Module 44: Financial Management
Financial Management
Five functions:
- 1. Financing—Raising capital to fund the business
- Capital budgeting—Selecting the best long-term projects based on risk and return
- Financial management—Managing cash flow so that funds are available when needed at the lowest cost
- Corporate governance—Ensuring behavior by managers that is ethical and in the best interests of shareholders
- Risk management—Identifying and managing the firm's exposure to all types of risk
Working Capital Management
Inventory conversion period (ICP)—The average number of days required to convert inventory to sales
- ICP = Average inventory / Cost of sales per day
- Average inventory = (Beginning inventory + Ending inventory) / 2
- Assume 365 days in a year unless told otherwise
Receivables collection period (RCP)—The average number of days required to collect accounts receivable
- RCP = Average receivables / Credit sales per day
Payables deferral period (PDP)—The average number of days between the purchase of inventory (including materials and labor for a manufacturing entity) and payment for them
- PDP = Average payables / Purchases per day
Cash conversion cycle (CCC)—The average number of days between the payment of cash to suppliers of material and labor and cash inflows from customers
- CCC = ICP + RCP − PDP
Cash Management
Cash balances are maintained by a firm for:
- Operations—To pay ordinary expenses
- Compensating balances—To receive various bank services, fee waivers, and ...
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