FAA Accounts Recievable Management
FAA Accounts Recievable Management
FAA Accounts Recievable Management
SECURITY MANAGEMENT
GROUP 6
Apoorva Charu (117)
Swati Seshadri (118)
Meenal Shah (119)
Ankit Sharma (418)
Arpit Vijay (419)
Divi Khanna (420)
Juhi Rupani (421)
CASH MANAGEMENT
Juhi Rupani
MBA Tech (Telecom)
Roll No : 421
CASH MANAGEMENT
• It is the maintaining of liquidity of a firm to minimize the risk of
insolvency.
• It is also about the proper balancing of keeping cash without
letting it idling around.
• Good cash management means:
Knowing when, where, and how your cash needs will occur.
Knowing what the best sources are for meeting additional cash
needs.
Being prepared to meet these needs when they occur, by
keeping good relationships with bankers and other creditors.
MOTIVES FOR HOLDING CASH
• The 3 motives for holding cash as advocated by the British
Economist, John Maynard, are:
1. Transaction motive:
Maintaining cash for the purpose of meeting cash needs arising in
the ordinary course of doing business.
Includes regular payments like wages, utilities, acquisition of fixed
assets and inventories.
2. Speculative motive:
Holding cash for potential profit making situation like purchasing
raw materials in bulk in anticipation of a fall in price.
MOTIVES FOR HOLDING CASH contd.
3. Precautionary motive:
Maintaining of cash balance as buffer for UNEXPECTED needs that
may arise.
Either holding in cash or marketable securities that can be liquidated
easily
• From the figure we can see that the firm will benefit by
“speeding up” cash receipts and “slowing down” cash
payouts.
• CASH COLLECTION:
It is the management of receivables, customer
payments and incoming cash flows of a firm.
• CASH DISBURSEMENT:
A payment of money or simply a payment. Usually, the
writing of a check to pay for an item previously
obligated to be paid, such as loan payment, salary
payment or accounts receivable payment.
HP AND IBM
Parameter HP IBM
MARKET Approx 95004 Approx 563490
CAPITALIZATION crores crores
SUBSCRIBER BASE
45 million 119.68 million
(JUNE 2008)
PRESENCE Global Global
ORIGIN California New York
LISTED ON NYSE NYSE
RANKING IN INDIA 5 7
• HP specializes in developing and manufacturing
computing, storage, and networking hardware, software
and services. Major product lines include personal
computing devices, enterprise servers, related storage
devices, as well as a diverse range of printers and other
imaging products.
• Acceleration of Collections:
ORDER
OF
MAIL FLOAT
DEPOSIT FLOAT
COLLECTION FLOAT
WAYS TO REDUCE COLLECTION FLOAT
• Pre-authorized debt
• Use of Lockbox systems
• Concentration banking
• ADVANTAGES:
– Eliminates billing and postage costs, clerical processing costs
– Eliminates regular billing for customers
– Increased working cash
LOCKBOX SYSTEM
• Firm sets up a lock box service with their bank , customers send their
payments directly to lockbox.
• The bank deposits payments directly to the company's account.
• ADVANTAGES:
– Reduces mail float and processing float
– Reduces clerical functions (bank handles receiving, totaling,
depositing)
– Early knowledge of dishonored checks
CONCENTRATION BANKING
• ADVANTAGES:
• ADVANTAGES:
– Lower levels of excess cash
– Eliminates billing, postage and clerical processing costs
– Reduces mail float and processing float
• DISADVANTAGES:
– funds not immediately available on DTC receipt
– Mail-based collection of check
AUTOMATED CLEARINGHOUSE TRANSFER
• ADVANTAGES:
– Electronic version of DTC, hence is faster
– Funds available 1 business day later
– Better coordination between bank branches
• DISADVANTAGES:
• ADVANTAGES:
DISBURSEMENT FLOAT
NET FLOAT
• NET FLOAT:
– The total amount of float in a bank account.
– The net float, when added to or subtracted from the book
balance, shows how much money is in the bank account.
