheer this week.  Amid light trading conditions, the market dropped 1.7%, bringing its year-to-date decline to 41%.

It was a typical week in that we received another batch of dour economic news, saw oil prices continue to decline, and heard the Fed invoke its emergency powers again to lend stability to the financial system.  

In a front-end loaded week for economic data, it was reported that November existing home sales declined 8.6% from October and that new home sales of 407,000 units on an annualized basis hit their lowest level in 17 years.

Initial jobless claims surged to a 26-year high of 586,000, durable orders declined 1.0% in November, and personal income and personal spending fell 0.2% and 0.6%, respectively, in November.

Separately, MasterCard Spending Pulse said Friday that holiday sales from Nov. 1 to Dec. 24 declined as much as 4%, excluding autos and gasoline. 

Amazon.com (AMZN) for its part said 2008 was its best holiday season ever.  What that means for its income statement remains a mystery, but at least Amazon saw record order activity of its own.

Unfortunately, Amazon will be the exception and not the norm this holiday season.  Consumers have clearly become guarded with their spending activity in the face of concerns about rising unemployment, falling home prices, and much lower stock prices.

The final Q3 GDP report released this week indicated as much.  Real personal consumption expenditures declined 3.8% in the third quarter and knocked 2.8% off real GDP growth, which was negative 0.5% for the quarter. more… 

December 29, 2008 Posted by | Assets, Business Flow, Capital, Working Capital, Working Capital Management | , , | Leave a comment

OPTIMIZATION MODELS FOR SHORT TERM INVESTMENTS

A cash management imperative is that idle excess balances represent an opportunity cost to the firm. To ignore investment possibilities, even for one day, is inconsistent with the objective of managing cash as an asset that must return value to the company. Our next logical focus is, therefore, on short-term investment strategies.

 

In most firms, the cash management staff is responsible for short-term investing. One reason for this is that the cash manager has ‘hands-on’ knowledge of the money market and its players. Besides, cash manager is equipped, and psychologically geared, to react to fast-breaking investment opportunities. He and his staff are used to thinking in terms of very short time frames, days and hours. In the investment world, that us when profits are made, and fortunes lost.

 

There are several outlets for short-term investments like inter corporate advances; inter corporate bills financing, stock market operations, treasury bills, commercial papers, etc. The return on such investments is different and depends on money market conditions, amounts to be invested, period of investment, and transaction cost. The risks associated with a certain investment determines its safely, marketability and, hence, its yield. For the most part, the cash manager is primarily concerned with preserving principal. Although he hopes for the best returns on short-term investments, he looks for instruments that are, above all, safe.

December 25, 2008 Posted by | Business Flow, Capital, cash loans, Credit Analysis, Current Assets, Working Capital, Working Capital Management | , , , , , , , , | Leave a comment

SIMULATION APPROACH

Still today we have discussed on cash management and credit analysis. Today we are going to discuss on Simulation Approach. Simulation analysis permits the financial manager to incorporate in his forecasting both likely value of ending cash balances (surplus/deficits) for each of the forecast periods (say, for each month over the next quarter) and the margin of error associated with this estimate. It involves the following steps: First, probability distributions for each of the major uncertain variables are developed. The variables would generally include sales, selling price, proportion of cash and credit sales, collection rates, production costs, and capital expenditures. Some of these variables have the greatest influence upon cash balances.

 

Clearly, more time and effort should be spent in obtaining probability distribution of these variables. Second, values are drawn at random for the variables from their respective probability distributions and using these values each balances are estimated. Third, the process is repeated several times (say, 1000times). Needless to say, such tedious and cumbersome computations are done on computer.

 

In practice, the array of possible hedging strategies is quite a bit more complicated. One is required to consider various alternatives and the associated costs and risks in hedging strategies.

December 22, 2008 Posted by | Assets, Business Flow, cash loans, Credit Analysis, Credit Repair, Credit Rport, Current Assets, Working Capital, Working Capital Management | , , , , , , , , , , | Leave a comment

Collection Rate Uncertainty

The firm is also faced with collection rate uncertainty. The firm may historically have collected an average of a certain per cent of its outstanding receivables from a particular period in another particular period, but this average contains considerable variability. Further, changing market and economic conditions may make extrapolation of past historic data into future periods a futile exercise.  

