Short Term Financial Policies
PTMBA I / Trim III (A. Y. 2010-11) Div. C.
Assets of Short Term Financial Policy
Flexible Short Term Financial Policy
Maintainance of high ratio of current assets to sales. This would include:-
❖ Keeping large cash & bank balances ❖ Making substantial investment in inventories. ❖ Liberal Credit Term meaning high level of debtors.
Restrictive Short Term Financial Policy. This would include:-
❖ Low cash balances / no investment in marketable securities ❖ Small inventory level ❖ No credit on Sales & hence receivables at minimum
Thus, flexible short-term financial policies are costly in that they require higher cash outflows to finance cash and marketable securities, inventory, and accounts receivable. However, future cash inflows are highest with a flexible policy. Sales are stimulated by the use of a credit policy that provides liberal terms to customers. A large amount of inventory on hand ("on the shelf") provides a quick delivery service to customers and increases in sales. In addition, the firm can probably charge higher prices for the quick delivery service and the liberal credit terms of flexible policies. A flexible policy also may result in fewer production stoppages because of inventory shortages.
Managing current assets can be thought of as involving a trade-off between costs that rise with the level of investment (i.e. Carrying Cost) and costs that fall with the level of investment(i.e. Shortage Cost)
Carrying costs are generally of two types. First, because the rate of return on current assets is low compared with that of other assets, there is an opportunity cost. Second, there is the cost of maintaining the economic value of the item. For example, the cost of warehousing inventory belongs here.
Determinants of Corporate Liquid Asset Holdings
Firms with High Firms with Low
Holdings of Liquid Holdings of Liquid
Assets will Have Assets will Have
High-growth opportunities Low-growth
Assets of Short Term Financial Policy
Flexible Short Term Financial Policy
Maintainance of high ratio of current assets to sales. This would include:-
❖ Keeping large cash & bank balances ❖ Making substantial investment in inventories. ❖ Liberal Credit Term meaning high level of debtors.
Restrictive Short Term Financial Policy. This would include:-
❖ Low cash balances / no investment in marketable securities ❖ Small inventory level ❖ No credit on Sales & hence receivables at minimum
Thus, flexible short-term financial policies are costly in that they require higher cash outflows to finance cash and marketable securities, inventory, and accounts receivable. However, future cash inflows are highest with a flexible policy. Sales are stimulated by the use of a credit policy that provides liberal terms to customers. A large amount of inventory on hand ("on the shelf") provides a quick delivery service to customers and increases in sales. In addition, the firm can probably charge higher prices for the quick delivery service and the liberal credit terms of flexible policies. A flexible policy also may result in fewer production stoppages because of inventory shortages.
Managing current assets can be thought of as involving a trade-off between costs that rise with the level of investment (i.e. Carrying Cost) and costs that fall with the level of investment(i.e. Shortage Cost)
Carrying costs are generally of two types. First, because the rate of return on current assets is low compared with that of other assets, there is an opportunity cost. Second, there is the cost of maintaining the economic value of the item. For example, the cost of warehousing inventory belongs here.
Determinants of Corporate Liquid Asset Holdings
Firms with High Firms with Low
Holdings of Liquid Holdings of Liquid
Assets will Have Assets will Have
High-growth opportunities Low-growth