RSM333H1 Lecture Notes - Lecture 3: Commercial Paper, Economic Order Quantity, Cash Management
Document Summary
Week 3: working capital management: current assets and current liabilities. Amount of cash partly determined by ability to borrow on line of credit or overdraft. Minimize float: time that elapses between time paying firm initiates payment and time funds are available for use by receiving firm. More businesses fail for lack of cash than for want of profit. Cash provides low return but high liquidity, low risk. Must balance risk of illiquidity against sacrificing returns. May hold cash as marketable securities to increase return. Time it takes cheque to reach firm after mailed. Increase cash inflow, decrease cash outflow, minimize cash balance. Increase days ap, decrease days ar and days inventory. Time firm has to do without cash payment. Extending trade credit is not same as loan. If customer doesn"t repay, only lose cost of production rather than entire value of loan. A customer who does pay might make future purchases, representing future profit margin.
