Managing ShortTerm Resources

1
Managing Short-Term Resources
PA 546 Constantine Hadjilambrinos

• Lecture 3
• September 13, 2005

2
PA 546 Constantine Hadjilambrinos

• Working capital
• Current assets Current liabilities
• Current assets Cash and highly liquid assets
  (money market accounts, very short term bonds,
  etc.)
• Liquidity has a cost High liquidity means
  that investment opportunities offering better
  rates of return cannot be utilized.

3
Cash Management
PA 546 Constantine Hadjilambrinos
Cash reserves Line of credit
Investment
4
Short-term cash investments
PA 546 Constantine Hadjilambrinos
Liquidity
Capital risk

• Checking account
• Savings account
• Certificate of deposit
• Treasury notes
• US Govt. bonds
• Other govt. notes
• Other govt. bonds
• Corporate notes
• Corporate bonds

5
Cash budgeting
PA 546 Constantine Hadjilambrinos

• Match projected expenditures with projected
  revenues
• Estimate appropriate level of emergency funds
• Balance safety with investment opportunities

6
Bank Services
PA 546 Constantine Hadjilambrinos

• Account services
• Processing deposits, checks, and reconciling
  accounts
• Concentration/zero balance accounts
• Daily account notification
• Electronic funds transfer
• Collection services
• Wire transfers
• Lockboxes
• Night depository
• Armored cars
• Counting depositing funds

7
Bank Services
PA 546 Constantine Hadjilambrinos

• Safeguarding services
• Safe deposit boxes
• Storage of stocks, bonds, and cancelled checks
• Credit services
• Lines of credit
• Note purchases
• Lease-purchase financing
• Long-term bond underwriting
• Investment services
• Investment instruments
• Investment advice
• Sweep facility
• Registration of bonds

8
Marketable securities
PA 546 Constantine Hadjilambrinos

• Debt
• Money market, notes, bonds principal risk
  yield risk
• Equity
• Stock principal risk yield risk
• Derivatives
• Options principal risk

9
Accounts Receivable
PA 546 Constantine Hadjilambrinos
Invoice received
Invoice paid
Payment received
Payment deposited
Payment clears
10
Value of speed in billing/collection process
PA 546 Constantine Hadjilambrinos

• Value of collections 300 million per year
• r 9 (0.09)
• Increase speed of billing/collection by 3 days

So, for 3 days
11
Short Term Obligations
PA 546 Constantine Hadjilambrinos

• Accounts payable
• Get discounts for early payment
• Avoid penalties for late payments (pay on time)
• Typical terms 2/10 N/30 (No penalty if paid in
  30 days and 2 discount if paid in 10 days or
  less.
• Payroll payable
• Consider reducing frequency of payroll
• Delay in payment (when do benefits get paid?)
• Short term debt
• Interest Loan amount X Interest rate/yr X
  Fraction of yr.
• Taxes payable