Cash Receivable and Inventory Management

CASH
RECEIVABLE
and
INVENTORY
MANAGEMENT
CASH
MANAGEMENT
CASH MANAGEMENT
- involves the maintenance of a
cash and marketable securities
investment level which will
enable the company to meet its
cash requirements and optimize
the income on idle funds.
A financial officer has the
following specific objectives
in monitoring cash balances:
1. To meet the cash
disbursement needs
(payments schedule);
2. To minimize the funds
committed to transactions
and precautionary cash
balances; and
3. To avoid
misappropriation and
handling losses in the
normal course of business.
REASONS FOR
HOLDING CASH
1. Transaction Motive
Cash is needed to facilitate
the normal transactions of the
business.
2. Precautionary Motive
Cash may be held beyond its
normal operating requirement
level to provide for a buffer
against contingencies.
3. Speculative Motive
Cash is held ready for
profit-making or investment
opportunities.
4. Contractual Motive
A company may be
required by a bank to
maintain a certain
compensating balance.
MANAGING CASH
FLOWS
Techniques for Lessening
Cash Needs
1. Accelerating collections
2. Slowing disbursements
3. Reducing the transactions and
precautionary idle cash
ACCELERATING
COLLECTION
Any method that
accelerates collection
lessens the firm’s need for
cash.
1. Prompt billing.
2. Offering trade and cash
discounts.
3. Maintenance of regional
collection office.
4. Mechanical procedures such
as enclosure of self-
addressed return envelopes
with the bill to make it
easier for the customer to
mail payments.
5. Customer making direct
payment to the company’s
depository banks which
reduces the time required
for a company to receive
incoming checks…
… to deposit them and to
get them cleared through
the banking system.
6. Payment by wire. Most large
companies require payments
of larger bills by wire, or
even by automatic debts.
This is, of course, the
ultimate in…
… speeded-up collection
process, and computer
technology in making such a
process increasingly feasible
and efficient.
SLOWING
DISBURSEMENTS
1. Centralized processing of
payables.
- permits the finance manager
to evaluate the payments
coming due for the entire
company.
2. Zero balance accounts
(ZBA)
- are special disbursement
accounts having a zero peso
balance on which checks are
written.
3. Delaying payment
- If one is not going take
advantage of any offered
trade discount for early
payment, pay on the last day
of the credit period.
4. “Play the float”
- involves taking advantage of
the time it takes for the
company’s check to clear
the banking system.
5. Less Frequent Payroll
- instead of paying the
workers weekly, they may
just be paid semi-
monthly.
REDUCING THE NEED
FOR PRECAUTIONARY
BALANCE
Techniques:
1. More accurate cash
budgeting.
2. Lines of credit.
3. Temporary investments.
RECEIVABLE
MANAGEMENT
OBJECTIVE:
To encourage sales and
gain additional customers
by extending credit.
It is therefore the
responsibility of the finance
officer to evaluate the
pertinent costs and benefits
related to credit extension,
to finance…
…the firm’s investment in
account receivable,
implement the firm’s
chosen credit policy and to
enforce collection.
FACTORS IN DETERMINING
ACCOUNTS RECEIVABLE
POLICY
1. Credit Standards
- involve extending trade credit
more liberally until the marginal
profitability…
… on additional sales equals
the required return on the
additional investment in
receivables.
2. Credit Terms
- involve both the length of the
credit period and the discount
given.
3. Collection Program
4. Delinquency and
Default
Summary of Trade-offs in Credit
and Collection Policies
BENEFIT COST
a.Increase in a. Increase in
sales and total credit processing
costs.
1. Relaxation
contribution
b. Increase in
of credit margin. collection costs.
standards c. Higher default
costs (bad debts)
d. Higher capital
costs (opportunity
costs)
BENEFIT COST
a.Increase in a. Higher
Lengthening sales and total capital costs
contribution (opportunity
of credit margin.
costs of higher
period
investment in
a.Increase in
sales and total
receivables).
contribution
Granting margin.
cash b. Opportunity a. Lesser profit.
income on lower
discounts investment in
receivable.
BENEFIT COST
a. Lower
default costs a. Higher
Intensified
4.
(bad debts) collection
Collection b. Lower expenses.
Efforts opportunity
b. Lower sales
cost or
capital costs.
INVENTORY
MANAGEMENT
Inventory is the stockpile
of the product the firm is
offering for sale and the
components that make up
the product.
FUNCTIONS OF
INVENTORIES
1. Pipeline or transit inventories
– are being moved or transported from
one location to another and they fill the
supply pipelines between stages of the
entire production-distribution system.
2. Organizational or
decoupling inventories
– are maintained to provide each
link in the production-distribution
chain a certain degree of
independence form the others.
3. Seasonal or anticipation
stock
4. Batch or lot-size
inventories
5. Safety or buffer stock

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