 

There is still another source of uncertainty – production cost uncertainty. The price of materials may change; production problems may arise that lead to increased labor costs; and errors in the sales estimates themselves would necessarily lead to forecasting errors in purchases – hence the volume of payables.  

 

Capital outflow uncertainty is one of the biggest sources of surprises in cash flow forecasting. This is the uncertainty regarding the timing of cash disbursement related to the firm’s major capital expenditure and constructions programmes. For instance, construction firms are notorious for filing late progress reports and then expecting immediate payment. While only a small per cent of the firm’s total bills are from capital construction programmes, the amounts involved are usually very large. One unexpected item of this sort can impair a carefully drawn cash flow forecast.  

 

An efficient way to deal with above uncertainties is to apply simulation analysis of the cash forecast. We will now briefly outline this method.

December 18, 2008 Posted by | Assets, Business Flow, Capital, cash loans, Credit Analysis, Credit Repair, Credit Rport, Current Assets, installment loans, Working Capital, Working Capital Management | , , , | Leave a comment

Source of Uncertainty in Cash Forecasting

Accurate cash flow forecasting hinges on the forecaster’s ability to reduce the amount if observed error between forecast values and actual values that have occurred. Given the short-run nature of the cash forecast, with most things occurring in the near future, one would tent to think that most financial transaction could be forecast very accurately. This is far from true.

 

In practice few firms, if any are able to forecast their inflows and outflows accurately. Sales forecasts are notoriously unreliable, for actual sales depend in part upon factors that lie outside the control of the firm. Changes in the marketing of competitive products, as well as changes in general economic conditions, can lead to large forecasting errors.

 

We may further note that any errors in sales forecasts have multiple impacts on the firm’s cash flows; they impact on receivable levels (and therefore collections) and also on production expenses (and therefore disbursements).

 

October 23, 2008 Posted by | Assets, Business Flow, Capital, cash loans, Credit Analysis, Credit Repair, Credit Rport, Current Assets, Working Capital, Working Capital Management | , , , , | Leave a comment

Issues and Approaches to Forecasting -3

We are talking Issues and Approaches to Forecasting. An useful forecasting method is to analyze the historical payment patterns to determine the proportion of credit sales that are collected at various times after the date of sale, and then to use this information (along with the estimates of future sales) to project future receipts. We may, however, adopt a better and a more sophisticated approach.

 

In this, all collection rates are estimated simultaneously by regressing past sales figures against past collections. The estimated coefficients of the sales figures in the regression can be interpreted as the collection proportions, and the standard errors of the estimated regression coefficient as the uncertainty inherent in the estimation of these collection proportions.

 

In a situation where the firm is in multiple business lines, the use of overall payment patterns to forecast receipts will be accurate only when the proportions of total sales made in each business lines are constant. This is an unlikely situation, particularly since the different lines usually have different seasonal variations. In such a multiple situation, the most accurate forecasting result is achieved by forecasting receipts for the different units of the firm individually based on their own receipt patterns, then summing these receipts forecasts to obtain total cash receipts for the firm.

 

October 15, 2008 Posted by | Assets, Business Flow, Capital, cash loans, Credit Analysis, Credit Rport, Current Assets, Working Capital, Working Capital Management | , , , , , , | Leave a comment

Issues and Approaches to Forecasting -2

We are talking Issues and Approaches to Forecasting from last two posts. There are four techniques for forecasting financial variables. Diret Method, Proportion of another Account, Compounded Growth, Multiple Dependencies. We talk on all of the above four techniques for forecasting financial variables.

 

Since cash forecast deal mostly with the near future, many of the items on the cash forecast are usually estimated by some variation of the post method. The bases of these spot estimated are usually the firm’s other financial plans. Remaining estimates are mostly on a ‘proportion of another account’ basis, the account often being particular period’s sales. The other two methods are employed less frequently.  