– Accurate estimation is necessary for ‘playing the float’.
• Remote Disbursements
• Outsourcing
CENTRALIZED SYSTEM
• ADVANTAGES:
– Delays the time firm has to maintain funds to cover the draft
– Allows firm to maintain smaller bank balances
– Payment can be stopped if necessary
• DISADVANTAGES:
– Banks impose higher service charge for drafts
ZERO BALANCE ACCOUNT (ZBA)
• Just enough cash is transferred daily from the firm’s master account
to subsidiary accounts to maintain zero balance account
• ADVANTAGES:
– Allows more control over cash outflows
– No idle cash in subsidiary accounts
• DISADVANTAGES:
– Daily transfer of cash required
– Efficient management of master account required
OTHER METHODS
• CONTROLLED DISBURSEMENTS:
– Bank provides a daily report, that provides the amount of
disbursements that will be charged to the firm's account.
– This early knowledge of daily funds requirement allows firm to
invest any surplus in intra-day investment opportunities.
• REMOTE DISBUSREMENTS:
– Payments are issued through a remote branch of a bank and firm
is able to delay the payment due to increased float time.
• OUTSOURCING:
– Firm can hire outside services to perform disbursement functions.
Electronic Commerce and
Outsourcing
Ankit Sharma
MBA Tech (Telecom)
Roll No : 418
ELECTRONIC COMMERCE
ELECTRONIC FINANCIAL
FUNDS TRANSFER EDIs
ELECTRONIC FUNDS TRANSFER
Electronic transfer of a certain monetary value takes place in
which a depository institution sends or receives electronic
payments. It can be applied to:
• Cardholder-initiated transactions, where a cardholder makes use
of a payment card
• Direct deposit payroll payments for a business to its employees,
possibly via a payroll services company
• Direct debit payments from customer to business, where the
transaction is initiated by the business with customer permission
• Electronic bill payment in online banking, which may be delivered
by EFT or paper check
• Wire transfer via an international banking network (generally
carries a higher fee)
ELECTRONIC FUNDS TRANSFER contd.
Instruction for transfer set by two major societies:
• SWIFT (Society for worldwide interbank financial
telecommunication)
• CHIPS (Clearing house interbank payment systems)
• The buyer and seller must work closely with their respective
banks to effect a Financial EDI transaction.
• Examples include:
– Lockbox remittance information
– Bank balance information
STEPS IN FINANCIAL EDI
• The buyer, or originator, electronically extracts payment information
from the company's accounts payable system.
• The buyer formats the data into an EDI ANSI standard, the ANSI 820
transaction set using an EDI software.
• The buyer then transmits an ANSI 820 format to bank for processing.
• The bank then takes the 820 data and puts it into a format so that it
can be sent through the Automated Clearinghouse.
• The ACH network then delivers the payment data to the seller's, or
receiver's, bank.
COSTS AND BENEFITS OF EDI
Costs Benefits
• Computer hardware and • Information and payments
software expenditures move faster and with greater
• Increased training costs to reliability
implement and utilize an EDI • Improved cash forecasting and
system cash management
• Additional expenses to • Customers receive faster and
convince suppliers and more reliable service
customers to use the • Reduction in mail, paper, and
electronic system document storage costs
• Loss of float
OUTSOURCING
• Shifting an in-house operation to outside firm in a view to
reduce company’s costs
After Acquisition
• Because there exists a market value, marketable securities can be
reliably written up or down to the market value giving a more current
estimate of economic worth
• This also results in a holding gain or loss which is not due to the normal
operations of a firm.
