Short-term Financial

Management Decisions:
Working Capital Management

AE 321: Strategic Business Analysis

 Management of
Current Liabilities
Trade Payables

Which is better?
???
2/10, 2/10,
OR
N/30 N/40
Trade Payables

Which is better?
???
2/10, 3/10,
OR
N/30 N/30
Trade Payables

Which is better?
???
2/10, 3/10,
OR
N/40 N/30
 Trade Payables
Effective Cost: Computation:
Formulas:

Non-free
Credit Simple Annual
Periodic Rate Credit n Remark
Term Effective Cost
Days
2/10, n/30 2/98 = 0.02041 30-10=20 360/20 = 18 36.73% Average
2/10, n/40 2/98 = 0.02041 40-10=30 360/30 = 12 24.49% Best if the entity plans to delay
payments
3/10, n/30 3/97 = 0.03092 30-10=20 360/20 = 18 55.67% Best if the entity plans to take
advantage of the cash discount
Trade Payables

Which is better?
???
2/10, 3.9215/20,
OR
N/30 N/60
 Trade Payables
Effective Cost: Computation:
Formulas:

Non-free
Simple Annual
Credit Term Periodic Rate Credit n Remark
Effective Cost
Days
2/10, n/30 2/98 = 0.02041 30-10=20 360/20 = 18 36.73% Same?
3.9215/20, n/60 3.9215/96.0785 = 0.04082 60-20=40 360/40 = 9 36.73%
 Trade Payables
Effective Cost: Computation:
Formula:

COMPOUND Annual
Credit Term Periodic Rate N Remark
Effective Cost

2/10, n/30 2/98 = 0.02041 360/20 = 18 (1+0.02041)^-1 = 43.86% For early payment
3.9215/20, n/60 3.9215/96.0785 = 0.04082 360/40 = 9 (1+0.04082)^-1 = 43.33% For delayed payment
 Short-term Loans
Effective Cost: Computation:
Formulas: Same as trade payables
What Deductions?
1. Bank charges
2. Discount (or interest
deducted in advance)
3. Compensating
balance
 Trade Payables
Effective Cost: Computation:
Illustration: P1,000,000 face amount
Nominal Interest Simple Annual Compound Annual
Term Other Conditions
Rate Effective Cost Effective Cost
3 months 5% Bank charge of P10,000 5.0505% 5.1470%
6 months 5% Bank charge of P10,000 5.0505% 5.1143%
3 months 5% Compensating balance of P50,000 5.2632% 5.3680%
3 months 5% Interest is deducted in advanced 5.0633% 5.1602%
3 months Bank charge of P10,000 and
5% 5.3191% 5.4262%
compensating balance of P50,000
1 year Compounded monthly, due on
5% 5.1162% 5.1162%
maturity
 Management of
Current Liabilities

-End of Topic-