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Handout Manajemen Keuangan

Cash Management

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Cash conversion cycle

CCC = + –

CCC = + –

CCC = + 46 – 30

CCC = 76 + 46 – 30

CCC = 92 days.

Inventoryconversion

period

Receivablescollection

period

Payablesdeferralperiod

Days per yearInv. turnover

Payablesdeferralperiod

Days salesoutstanding

3654.82

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Cash doesn’t earn a profit, so why hold it?

1. Transactions – must have some cash to operate.

2. Precaution – “safety stock”. Reduced by line of credit and marketable securities.

3. Compensating balances – for loans and/or services provided.

4. Speculation – to take advantage of bargains and to take discounts. Reduced by credit lines and marketable securities.

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What is the goal of cash management?

To meet above objectives, especially to have cash for transactions, yet not have any excess cash.

To minimize transactions balances in particular, and also needs for cash to meet other objectives.

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Ways to minimize cash holdings

Use a lockbox. Insist on wire transfers from customers. Synchronize inflows and outflows. Use a remote disbursement account. Increase forecast accuracy to reduce need for “safety

stock” of cash. Hold marketable securities (also reduces need for “safety

stock”). Negotiate a line of credit (also reduces need for “safety

stock”).

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Cash budget:The primary cash management tool

Purpose: Forecasts cash inflows, outflows, and ending cash balances. Used to plan loans needed or funds available to invest.

Timing: Daily, weekly, or monthly, depending upon purpose of forecast. Monthly for annual planning, daily for actual cash management.

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Data Required for a Cash Budgeting

1 Sales forecast.

2.Information on collections delay.

3.Forecast of purchases and payment terms.

4.Forecast of cash expenses, taxes, etc.

5.Initial cash on hand.

6.Target cash balance.

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SKI’s cash budget:For January and February

Net Cash Inflows

Jan FebCollections $67,651.95 $62,755.40Purchases 44,603.75 36,472.65Wages 6,690.56 5,470.90Rent 2,500.00 2,500.00Total payments $53,794.31 $44,443.55Net CF $13,857.64 $18,311.85

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SKI’s cash budget

Net Cash Inflows Jan FebCash at start if no borrowing $ 3,000.00 $16,857.64Net CF 13,857.64 18,311.85Cumulative cash 16,857.64 35,169.49Less: target cash 1,500.00 1,500.00Surplus $15,357.64 $33,669.49

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Should depreciation be explicitly included in the cash budget?

No. Depreciation is a noncash charge. Only cash payments and receipts appear on cash budget.

However, depreciation does affect taxes, which appear in the cash budget.

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What are some other potential cash inflows besides collections?

Proceeds from the sale of fixed assets. Proceeds from stock and bond sales. Interest earned. Court settlements.

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How could bad debts be worked into the cash budget?

Collections would be reduced by the amount of the bad debt losses.

For example, if the firm had 3% bad debt losses, collections would total only 97% of sales.

Lower collections would lead to higher borrowing requirements.

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Analyze SKI’s forecasted cash budget

Cash holdings will exceed the target balance for each month, except for October and November.

Cash budget indicates the company is holding too much cash.

SKI could improve its EVA by either investing cash in more productive assets, or by returning cash to its shareholders.

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Why might SKI want to maintain a relatively high amount of cash?

If sales turn out to be considerably less than expected, SKI could face a cash shortfall.

A company may choose to hold large amounts of cash if it does not have much faith in its sales forecast, or if it is very conservative.

The cash may be used, in part, to fund future investments.

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Float

Float refers t funds that have been sent by the payer but are not yet usable funds to the payee.

Float increases both the firm’s average collection period and its average payment period.

The primary role of a cash manager on the collection side is to minimize this float wherever possible and to maximize it.

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Float

Mail float: the time delay between when payment is placed in the mail and when payment is received.

Processing Float: the time between receipt of the payment and its deposit into the firm’s account.

Availability Float: the time between deposit of the check and availability of the funds to the firm.

Clearing Float: the time between deposit of the check and presentation of the check back to the bank on which it is draw

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Float

Field-Banking system: collections are made either over the counter or at a collection office. The main collection problem is moving the funds from the local banks up to the main accounts at the company’s primary bank.

Mail-Based System: The process center will receive the mail payments, open the envelopes, separate the check from the remittance information, prepare the check for deposit, and send the remittance information to the accounts receivable department application of payment.

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Types of Collection Systems

Electronic System: In a electronic bill presentment and payment (EBPP) system, customers are sent bills in an electronic format and then can pay their bills via electronic means.

Lockbox System: Customers mail payments to a post office box, which is emptied regularly by the firm’s bank. The bank processes each payment and deposits the payments in the firm’s account.

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Types of Collection Systems

Electronic System: In a electronic bill presentment and payment (EBPP) system, customers are sent bills in an electronic format and then can pay their bills via electronic means.

Lockbox System: Customers mail payments to a post office box, which is emptied regularly by the firm’s bank. The bank processes each payment and deposits the payments in the firm’s account.

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Lockbox System: An Example

Firm Y believes that use of a lockbox system can shorten its accounts receivable collection period by four days. The firms’ annual sales, all on credit, are $65 million, billed on a continuous basis. The firms can earn 9% on its short-term investments. The cost of the lockbox system is $57,500 per year. Assume a 365-day year.

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Lockbox System: An Example

A. What amount of cash will be made available for other uses under the lockbox system?

B. What net benefit (or cost) will the firm receive if it adopts the lockbox system? Should it adopt the proposed lockbox system?

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Lockbox System: An Example

Solution: A. Cash available = ($65m/365) *4 =

$712,329 B. Interest Income from Reinvesting the

cash available = $712,329 *(9%/365) = $64,109.61

Lockbox costs = $57,500

Net Benefit = $64,109.61 - $57,500 = $6,609.61