ACYFMG1

Formula

UNIT IV

Working Capital Mgt and Cash/MS Management

Cash conversion = Inventory conversion period + Average
cycle collection period – Average payment period
Operating cycle = Inventory conversion period + Average
collection period
Net float =Disbursement float less Collection float

Value of =Ave. daily cash receipts x collection float

Collection float time
Value of =Ave. daily cash disbursements x
disbursement disbursement float time
float
Cost of = value of collection float x opportunity cost
collection float
Benefit of = value of disbursement float x opportunity cost
disbursement
float
Cash conversion Optimal cash balance =
model (Baumol)

where,

Opportunity cost and

Trading cost
ACYFMG1 Formula

AR and Inventory MANAGEMENT
Opportunity
cost of
carrying
receivables
Cost of bad
debts
Carrying cost = opportunity cost + cost of bad debts +
of AR administrative cost
Altman Z-
score
Marginal = additional (lost) units sold x unit contribution
contribution margin
margin
Cost of =marginal investment in AR x interest rate
marginal
Where: Marginal AR investment= New VC of Ave AR –
investment in Current VC of Ave AR; and
AR

Cost of =Costs under Proposed Plan – Costs under

marginal bad Present Plan
debts
Net benefit Net benefit (loss) of proposed cash discount =
(loss) of Marginal (lost) CM - financing cost (savings)
proposed from marginal investment in AR – cost (savings)
credit of marginal bad debts
standards
ACYFMG1 Formula

AR and Inventory MANAGEMENT (cont’d)

Net benefit Net benefit (loss) of proposed cash discount =
(loss) of Marginal (lost) CM - financing cost (savings)
proposed from marginal investment in AR – cost (savings)
credit terms of marginal bad debts – additional (lower) cost of
cash discount
Economic
order quantity

where: S = usage in units per period

O = fixed cost per order
C = carrying costs per unit per period (P)

Ordering cost = O x S/Q

where Q is the number of units per order
Carrying cost = C x Q/2
Total cost = ordering cost + carrying cost

Reorder point = (lead time in days x daily usage) + Safety

Stock
ACYFMG1 Formula

Short term sources of financing

annual
percentage cost
of giving up cash OR
discount

where: CD% – stated cash discount percentage

CD- cash discount amount (purchase price x CD%) CP –
credit period
CDP – cash discount period
Net purchase- purchase price less cash discount

Interest cost of ST = Principal × Annual Rate × Time

loans
Annual interest/
percentage rate or
Periodic rate

or
Effective periodic
rate/cost of
discount loan OR
Effective periodic
rate/cost of loan
with compensating
balance
Effective periodic
rate/cost of loan
with compensating
and commitment
fee
ACYFMG1 Formula

Short term sources of financing (cont’d)

Effective periodic
cost of ST funds
Effective periodic
cost of
commercial paper