Scribd
Upload
123 views12 pages

Short-Term Financial Management Decisions: Working Capital Management

This document discusses short-term financial management decisions related to working capital management and management of current liabilities. Specifically, it addresses trade payables terms, comparing options like 2/10 N/30 versus 2/10 N/40. It also discusses effective costs of various credit terms, using formulas to calculate simple and compound annual effective costs. Various deductions that affect loan costs are defined, like bank charges, discounts, and compensating balances. Worked examples illustrate calculating effective interest rates under different credit conditions.

Uploaded by

Nhel Alvaro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
123 views12 pages

Short-Term Financial Management Decisions: Working Capital Management

This document discusses short-term financial management decisions related to working capital management and management of current liabilities. Specifically, it addresses trade payables terms, comparing options like 2/10 N/30 versus 2/10 N/40. It also discusses effective costs of various credit terms, using formulas to calculate simple and compound annual effective costs. Various deductions that affect loan costs are defined, like bank charges, discounts, and compensating balances. Worked examples illustrate calculating effective interest rates under different credit conditions.

Uploaded by

Nhel Alvaro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 12

Short-term Financial

Management Decisions:
Working Capital Management

AE 321: Strategic Business Analysis


Management of
Current Liabilities
Trade Payables

Which is better?
???
2/10, 2/10,
OR
N/30 N/40
Trade Payables

Which is better?
???
2/10, 3/10,
OR
N/30 N/30
Trade Payables

Which is better?
???
2/10, 3/10,
OR
N/40 N/30
Trade Payables
Effective Cost: Computation:
Formulas:

Non-free
Credit Simple Annual
Periodic Rate Credit n Remark
Term Effective Cost
Days
2/10, n/30 2/98 = 0.02041 30-10=20 360/20 = 18 36.73% Average
2/10, n/40 2/98 = 0.02041 40-10=30 360/30 = 12 24.49% Best if the entity plans to delay
payments
3/10, n/30 3/97 = 0.03092 30-10=20 360/20 = 18 55.67% Best if the entity plans to take
advantage of the cash discount
Trade Payables

Which is better?
???
2/10, 3.9215/20,
OR
N/30 N/60
Trade Payables
Effective Cost: Computation:
Formulas:

Non-free
Simple Annual
Credit Term Periodic Rate Credit n Remark
Effective Cost
Days
2/10, n/30 2/98 = 0.02041 30-10=20 360/20 = 18 36.73% Same?
3.9215/20, n/60 3.9215/96.0785 = 0.04082 60-20=40 360/40 = 9 36.73%
Trade Payables
Effective Cost: Computation:
Formula:

COMPOUND Annual
Credit Term Periodic Rate N Remark
Effective Cost

2/10, n/30 2/98 = 0.02041 360/20 = 18 (1+0.02041)^-1 = 43.86% For early payment
3.9215/20, n/60 3.9215/96.0785 = 0.04082 360/40 = 9 (1+0.04082)^-1 = 43.33% For delayed payment
Short-term Loans
Effective Cost: Computation:
Formulas: Same as trade payables
What Deductions?
1. Bank charges
2. Discount (or interest
deducted in advance)
3. Compensating
balance
Trade Payables
Effective Cost: Computation:
Illustration: P1,000,000 face amount
Nominal Interest Simple Annual Compound Annual
Term Other Conditions
Rate Effective Cost Effective Cost
3 months 5% Bank charge of P10,000 5.0505% 5.1470%
6 months 5% Bank charge of P10,000 5.0505% 5.1143%
3 months 5% Compensating balance of P50,000 5.2632% 5.3680%
3 months 5% Interest is deducted in advanced 5.0633% 5.1602%
3 months Bank charge of P10,000 and
5% 5.3191% 5.4262%
compensating balance of P50,000
1 year Compounded monthly, due on
5% 5.1162% 5.1162%
maturity
Management of
Current Liabilities

-End of Topic-

You might also like