Chapter 15: Short Term Financial Management

Learning Goals
Describe the scope of short-term financial management and the cash conversion cycle.

Explain the funding requirements of the cash conversion cycle and strategies for minimizing negotiated liabilities.

Understand inventory management: differing views, common techniques, and international concerns.

Explain the key aspects of accounts receivable management including credit selection and standards, credit terms, and credit monitoring.

Review the management of receipts and disbursements, including float, speeding collections, slowing payments, cash concentration and zero-balance accounts.

Discuss current liability management, including spontaneous liabilities, unsecured short-term financing, and secured short-term financing.

Managing the Cash Conversion Cycle

Short-term financial management—managing current assets and current liabilities—is one of the financial manager’s most important and time-consuming activities.

The goal of short-term financial management is to manage each of the firms’ current assets and liabilities to achieve a balance between profitability and risk that contributes positively to overall firm value.

Central to short-term financial management is an understanding of the firm’s cash conversion cycle.

The operating cycle (OC) is the time between ordering materials and collecting cash from receivables.

The cash conversion cycle (CCC) is the time between when a firm pays its suppliers (payables) for inventory and collecting cash from the sale of the finished product.

Both the OC and CCC may be computed mathematically as shown below.

Justin Industries has annual sales of $10 million, cost of goods sold of 75% of sales, and purchases that are 65% of cost of goods sold. Justin has an average age of inventory (AAI) of 60 days, an average collection period (ACP) of 40 days, and an average payment period (APP) of 35 days.

Using the values for these...