 

It is a common experience that forecast of disbursements is much easier than receipts, because the cash manager can rely on internal information and knowledge of payment knowledge of firm’s other plans (or budgets) and can make use of the forecasting techniques described above. However, a major challenge for him comes in estimating the receipts from the collection of the firm’s receivables. In this regard, an useful forecasting method is to analyze the historical payment patterns to determine the proportion of credit sales that are collected at various times after the date of sale, and then to use this information (along with the estimates of future sales) to project future receipts.

 

October 8, 2008 Posted by | Assets, Business Flow, Capital, cash loans, Current Assets, Working Capital, Working Capital Management | , , | Leave a comment

Issues and Approaches to Forecasting -1

We are talking issues and approaches to forecasts. The most common approach to short-term cash forecasts is the receipts and disbursement approach. This method minutely traces the movement of cash and is preferred by firms that exercise very close cash control. 

 

After the firm has determined what types of receipts and disbursement are important in its overall cash flow, an important question is how to forecast the future level of these types of inflows and outflows. There are four common techniques of forecasting financial variables (i.e. items/disbursement): 

 

 Direct MethodIn using this technique, it is assumed that the variable to be forecast is independent of all other variable, or alternatively, is predetermined. The variable (e.g. lease rental) is forecast by using its excepted or predetermined level.
 

Proportion of Another Account - This technique is used to project financial variables that are expected to vary directly with the level of another variable. For example, if sales volume increases, it is natural that more units will have to be produced to replenish inventory. It is then reasonable to project certain direct costs of production, such as direct materials, as a per cent of sales.
 

ompounded Growth - This method is used when a particular financial variable is expected to grow at a steady growth rate over time.

 

Multiple Dependencies Under this technique the variable is considered to be influenced by more than one factor. The statistical technique of liner regression is often employed with historical data to determine which explanatory variables are significant in explaining the dependent variable. We will see the application of regression technique after a while. 

 

Since cash forecast deal mostly with the near future, many of the items on the cash forecast are usually estimated by some variation of the post method. The bases of these spot estimated are usually the firm’s other financial plans. Remaining estimates are mostly on a ‘proportion of another account’ basis, the another account often being particular period’s sales. The other two methods are employed less frequently. 

September 30, 2008 Posted by | Capital, cash loans, Credit Analysis, Credit Repair, Credit Rport, Current Assets, Working Capital, Working Capital Management | , , , | Leave a comment

Issues and Approaches to Forecasting

An important question in short-term cash forecasting is what the length of the forest period to be forecast should be. This depends critically on the volume of the firm’s cash inflows and outflows. If the firm is sufficiently large, it will probably pay the firm to forecast on a daily basis. Small firms with lesser amounts to deal with are probably better off using a month or even a quarter as the length of their shortest period.

 

Most firms, however, to not confirm themselves to a single forecast; instead they use several forecast with periods of various lengths. In this context, the question arises how one forecast related to another. To see how this question arises, assume that a firm is practicing multiple period-length forecasting and is generating forecasts for the next quarter, months within this quarter, and weeks, within these months.

 

Does the forecast start with quarterly data and break this down into months, then break the months down into weeks, or does the forecast start with weekly data and aggregate this into months and quarters? Starting with data on relatively long periods and breaking it down into smaller periods is called distribution; starting with data on relatively short periods and aggregating into longer periods is called scheduling. Both the methodologies have advantages and disadvantages. Scheduling requires more data manipulation, but distribution required more sophisticated statistical techniques.


The most common approach to short-term cash forecasts is the receipts and disbursement approach. This method minutely traces the movement of cash and is preferred by firms that exercise very close cash control.

September 24, 2008 Posted by | Assets, Business Flow, Capital, cash loans, Working Capital, Working Capital Management | , , , , , | Leave a comment

Cash Loans for bad credit

 

We are talking Credit Analysis, Credit Collection, Short term Investment and Cash Management in our previous post. We talk all those things with reference to business or commercial purpose. We workout working capital needs for business. We talk credit collection or cash management for business.

 Like business needs working capital management and planning, individual also need to plan for working capital or short term cash management. Last weekend I and my family were visiting a friend of us. When we were sitting together we were talking abut stock market and financial condition of AIG. We talked about AIG going to be bankrupt soon.