THREE CLASSES OF MARKETABLE SECURITIES
• For the purposes of valuation after acquisition, there are three classes
of marketable securities:
– Trading securities
• Characterized by frequent & active buying & selling with the object of
generating profit
Ready cash
Free cash segment
segment (F) (R)
Controllable
cash segment
(C)
READY CASH SEGMENT (R)
• Optimal balance of marketable securities held to take care of probable
deficiencies in the firm’s cash account
• Can be sold quickly to build up cash
• Ideally, Cash Inflows >= Cash Outflows, each day
Ready
Free cash cash
segment segment
(F) (R)
Controllable
cash
segment (C)
CONTROLLABLE CASH SEGMENT (C)
• Market securities held for meeting controllable (knowable) outflows
such as taxes and dividends
• Accumulated funds for such purposes can be invested temporarily to
earn interest
Ready
Free cash cash
segment segment
(F) (R)
Controllable
cash
segment (C)
FREE CASH SEGMENT (F)
Ready
Free cash cash
segment segment
(F) (R)
Controllable
cash
segment (C)
VARIABLES FOR SELECTION
Yield
Time
MATURITY
• Longer the maturity, greater the yield , but also more exposure to
yield risk.
MARKETABLE SECURITIES
IBM
• IBM ended 2008 , with $ 12.9 billion of marketable securities
• Cash and Cash equivalents : $ 12,741 million
• Short term marketable securities : $ 166 million
HP
• HP ended 2008, with 10.2 billion of marketable securities
• Cash and Cash equivalents : $ 10,153 million
• Short term Investments : $ 93 million
CONTROVERSY ABOUT MARKETABLE SECURITIES
Treasury Bills
• Short term borrowing instruments issued by Central Bank (RBI in
India) on behalf of Government of India
• Minimum of 25000 and its multiple
• Sold at a discount and repaid at maturity
Certificates of Deposit
• Unsecured interest paying negotiable instruments issued by
commercial banks and also financial institutes
• Having maturity ranging from 30 days to 3 years.
• CD’s are issued in denominations of Rs. 0.5 million.
Common Money Market Instruments
Commercial Paper
• Money market instrument introduced by RBI and consists of
short term, unsecured promissory notes
• Generally issued by finance companies with sound financial
position and a high credit rating.
• Commercial Paper is issued at a discount which is determined by
the money market forces
• It can be issued in denomination of Rs 5 lakh or in multiples of it
for 15 days to 1 year
Common Money Market Instruments
– The same is guaranteed by the banker of the buyer in exchange for a claim on the
goods as collateral.
Bill Discounting
– While discounting a bill, the Bank buys the bill before it is due and credits the value of
the bill after a discount charge to the customer's account.
– The transaction is practically an advance against the security of the bill and the
discount represents the interest on the advance from the date of purchase of the bill
until it is due for payment.
Common Money Market Instruments
Fixed Deposits
• FDs are fixed-income debt securities issued by banks.
• Putting money into an FD is like giving a loan to the bank, in
return for which the bank pays you interest.
Common Money Market Instruments
• The current ratio for both HP and IBM has plummeted for the year 2008. The YoY
decrease is more for HP showing its lack of liquid assets in the year 2008.
• Current ratio of HP has reduced from 1.21 to 0.99 (less than 1).This indicates that HP’s
ability to meet its payment obligations was very poor in FY 07-08.
• The cash and cash equivalents with the total value of $2250 million decreases over the
FY 07-08. This and the decrease in marketable securities and financing receivables led
to a decrease in the solvency of IBM.
ACID TEST RATIO
FORMULA :
CURRENT ASSETS + CURRENT INVESTMENTS – PREPAID EXPENSES - INVENTORY
CURRENT LIABILITIES + SHORT-TERM DEBT
• The Quick ratios for both the companies have shown a decrease, with HP showing a
greater decrease (0.22) as compared to IBM(0.06). This shows that IBM has greater
solvency as compared to HP.
• Quick ratio shows that IBM is much more liquid than HP according to the current
industry averages.
