The most comprehensive educational resources for finance

Mutually Exclusive Projects, Project Sequencing, and Capital Rationing

The cash flow analysis for making capital decisions can become more complex because of the interaction between different projects. The finance manager will have to work with these complexities while evaluating and selecting projects Independent Vs. Mutually Exclusive Projects The projects being analyzed by a company may be completely independent of each other or mutually

Principles of Capital Budgeting

Even though the capital budgeting decisions can be very complex with lots of underlying assumptions and variations, most decisions have the following basic principles underlying them. 1. Decisions are based on cash flow not accounting income The capital budgeting decisions are based on the cash flow forecasts instead of relying on the accounting income. These

Is Debt Good or Bad for Business?

Equity or debt? All businesses that need financing will do so in these two forms. There are however some large companies that have managed to totally become debt-free. Some examples are Google, Amazon, and Apple. When you hear that these companies have no debt, it sounds like a great deal. But is it really that

Choices of Short-term Funding Available to a Company

A company has access to many short-term sources of funding. These include funding from both bank and non-bank sources. Short-term Funding from Banks A company can avail short-term funding from banks in the following forms: Lines of Credit This is the most common form of funding for working capital needs. In this case a bank

Calculating the Cost of Trade Credit

Trade credit is an important source of liquidity and financing for any company. The company needs to manage its accounts payables effectively and take advantage of the credit period to minimize its cost of funds. An important decision here is whether it is beneficial for the company to pay within the discount period or pay

Management of Accounts Payable

Accounts payable are the amounts that are due to the suppliers of goods and services to the business. For example, a furniture chain buys its raw material from various suppliers on credit. Accounts payable arise from trade credit, which is an important portion of working capital.  It works in favor of both the buyer and

Management of Inventory

Management of inventory is another important aspect of a business. The goal here is to maintain an optimal level of inventory. If the inventory levels are too low, it can lead to a loss of sales because of stock-outs. At the same time, if there is too much inventory, it indicates that the firm’s excess

Evaluating Management of Accounts Receivables

In any business it is a usual practice to provide credit to your customers. Granting credit helps the business in increasing sales but at the same time also increases the risk of uncollectible accounts. The company needs to actively manage and monitor the accounts receivables and evaluate how well the company is managing its receivables.

Evaluating the Management of Short-term Funds

Based on their short-term investment policy, the treasurer can effectively manage the short-term funds, including short-term investments, borrowings, etc. There are sophisticated treasury management software available to do this. A treasury manager based on his needs, size of the funds, and complexity in the portfolio may decide to use a treasury software or simply do

Short Term Investment Strategies

A key element of working capital optimization is the short-term investment strategies treasurers undertake. They are a vital tool of risk management, but are somewhat more limited in their type and maturity than long term strategies. Liquidity and security are the twin objectives managers look for in short term investments. Short- term strategies fall into