When we talked about AIG going to be bankrupt, he slowly speak up that he was running short on cash. Due to his past mistake he was having a bad credit which leaves him with very few options for purchasing necessities. He was suppose to pay home loan installment and also few other outstanding bills. He was proud and a private person so borrowing money from family members and friends were not going to happen. He was so nervous. He was just going to break his tears and cry with me.  I hold his hand and tell him don’t worry. There are many doors still open for you. I told him that kind of problem has its own solution it is very simple, so I suggested him not to be anxious, his problem can be resolve with a cash loans or installment loans from thinkcash.com.

He said in past he needed the  money and he took money from some cash advance company. He said the way they process my documents was so time consuming and lengthy and the rates were so high. I stopped him right away.  I asked him have you heard the name thinkcash.com. I told him about thinkcash.com. Thinkcash.com is a short term, personal loan company which lends amounts for emergency times and known for cash loans and installment loans.

As I am attached with finance industry in my professional life he knew the value of what I have told him. Thinkcash.com is quick, private and personal. The rates are typically 25-75% lower than payday loans and other loans providers available online. I told him that you can fill out application form online and the money wired by the next business day. Once you applied, all you have to do is to wait.  No need to fax or call an officer in charge for the status of your loan or even go for follow up. Isn’t it the fastest way rather than the others?

He asked me, what about repayment and penalties. If he doesn’t have money to pay off completely at a time, are there any penalties? Thinkcash.com cash loans can be paid on installment basis. The process is nicely streamlined. I want to give special annotation with this note; thinkcash.com is a no hassle loan company.

He was then very happy to know that there is still a solution for his short term financial needs.

September 17, 2008 Posted by | Assets, Capital, cash loans, Credit Repair, installment loans, Working Capital, Working Capital Management | , , , , | Leave a comment

Cash Management -1

Corporate cash management is perhaps the most critical aspect of working capital management as expressed in an old saying. The thing is finest when the need is urgent. Efficient cash management requires proper cash planning, management of receipts and disbursement and an efficient control and review mechanism. In Cash Management we intend to discuss in some details cash forecasting under uncertainty and decision-making models regarding the temporary investment of cash. We will also briefly review current practices of management of cash. Agentswebworld is nice way to handle agents website management.

CASH FORECASTING UNDER UNCERTAINTY

The worst time to raise cash is when you need it most. The company that cannot predict and plan its short-term cash flows simply does not have a handle on reality. Smart cash managers have learned to forecast cash flows for this reason.

The cash forecast is the estimate of the flows in and out of the firm’s cash account over a particular period of time. The cash flow forecast can cover a short time period (e.g. quarter, month, week or day), an annual accounting period or operating cycle or longer period of time. Forecasts for different time spans have different uses. For example, the long-range cash projections may cover periods ranging from three to five years and is useful in planning business growth, investment in projects, and introduction of new products. We will talk more in next post.

 

Ref: agents website, insurance software, insurance crm

 

August 27, 2008 Posted by | Business Flow, Capital, Credit Analysis, Current Assets, Working Capital, Working Capital Management | , , , , | Leave a comment

Short Term Investments

A cash management imperative is that idle excess balances represent an opportunity cost to the firm. To ignore investment possibilities, even for one day, is inconsistent with the objective of managing cash as an asset that must return value to the company. Our next logical focus is, therefore, on short-term investment strategies.

In most firms, the cash management staff is responsible for short-term investing. Life insurance and Annuity is not good investment when business think about short term investing. Financial One helps to manage investment in life insurance. One reason for this is that the cash manager has ‘hands-on’ knowledge of the money market and its players. Besides, cash manager is equipped, and psychologically geared, to react to fast-breaking investment opportunities. He and his staff are used to thinking in terms of very short time frames, days and hours. In the investment world, that us when profits are made, and fortunes lost.

There are several outlets for short-term investments like inter corporate advances; inter corporate bills financing, stock market operations treasury bills, commercial papers, etc. For individual term life insurance or Mortgage life insurance are good way to have term investment. The return on such investments is different and depends on money market conditions, amounts to be invested, period of investment, and transaction cost. The risks associated with a certain investment determines its safely, marketability and, hence, its yield. For the most part, the cash manager is primarily concerned with preserving principal. Although he hopes for the best returns on short-term investments, he looks for instruments that are, above all, safe. In addition, cash managers are responsible for keeping the firm in a liquid position. If an unexpected need for cash should arise, the cash manager may need to investments before maturity. Thus, an important criterion for a short-term investment strategy is instrument’s marketability.

