Financial Management Re Vie We
Financial Management Re Vie We
• By
• 2. Profitability Ratios
• 4. Turnover/Efficiency Ratios
Liquidity Ratios
• Measure the company’s capability to pay
its maturing short-term debts/obligations
out of its current assets.
• Current Ratio
• Equals to current assets divided by current
liabilities.
Liquidity Ratios
• Quick (Acid-Test) Ratio
• Equals to most liquid current assets (cash,
marketable securities, and receivables)
divided by current liabilities. (Inventory is
not included in the current assets. Prepaid
expenses are also not included because
they are not convertible into cash to pay
current liabilities).
Profitability Ratios
• Measure the company’s ability to earn a
satisfactory profit and return on investment.
• Debt Ratio
• Compares total liabilities to total assets. It
shows the percentage of total funds
obtained from creditors.
• Equals Total Liabilities divided by Total
Assets. Creditors prefer low debt ratio.
Leverage Ratios
• Debt/Equity Ratio
• Measures the solvency of the company
that ensures the high or low degree of
safety to creditors.
• Equals to Total Liabilities divided by
Stockholders’ Equity.
• A low debt/equity ratio is favored by
creditors.
Leverage Ratios
• Times Interest Earned (Interest Coverage) Ratio
• 2. Precautionary Balance
• 3. Speculative Balance
• 4. Compensating Balance
Cash Management Techniques
• 1. Cash Flow Synchronization.
• 2. Playing the Float.
• 3. Lockbox Plan
• 4. Concentration Banking
• 5. Automatic Bank Credits
• 6. Payables Centralization
• 7. Zero-Balance Accounts
• 8. Overdraft System
Rationale for Holding Marketable
Securities
• 1. Marketable securities as a substitute
for cash or temporary investments:
• a. To finance seasonal or cyclical
operations.
• b. To meet future financial
requirements.
Factors Influencing the Choice of
Marketable Securities
• 1. Default Risk
• 2. Interest Rate Risk
• 3. Inflation Risk
• 4. Marketability Risk
Baumol Model for Balancing Cash
and Marketable Securities
• An economic model that determines the optimal
cash balance by using economic ordering
quantity (EOQ) concepts.
• Formula:
• Optimal Cash Balance
• = Square Root of 2(F)(T)/k
• Where: F is the fixed cost of trading a security; T
is the annual cash requirements and k interest
rate of marketable security (opportunity cost)
Receivable Management
• Formulation of Credit Policy
• 1. Credit Standards
• 2. Credit Terms (2/10, net 30)
• -Credit Period
• -Discount
• 3. Collection Policy
• 5. Discount Policy
The Five (5) Cs of Credit
• 1. Character
• 2. Capacity
• 3. Capital
• 4. Collateral
• 5. Conditions
•
Inventory Management
• Involves a trade-off between the costs
associated with keeping inventory versus
the benefits of holding inventory.
• High inventory level results in increased
inventory costs but low inventory level can
result to possible stockouts and lost sales.
• The goal is to provide inventories required
for operation at the lowest possible
inventory costs.
Types of Inventories
• 1. Raw Materials
• 2. Goods-in-Process
• 3. Finished Goods
Inventory Costs
• 1. Ordering Costs
• The costs of placing and receiving the
orders.
• 2. Carrying Costs
• The costs associated with carrying
inventory (storage, depreciation, etc.)
Inventory Mgt. Models
• Economic Order Quantity (EOQ) Model
• To determine the particular quantity to order
which will minimize the total inventory costs.
• Formula:
• EOQ=Square Root of 2SP/C where:
• S is the estimated annual sales
• P is the fixed cost per order
• C is carrying cost per unit
Reorder Point
• The inventory level at which an order
should be placed.
• Formula:
• Reorder Point
• =Lead Time Usage plus Safety Stock
• Where Lead time usage is the normal sale
or consumption during lead time while
safety stock is the additional inventory
carried to guard against stockout.
Basic Strategies of Working Capital
Management
• 1. Accelerate collection of receivables