Financial Management subject For undergraduate students (semester 4)

1. Overview
Short-term Finance
Meeting 8

2. Financial Manager is responsible
for the following decisions:
• Investment/Financing/Dividends/Cash

3. The Goals of the Firm:
• Profit maximization
• Shareholders Wealth maximization
• Corporate Social Responsibility

4. Agency Problem is a conflict between:
• Managers vs Shareholders

5. How to calculate Working Capital:
• Working Capital = Current Assets - Current
Liabilities

6. What is cashflow cycle:
• time between when cash goes out of a firm
and when it comes back

7. Types of WC investment policy:
• Conservative-flexible (high WC)
• Moderate
• Aggressive-restrictive (low WC)

8. Matching principle of funding WC:
• Related to Moderate policy
• maturity of the sources of financing should
match the maturity of the assets being
financed:
• permanent CA – supported by long-term
sources of finance
• temporary CA - supported by short-term
sources of finance

9. Main investment instruments to invest
surplus (extra) cash:
T-bills (short term)
G-secs (long term) - risk ↓ return ↓
Deposits - risk average return average
Futures/options (derivatives) - risk ↑ return ↑

10. Efficient Cash Management Strategies:
• Accounts Receivables – Better smaller (change
credit terms and cash discounts for your
customers)
• Accounts Payables – Better bigger (pay as late
as possible to suppliers)
• Inventory – Better smaller (decrease the
production cycle with better planning)

11. Credit Standards policies:
• Restrictive policy (to give credit to selected
customers)
• Less selective policy (to give credit to
everyone)

12. Establishing Credit Terms includes:
• Credit amount
• the length of the period of payment
• discount percentage and the discount period

13. What does this mean
a firm selling on terms of 2/15, Net 30:
• 2 shows the discount percentage offered by
the seller
• the discount period is 15 days
• and there are 30 days to pay before the
account is overdue

14. Types of inventories:
• Raw materials (to make the final product)
• Work-in process (intermediate stage of
production)
• Finished goods (goods ready to sale)

15. Main costs of Inventory:
• Ordering costs (e.g. expediting, transport)
• Carrying (holding) (e.g. costs storage,
insurance, taxes)

16. Just-in-time inventory management
requires
• 1. exceptional coordination with suppliers
• 2. predictable demand for the firm’s
products
• 3. good production planning is also essential