August 18, 2008 Posted by | Business Flow, Capital, Credit Analysis, Current Assets, Working Capital, Working Capital Management | , , , , | Leave a comment

Collection Experience

We talkd about Credit Analysis. we talked the business magazines generally carry the detailed analysis of financial statements and inter-firm comparison of companies in the same industry. This information would be useful in assessing the market conditions of a particular industry. The company can then explore about the credit worthiness of customer through the references provided by him. Additional information may also be obtained by interviewing the customer or visiting his place of work.

In additional to setting the credit standards, credit period, and cash discount policy, it is also important for the company to design the collection policy and procedures so as to speed up the collections as and when become due. What would the company do if the customers do not pay within the set credit period? In this regard the company has to assess the chances of collecting the accounts receivable by putting some effort. If by putting small effort the chance are that the customer will pay his bill are high then the company should go ahead with that much of effort. In situations when the chances of collecting the money are considerably less than the company should explore other ways of collecting the money. Credit Cards or business credit cards collections are easier and require less effort.

The company can use number of methods to speed up the collections. Letters and telephone calls are the easiest one and least expensive. The company may design a policy of sending a letter few days before the payment becomes due. Depending upon the situation the company can call the customers on telephone just before the due date. A visit to customer may prove to be effective when the bills are overdue. Legal action should be treated as the last resort. Before that the company should try to understand the problems of the customer and if the company finds that the integrity of the customer is at doubt, they should resort to legal action. Pre-paid debit cards are better alternative for low interest credit card. On that basis the company can find out whether the particular debt should be treated as doubtful and should be writer off or not.

August 7, 2008 Posted by | Credit Analysis, Credit Repair, Credit Rport, Current Assets | , , | Leave a comment

Credit Analysis -3

We are talking Credit Analysis. The cost in terms of time and money resources involved in such experience would outweigh the benefits. But at the same time the company has to come o conclusion and satisfy itself that the customer to whom it is extending credit is worthy of it and the risks involved commensurate with the return. Bad Credit Repair analysis helps company to plan their credit policy.

   

In order to undertake credit analysis, the company may analyze the financial statements of the customer. For the companies which are listed on stock exchanges, obtaining their financial statements is not difficult as the same are available with the exchanges. Some of the major stock exchanges regularly publish summarized financial statements in their directories. In case the customer to whom the company is thinking to extend the credit is not listed and the financial information is not available, the company can ask the customer to submit the latest financial statements. In such situations the company may adopt a policy not to extend the credit to customers who do not submit the financial statements. Credit Repair and Credit Repair Services helps to have good credit reports for individuals.

   

Once the company gets the financial statements the following analysis would provide information about the credit worthiness of customers;

  

Ratio analysis

Fund Flow Analysis

 

Inter-firm comparison 

 

 Discriminate analysis and mark or analysis can also be usefully employed for credit analysis.

 

 

 

The business magazines generally carry the detailed analysis of financial statements and inter-firm comparison of companies in the same industry. This information would be useful in assessing the market conditions of a particular industry. Free debt settlement report helps company for credit analysis. The company can also ask the customer to provide the list of references or the names of companies with whom the customers has transacted in the past. The company can then explore about the credit worthiness of customer through the references provided by him. Repair Credit is one of the service helps company for credit analysis.  Additional information may also be obtained by interviewing the customer or visiting his place of work.

 

 

August 6, 2008 Posted by | Business Flow, Capital, Credit Analysis, Credit Rport, Working Capital, Working Capital Management | , , , , , | 1 Comment

Credit Analysis -2

Capacity is the ability of the customer to meet the obligations whenever they are due. In this regard it would be important for the company to see that the obligations are met through the funds generated from the operations of the customers. That would reflect the long term ability of the customer to meet the obligations. In case the customer is not in a position to meet his obligation out of operations in some abnormal year, the company should examine the capital base of the company. This would indicate the capability of the company to face the problems in case of some difficulty. The company should examine the net worth of the customer to access the capital base. Credit card debt assistance companies help company to examine net worth of individual customer.

