1. Short-Term Financial Management
C H A P T E R 12
Short-Term Financial Management
Chapter 12

2. Chapter Objectives
• Understand the definition of net working capital and see how net working capital is calculated.
• Discuss cash management by sport businesses, including how much cash to hold.
• Understand what is involved in the efficient collection and disbursement of cash.
• Describe how firms manage the granting of credit and how they set credit terms.
• Identify issues that arise as businesses engage in collections management, the conversion of accounts receivable to cash.

3. Key Terms Net Working Capital Current assets – current liabilities
Short-Term Financial Management
Centers on current assets and current liabilities, which generate inflows or outflows of cash to or from a business within one year or less

4. Current Assets Current Assets
Cash and other assets that are expected to be converted to cash within one year
Accounts Receivable
Unpaid bills for goods and services that have been sold to customers
An extremely important current asset based on the value of accounts receivable relative to other current assets
(continued)

5. Current Assets (continued)
Types of Current Assets
Cash
Marketable securities
Accounts receivable
Inventories
Prepaid expenses
Other types of current assets

6. Current Liabilities Types of Current Liabilities Short-term debt
Accounts payable
Accrued income taxes
Current payments on long-term debt
Accrued liabilities
Unearned or deferred credits
Other types of current liabilities

7. Current Assets and Liabilities
Current assets and liabilities for all U.S. manufacturing corporations in second quarter of All numbers are in billions.
Data from U.S. Department of Commerce 2011.
Current Assets ($ billions)
Current Liabilities ($ billions)
Cash
344.1
Short-term debt
166.0
Marketable securities
172.3
Accounts payable
510.6
Accounts receivable
669.6
Accrued income taxes
31.4
Inventories
672.3
Current payments due on long-term debt
117.8
Other current assets
391.2
Other current liabilities
732.7
Total
$2,249.5
$1,558.50

8. Cash Management Decisions
Cash management: The efficient collection and disbursement of cash.
How much cash to hold?
How best to replenish cash?
Marketable securities vs. borrowing
The reason for holding cash (despite the fact that it doesn’t earn interest) is the need for liquidity (i.e., having an asset on hand for immediate transactions).

9. Collection and Disbursement of Cash
The financial manager’s true concern is with available balance rather than ledger balance.
Payment float: Checks written by the firm and not yet cleared.
Availability float: Checks received by the firm and deposited but not yet cleared.
Net float: The net effect of checks in the process of collection (payment – availability float).
Benefit of Float
Interest is earned on available balance from the bank while payment float occurs (assuming the business has an interest-earning account with the bank).

10. Methods of Reducing Float
Concentration Banking
This method involves making payments to a local office as opposed to corporate headquarters.
It reduces mail time, and local checks reduce check processing time.
Lockbox System
Concentration banking can also be combined with a lockbox system.
In a lockbox system, the company pays a local bank to handle the administrative chores so it is not necessary to establish a branch office to handle receipt of payments.
(continued)

11. Methods of Reducing Float (continued)
Disbursements
Slowing down disbursements is another technique for reducing float.
Electronic Fund Transfers
This method reduces the use of paper checks, thereby speeding up collections and reducing availability float.

12. Credit Management
The terms of credit become important in determining the amount of accounts receivable appearing on the balance sheet.
1/10/30
Customers receive a 1% discount for paying within 10 days
2/10/30
Customers receive a 2% discount for paying within 10 days
If customers have a poor credit record:
COD (cash on delivery)
CBD (cash before delivery)

13. Average Daily Sales Outstanding
Assume Under Armour annual sales are $4 million.
Therefore, its average daily sales = $4,000,000 / 365 days = $10,959 per day.
The average daily sales outstanding = (avg. daily sales) / (current accounts receivable).
Assume that accounts receivable equal $186,300.
Then the average daily sales outstanding equals $186,300 / $10,959 = 17 days.
This means that when making a purchase, the average Under Armour customer pays in 17 days.

14. Aging Report An aging report tabulates receivables by account ages.
Can provide more detailed information
Sample Aging Report
Age of account
Percent of total accounts receivable
0 to 30 days
60%
31 to 60 days
15%
61 to 90 days
90 to 120 days 6%
over 121 days 4%
Total
100%
This company has serious collections problems and should be reviewing its collections policies.
A significant number of customers are past due (40% are accounts outstanding more than 30 days).

15. Questions for Class Discussion
How should a business monitor collections activity?
How has the advent of greater volumes of electronic funds transfers affected the accumulation of float by a business?
Businesses can increase cash flow by stretching out payments to vendors by an additional fifteen days. If this is so obvious, why is it that companies do not necessarily do this?
If a company has excess cash available, should it use that cash to pay its vendors more quickly?
(continued)

16. Questions for Class Discussion (continued)
Is it better business practice to make all customers pay before receiving a product, as opposed to having receivables?
For a professional sport organization such as an NFL team, list some of the financial activities that may be classified under short-term financial management.