Cash Management
I. Internal Factors That Affect Working Capital Needs:
• Company size and growth rate
• organizational structure
• Sophistication of working capital management
• Borrowing and investing positions/acyivities/capacities
II. External Factors
• Banking services
• Interest rates
• New technologies and products
• The economy
• Competitors
III. Cash versus liquidity management
• Primary sources of liquidity
o Cash balances
o Short-term funds
o Cash-flow management
• Secondary sources — may result in a change in the company’s financial and operating position:
o negotiated debt contracts
o liquidating assets
o filing for bankruptcy
IV. Statement of Cash Flow
A. Tracing how the cash balance has changed from one period to next.
B. Three parts: Operations, Capital Spending, Financing Cash Flows.
V. Tracing Cash Flows
A. Sources of Cash: Increases in Liabilities or Equity Accounts; Decreases in Assets(other than cash).
B. Uses of Cash: Decreases in Liabilities or Equity; Increases in Assets (other than cash)
VI. Operating Cycle
A. = Inventory Period + Average Collection Period
B. Inventory Period = 365÷InventoryTurnover
Inventory Turnover = CostofGoodsSold÷AverageInventory
C. Average Collection Period = 365÷ReceivablesTurnover
Receivables Turnover = CreditSales÷AverageReceivables
VII. Cash Cycle
A. = =OperatingCycle−PayablesPeriod
Payables Period =365÷PayablesTurnover
PayablesTurnover=CostOfGoodsSold÷AveragePayables
B. What is the link between the cash cycle and value?

1. How does Total Asset Turnover affect ROA & ROE?
   VIII. Why do companies hold cash?
   A. Transactions
   B. Emergencies
   C. Speculative
   D. Compensating Balances
   IX. But what is cost of cash?
   X. Aspects of Working Capital Management
   A. Size of firm’s investment in current assetss
   B. How are current assets financed? With short-term funds or long-term funds?
   XI. Typical Policies:
   A. Conservative (Flexible): High amounts of current assets financed with long-term funds
   B. Aggressive (Restrictive): Low amounts of current assets financed with short-term funds
   XII. Cash Budget
   A. Expected Cash Inflows
   B. Operating Outflows
   C. Capital Spending
   D. Planned financial expenses (dividends, interest, share repurchases, debt payments)
   E. Target Cash Balance
   XIII. Float
   A. Disbursement Float
   B. Collection Float
   XIV. Investing Temporary Surpluses
   XV. Measuring Liquidity
   • Liquidity Ratios