LIQUIDITY RATIO ANALYSIS
HP IBM
• Cash and cash equivalents at October 31, 2008 • IBM's liquidity positions were strong as the cash
totaled $10.2 billion, a decrease of $1.1 billion on hand was $12,741 million. Total debt
from the October 31, 2007 balance of $11.3 decreased $1,349 million year to year, and the
billion. company generated $18,812 million in operating
borrowings affects liquidity and financial condition • The company provides for additional liquidity
and potentially credit ratings. Thus HP's liquidity through several sources: maintaining a sizable
reduced in 2008 due to it acquisition of EDS. cash balance, access to global funding sources, a
• HP uses cash generated by operations as the committed global credit facility and other
primary source of liquidity. Internally generated committed and uncommitted lines of credit
• In the case of HP the total debts have shown an substantial increase in the year 2008
as compared to the previous year whereas the stockholder’s equity has remained
almost constant. This shows that the debts used to finance the company is increasing
compared to the equity.
• In this case IBM has a lesser difficulty with creditors even if the debt to equity ratio has
increased because their total debts have shown a decrease in the FY 08 with the
shareholder’s equity being halved.
DEBT TO TOTAL ASSETS RATIO
FORMULA : TOTAL DEBT
TOTAL ASSETS
2007-08 2006-07 YOY (%)
HP 0.16 0.09 77
IBM 0.31 0.29 7
• In IBM the total assets have decreased more as compared to the total debts. Thus
showing an increase in the YOY ratio.
• In case of HP the debts are increasing substantially as compared to the total assets.
• IBM has a higher debt to total asset ratio showing that it has higher financial risk in
terms of the total assets accumulated by the firm.
LONG TERM DEBT TO TOTAL CAPITALIZATION RATIO
• IBM shows a decrease in the total capitalization whereas HP shows an increase in it.
• In case of HP the long term debts are increasing substantially leading to an increase in
the ratio (though not substantial as total capitalization is also increasing)
• Long term debt and total capitalization in case of IBM have both decreased though the
decrease in the long term debt is less as compared to decrease in the total
capitalization.
DEBT RATIO ANALYSIS
IBM:
• Global Financing is a segment of the company and as such, is supported by the company’s
overall liquidity position and access to capital markets. Cash generated by Global Financing
was primarily deployed to pay intercompany payables and dividends to the company in order
to maintain an appropriate debt-to-equity ratio.
• Stockholders’ equity decreased $15,004 million, net of tax, primarily as a result of changes
from pension re-measurements and current year activity within accumulated gains and
(losses) not affecting retained earnings. This is a non-cash impact to equity and does not
affect the company’s access to capital markets or its ability to meet its obligations.
• This ratio shows the company’s ability to meet its interest payments to avoid
bankruptcy. It shows a firm’s capacity to take new debts. Higher ratios are preferred.
• Both HP and IBM have shown amore interest paying capacity year on year showing
that both of them are strengthening their capacity to pay back long term debts.
• Hp’s interest coverage ratio is better than that of IBM.
RECEIVABLE TURNOVER RATIO
FORMULA : ANNUAL NET CREDIT SALES
RECEIVABLES
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 6.13 6.53 (6) 4.8
IBM 3.67 3.34 10
• Receivable turnover ratio of HP is greater than that of IBM. Infact it is also greater that
the industry average(good sign). This shows that the collection methods are better
managed by HP.
RECEIVABLE TURNOVER IN DAYS
FORMULA : DAYS IN A YEAR
RECEIVABLE TURNOVER RATIO
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 60 56 7 77
IBM 100 110 (9)
• The increase in receivable turnover in days for HP was due primarily to a higher
accounts receivable balance during the fourth quarter of fiscal 2008 compared to the
same period in fiscal 2007 and the effect of the EDS acquisition.
• Receivables in case of IBM have reduced thus the ratio has increased and the
receivable turnover in days i.e average collection period has decreased which is a good
sign as it “speeds” up the receivables.
RATIO ANALYSIS
Divi Khanna
MBA Tech (Telecom)
Roll No: 420
PAYABLE TURNOVER RATIO
FORMULA : ANNUAL NET CREDIT PURCHASES
PAYABLES
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 6.35 6.64 (4) 6.99
IBM 8.09 6.89 17
• The slight decrease in payable turnover in days for HP was due primarily to purchasing
linearity and improved 66 accounts payable management.