 

The market conditions play an important role when one is doing credit analysis. The expected recessionary trends in the market, growing competition and other market factors should be taken into account when doing credit analysis of the customer. Given a particular set of conditions, the costs associated with extending the credit may some times be high. The cost may get reflected in high bad debt expenses or the default in payments. And finally, the company has to examine the kind of security, debt assistance, collateral in the form of assets, the customer is providing.

 

There will always be a problem in obtaining financial and qualitative information about the customers. This problem arises because there is no systematic source of information particularly about the small sized customers. It may not be possible for most of the companies to administer the collection of information about the customers. Company can take help of company who give assistance with credit cards. The cost in terms of time and money resources involved in such experience would outweigh the benefits. But at the same time the company has to come o conclusion and satisfy itself that the customer to whom it is extending credit is worthy of it and the risks involved commensurate with the return.

August 1, 2008 Posted by | Assets, Business Flow, Capital, Current Assets, Working Capital, Working Capital Management | , , | Leave a comment

Credit Analysis -1

No Company does blindly sell on credit to every customer approaching it. The company has to evaluate the capability of the customer and his strengths to fulfill the promise of paying the bills in time. The companies ignoring adequate analysis of their customer would soon find themselves in a situation not generating sufficient resources for day to day operation of the business. The company must analyze the risk of paying late or risk of default before extending credit. Credit given to Startup jobs employee carrying high risk compare to others.

 

The credit analysis would brodly involve the following three steps. 

  • Getting financial and non financial information about the customer.
  • Analyzing the credit worthiness of the customer and assessing the risk involved.
  • Deciding to grant the credit. 

Analyzing the credit-worthiness of the customer is the most difficult task. The financial and no-financial information may provide some insights into the credit worthiness of the customer. With the help of this information and other insights the company has to access the following six C’s of Credit Worthiness: 

  1. Character
  2. Capacity
  3. Capital
  4. Condition
  5. Cost
  6. Collateral

 The analysis of credit worthiness begins with the assessment of the customer’s willingness to pay the bills of the company. Capacity is the ability of the customer to meet the obligations whenever they are due.  Startup jobs employees are having less credit worthiness. In this regard it would be important for the company to see that the obligations are met through the funds generated from the operations of the customer.

We continue our talk on Credit Analysis in next post.

July 29, 2008 Posted by | Assets, Business Flow, Capital, Current Assets, Working Capital, Working Capital Management | , , | Leave a comment

Cash Discount

A company short of cash resources and facing liquidity problem may consider the use of cash discounts to influence its customers to pay promptly. There are two important of cash discount policy aspects -

  • Cash discount rate
  • Cash discount period

Giving the cash discount facility is not the same as cutting the prices and there by affecting demand. It is a mechanism through which the company is giving some benefits to customers who opt to pay early. There is a remote possibility that all customers will pay the company their dues within the cash discount period. Only a segment of customers who have sufficient cash resources and good liquidity position will avail cash discount facility. A Student Loan or Private Student Loans can’t consider cash discount. Cash discount will affect customers and sometime loss of revenue too.

The introduction of cash discount as a policy will also affect customers who were paying promptly earlier. Suppose 5 percent of sales were on case basis and rest 95 percent on credit, by introducing cash discounts, the company has to pay cash discount to the 5 percent customers who were paying cash immediately at the time of sale. Some of the customers from the 95 percent segment would avail cash discount but certainly not all.

The cash discount policy would result into loss of revenue to the company. At the same time the company would experience a quick collections resulting in to lower collection period. The reduction in average collection period in turn will affect the investment in accounts receivable. A College Loans for students can’t consider as revenue loss.  Before deciding about the cash discount policy the company has to find out whether the returns on funds released on account of reduction in investment in accounts receivable is more than the loss of revenue. Only if the return completely offsets the loss of revenue the cash discount policy should be introduced.

July 23, 2008 Posted by | Business Flow, Capital, Current Assets, Working Capital, Working Capital Management | , , | Leave a comment

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