Abstract
A firm with increasing sales volume needs increased current assets to service the new level of activity. Given normal inventory turnover, higher sales necessitate a higher level of stocks. Similarly, greater sales levels enlarge the average amount of receivables the firm carries since additions to the accounts come in faster than old accounts are collected. The corporation officers responsible for working capital management must decide how to finance the required increase in current assets.
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Notes
- 1.
In the early stages of a sales downturn, the firm may accumulate unintended inventory. The firm will cut current purchases to restore the inventory to a more “normal” relationship to sales. Adequate net working capital is important to bring the firm through just such transitional situations.
- 2.
In the broadest sense, the money market may be defined as the broad complex of institutions extending, dealing in, and using short-term money credit. It refers both to the dealers in short-term credit obligations and the debt instruments and types of loans customary on the market. The operations of the money market set the structure and level of the short-term interest rates. The center of its activities in the United States is New York City, although its eventual scope is nationwide and even international. Among the major suppliers of funds to the money market are the banks, insurance companies, other financial institutions, and corporations having temporary excess funds. The important rates set on the money market are the rates on short-term treasury bills, commercial paper, bankers’ acceptances, prime commercial loans, and margin loans to brokers on security collateral. The rates on the capital and money markets are related.
- 3.
That is, 20 days goes in 360 days 18 times (18 × 2% = 36%).
- 4.
As of December 31, 1960, commercial loans totaled $42.4 billion and constituted 80% of aggregate earning assets of all commercial banks in the United States. As of December 2002, commercial loans totaled $959.8 billion, and $2351.5 billion, as of December 2019. Source: Federal Reserve Economic data. www.fred.stlouisfed.org. October 21, 2020.
- 5.
See chapter “Long-Term Debt” for a discussion of this phenomenon.
- 6.
On a loan granted with a compensating balance, the bank is able to keep some proportion of its reserves otherwise committed to the loan. This savings in reserves can be lent to another borrower with a subsequent increase in the bank’s earning power.
- 7.
This seems to establish another advantage to having a publicly traded issue. The firm not only has access to the capital markets but has a better rating in the money market in addition.
- 8.
The small business investment companies growing out of the Small Business Act of 1959 were hopefully designed to fill this gap in our financial institutions by providing capital to intermediate-size firms.
- 9.
The spread received by the dealers for floating the notes is very low, but since the issues are large and the issuing firms have the highest credit standing, marketing problems are not difficult.
- 10.
In 1960 about $3.5 billion of finance company commercial paper outstanding was placed with insurance companies, corporations, or other large buyers without passing through the dealers and the open market. By December 2002, the commercial paper market had grown to $1321.5 billion, of which $1167.5 billion was finance and $154 billion was nonfinance. Source: US Federal Reserve (www.federalreserve.gov)
- 11.
When the account is collected in full the 25% coverage belongs to the seller; it is either returned to him or used to reduce his balance at the factors.
- 12.
If the cash budget indicates that the firm will require funds for a longer term, the management should, if it can, arrange more permanent financing.
- 13.
A budget can be made to cover the first third of every month and then the last two-thirds. This is useful, if there is a peak need around the tenth of the month.
- 14.
Many large corporations are suppliers of funds to the money market, investing temporarily idle cash in commercial paper, bankers’ acceptances, etc.—but above all in short-term US Treasury notes and bills. In the past, short-term corporate investment funds often went into “call loans” to stock brokers. In 1929, an exceptionally large amount of these corporation funds helped support the excesses of the stock market by supplying cash for margin loans to speculators. Member banks were prohibited from placing “call loans” for nonbank lenders in 1933.
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Guerard, J.B., Saxena, A., Gultekin, M. (2021). Financing Current Operations and the Cash Budget. In: Quantitative Corporate Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-43547-9_6
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DOI: https://doi.org/10.1007/978-3-030-43547-9_6
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