• In fact the payable turnover in days is less than the industry standards showing that it
pays back its debts faster than the other firms.
INVENTORY TURNOVER RATIO
FORMULA : COST OF GOODS SOLD
INVENTORY
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 11.37 9.78 16 11
IBM 20.99 20.91 0.4
• Commercial financing receivables relate primarily to inventory and accounts receivable financing
for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory and
accounts receivable financing generally range from 30 to 90 days. Accounts payable drove a use
of cash of $718 million; and A decrease in cash of $284 million driven by growth in inventory. The
net impact of the purchases and sales of marketable securities and other investments resulted in
an increase in cash of $642 million.
INVENTORY TURNOVER IN DAYS
FORMULA : DAYS IN A YEAR
INVENTORY TURNOVER
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 32 37 (14) 34
IBM 18 18 (0)
• IBM maintains a very short inventory turnover in days .However its receivable
turnover in days is very high, leading to its greater operating cycle.
CASH CYCLE
FORMULA : OPERATING CYCLE – PAYABLE TURNOVER IN DAYS
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 34 38 (11) 58
IBM 72 75 (4)
• IBM’s asset turnover ratio has increase by 15 % due to increase in sales and a decrease
in the total assets (Total assets decreased $10,907 million).
• Hp’s asset turnover ratio is quite high as compared to industry standards showing very
good management of assets in the sales. It is also because the OC and the CC are high.
• From the cash flow statement of IBM it can be seen that the net gain on asset sales is
very high for the year 2008.
GROSS PROFIT MARGIN
FORMULA : NET SALES – COST OF GOODS SOLD
NET SALES
2007-08 (%) 2006-07 (%) YOY (%) INDUSTRY
AVERAGE
HP 24.07 24.37 (1) 23.5
IBM 43.88 42.04 4
• Gross profit margin is a financial ratio used to assess the profitability of a firm's core
activities, excluding fixed costs. Gross profit margin indicates the relationship between
net sales revenue and the cost of goods sold. A high gross profit margin indicates that
a business can make a reasonable profit on sales, as long as it keeps overhead costs in
control.
PRE-TAX MARGIN
FORMULA : EBT
NET SALES
2007-08 2006-07 YOY (%) INDUSTRY
(%) (%) AVERAGE
HP 8.88 8.39 6 6.6
IBM 16.54 15.02 10
• It shows the rate of earning on sales after the interest cost but before the tax. It
indicates the margin to be included in sales to meet all expenses.
• Pre-tax income from continuing operations grew 15.4 percent and net income from
continuing operations increased 18.4 percent reflecting an improvement in the
company’s tax rate.
NET PROFIT MARGIN
FORMULA : EAT
NET SALES
2007-08 2006-07 YOY (%) INDUSTRY
(%) (%) AVERAGE
HP 7.06 6.99 2 5.6
IBM 12.2 10.8 13
• It measures profitability of sales after adjusting all income, expenses and taxes.
• A low profit margin indicates a low margin of safety: higher risk that a decline in sales
will erase profits and result in a net loss.
PROFITABILITY RATIO ANALYSIS
IBM
• Gross profit margins improved, reflecting the shift to higher value
businesses, pricing for value and the continued focus on productivity and
cost management
• Increase in Net cash used in investing and financing activities
HP
• Total company gross margin decreased slightly in fiscal 2008 from fiscal
2007.
• There was a favorable currency due to movement of the dollar against the
euro
RETURN ON INVESTMENT
FORMULA : EAT
TOTAL ASSETS
2007-08 (%) 2006-07 (%) YOY (%) INDUSTRY
AVERAGE
HP 7.35 8.19 (10) 23.9
IBM 11.26 8.65 30
• IBM has shown a substantial increase in the ROI due to decrease in total
assets and an increase in the net income.
• Curtail cash expenditure and increase cash in hand, cash at bank, and
marketable securities.
• Increase liquid assets and decrease current liabilities so that firm can
meet out the current liabilities.
• Curtail long term borrowings from short term funds so that financial
obligation may be managed properly.