Corp.finance 3: Working capital Management (1) - cash & Short-term investments

Working capital, including:

Asset:

1. Cash
2. Short-term investments
3. Account of Receivable (A/R)
4. Account of Payable (A/P)
5. Inventories

Liabilities:
Short-term liabilities

Measure the efficiency of them in operation activities:

• Ratios
• Current ratio = current asset/current liability = CA/CL (notes: NO AVERAGE!)
• Quick ratio (acid-test ratio) = (cash + short-term marketable investment + Receivables)/CL
  
• Turnover
•  A/R turnover = Credit sales/AVERAGE receivables
• Credit sales: % of sales or if n/a: use industry data
• A/P turnover = Purchases/AVERAGE payables
• Purchase = Ending Inventory - Beginning Inventory + COGS
• Inventory turnover = COGS/AVERAGE inventory
  
• Days:
• Number of days of Receivables = Accounts Receivable/ AVERAGE day's sales on credit
• = A/R : (credit sales/365)
  
• Number of days of Payables = A/P / AVERAGE day's purchases
• = A/P : (purchases/365)
• Number of days of Inventory = Inventory/ AVERAGE day's COGS
• = Inventory/ (COGS/365)
• Notes: 
• turnovers do NOT EQUAL to 365/number of days; vice versa: Number of days... NOT equal to (1/turnover)*365
• however, when the question does NOT provide enough information => use info. as much as possible
  
• Inferred definition:
  
• Operating cycle = No. of days of Receivables + No. of days of Inventory
• NET operating cycle <=> cash conversion cycle = No. of days of Receivables + No. of days of Inventory - No. of days of Payables = Operating cycle - No. of days of Payables

Now, let's talk 'bout managing these 5 items

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2011.03.22: trong lúc google về mấy mô hình quản lý tài sản ngắn hạn, tìm được file này khá đầy đủ, cụ tỉ, chi tiết. personally mình thấy phần này trong CFA viết ko đầy đủ sâu sắc cho lắm (hay đợi L2, L3 mới sâu sắc thì ko rõ nữa ^^)

Link đây

CASH

• Role of cash
• liquidity
• financial advantages
  
• Technique used: 
• continuously in each business day
• Forecasting short-term CF
• Minimum cash balances: keep cash buffer: Little much more than cash needs for unexpected cash need, financial flexibility
• Identifying typical CF
• stable CF
• extraordinary: M&A, capital expenditure
• Cash forecasting systems: could be separated by different horizon: short - medium - long term
  
• Monitoring cash uses & level
• seriously necessary to collect info. in time, if not: it's NO value
  
• could manage via bank account or service supplied by bank
• pay attention on seasonality. it creates peaks & valleys in business (high & low demand of cash, respectively)
• non-operating activities should be taken into account

INVESTING SHORT-TERM FUNDs

• Short-term investment instruments
• T-bills: most liquid
  
• Fed agency securities
• CDs (bank certificates of deposit)
  
• BAs (banker's acceptances)
• Eurodollar time deposits
  
• Bank sweep services
• Repos
• CP (commercial paper)
• Mutual funds & money market mutual funds
• Tax-advantaged securities
• Notes: Discounted sec. vs Interest-bearing sec.
  
• Discounted securities: buy @ Price < Par value => receive Par @ maturity
  
• Interest-bearing securities: buy @ Price = Par => receive Par + interest @ maturity
  
• These def. related to compute yield
• Bond equivalent yield: BEY = (Par - Purchase price)/Purchase price * 365/no. of day to maturity
• Money market yield: MMY = (Par - Purchase price)/Purchase price * 360/no. of day to maturity
• Discount-basis yield: DBY  = (Par - Purchase price)/Par * 360/no. of day to maturity

• Investment risk:
• Default risk / credit risk
  
• Market risk (<=> interest risk)
• Liquidity risk
  
• Foreign exchange risk
  
• Strategies (need more understanding)
  
• Passive
• Active
• Matching
• Mismatching
• Laddering
• Investment Policy
• Evaluating short-term funds management
• yield comparison: with benchmark or btw companies
  
• remember: for short-term investment, return is sacrificed for liquidity & safety