The process of managing the organization's cash flows is carried out in stages. We mentioned this earlier in the article "Company Cash Flows: Features of Management" (see Economist's Handbook No. 3, 2010). One of the most important stages in the analysis of the cash flow statement is the calculation and interpretation of financial ratios for the efficiency of using cash flows (see table). This system of indicators allows you to expand the traditional set of financial ratios, focusing on the analysis of the organization's cash flows.
You can also evaluate cash flow using the calculation of liquidity cash flow (LCF) for the purpose of express diagnostics of the financial condition of the organization:
LCF = (FL 1 + CL 1 - CASH 1) - (FL 0 + CL 0 - CASH 0),
where FL 1 , FL 0 - long-term credits and loans at the end and beginning of the analyzed period;
CL 1 , CL 0 - short-term credits and loans at the end and beginning of the analyzed period;
CASH 1 , CASH 0 - cash on hand, on settlement and currency accounts in banks at the end and beginning of the analyzed period.
Liquid cash flow is a measure of an organization's cash surplus or deficit. Its difference from other liquidity indicators is that liquidity ratios reflect the organization's ability to repay its obligations to external creditors, and liquid cash flow characterizes the absolute amount of funds received from its own activities. It is an internal indicator of the performance of the organization and is important for both creditors and investors.
Cash flow planning
One of the stages of cash flow management is the planning stage. Cash flow planning helps the financial manager to determine the sources of funds and assess their use, as well as to identify the expected cash flows, and therefore the growth prospects of the organization and its future financial needs.
The main task of drawing up a cash flow plan is to check the reality of the sources of funds and the validity of expenses, the synchronism of their occurrence, to determine the possible need for borrowed funds. The cash flow plan can be drawn up in a direct or indirect way.
In addition to the annual cash flow plan, it is necessary to develop a short-term plan for short periods of time (month, decade) in the form of a payment calendar.
Payment schedule- this is a plan for organizing production and financial activities, in which all sources of cash receipts and expenses for a certain period of time are calendar-related. It fully covers the cash flow of the organization; makes it possible to link receipts of funds and payments in cash and non-cash form; allows to ensure constant solvency and liquidity.
The payment calendar is compiled by the financial service of the enterprise, while the planned indicators of the cash flow budget are broken down by months and smaller periods. The terms are determined based on the frequency of the organization's main payments.
In the process of compiling a payment calendar, the following tasks are solved:
organization of accounting for the temporary docking of cash receipts and future expenses of the organization;
Formation of an information base on the movement of cash inflows and outflows;
daily accounting of changes in the information base;
analysis of non-payments and organization of measures to eliminate their causes;
calculation of the need for short-term financing;
Calculation of temporarily free funds of the organization;
· analysis of the financial market from the position of the most reliable and profitable placement of temporarily free funds.
The payment calendar is compiled on the basis of a real information base on the organization's cash flows, which includes: contracts with counterparties; acts of reconciliation of settlements with counterparties; invoices for products; invoices; bank documents on receipt of funds to accounts; money orders; product shipment schedules; payroll schedules; status of settlements with debtors and creditors; statutory deadlines for payments on financial obligations to the budget and extra-budgetary funds; internal orders.
To effectively draw up a payment calendar, a financial manager needs to control information about cash balances in bank accounts, funds spent, average daily balances, the state of the organization's marketable securities, planned receipts and payments for the coming period.
The methodology for compiling a payment calendar is widely represented in the specialized literature on financial management.
Balancing and synchronization of cash flows
The result of developing a cash flow plan can be both a deficit and an excess of cash. Therefore, at the final stage of cash flow management, they are optimized by balancing in volume and time, synchronizing their formation in time, and optimizing the cash balance on the current account.
Both deficit and excess cash flow have a negative impact on the activities of the enterprise. The negative consequences of a deficit cash flow are manifested in a decrease in the liquidity and solvency of an enterprise, an increase in overdue accounts payable to suppliers of raw materials and materials, an increase in the share of overdue debts on financial loans received, delays in paying wages, an increase in the duration of the financial cycle, and ultimately in a decrease in profitability use of own capital and assets of the enterprise.
The negative consequences of excess cash flow are manifested in the loss of the real value of temporarily unused funds from inflation, the loss of potential income from the unused part of monetary assets in the field of their short-term investment, which ultimately also negatively affects the level of return on assets and equity of the enterprise.
According to I. N. Yakovleva, the volume of scarce cash flow should be balanced by:
1) attracting additional equity or long-term debt capital;
2) improving work with current assets;
3) getting rid of non-core non-current assets;
4) reduction of the investment program of the enterprise;
5) cost reduction.
The amount of excess cash flow should be balanced by:
1) increasing the investment activity of the enterprise;
2) expansion or diversification of activities;
3) early repayment of long-term loans.
In the process of optimizing cash flows over time, two main methods are used - leveling and synchronization. Equalization of cash flows is aimed at smoothing their volumes in the context of individual intervals of the period under consideration. This optimization method eliminates, to a certain extent, seasonal and cyclical differences in the formation of cash flows (both positive and negative), while simultaneously optimizing the average cash balances and increasing the level of liquidity. The results of this method of optimizing cash flows over time are evaluated using the standard deviation or coefficient of variation, which should decrease during the optimization process.
Cash flow synchronization is based on convariations their positive and negative types. In the process of synchronization, an increase in the level of correlation between these two types of cash flows should be ensured. The results of this method of optimizing cash flows over time are evaluated using the correlation coefficient, which should tend to the value "+1" during the optimization process.
The tightness of the correlation increases due to the acceleration or deceleration of the payment turnover.
The payment turnover is accelerated by the following measures:
1) increasing the amount of discounts for debtors;
2) shortening the period of commodity credit provided to buyers;
3) tightening of the credit policy on the issue of debt collection;
4) tightening the procedure for assessing the creditworthiness of debtors in order to reduce the percentage of insolvent buyers of the organization;
5) use of modern financial instruments, such as factoring, accounting of bills, forfeiting;
6) use of such types of short-term loans as overdraft and credit line.
The slowdown in the payment turnover can be carried out due to:
1) an increase in the term of a commodity loan provided by suppliers;
2) the acquisition of long-term assets through leasing, as well as the outsourcing of strategically less significant areas of the organization's activities;
3) transfer of short-term loans into long-term ones;
4) reduction of cash settlements with suppliers.
Calculation of the optimal cash balance
Cash as a type of current assets is characterized by some features:
Routine - funds are used to pay off current financial obligations, so there is always a time gap between incoming and outgoing cash flows. As a result, the company is forced to constantly accumulate free cash on a bank account;
precaution - the activity of the enterprise is not strictly regulated, so cash is needed to cover unforeseen payments. For these purposes, it is advisable to create an insurance cash reserve;
· speculative - funds are needed for speculative reasons, since there is always a small probability that an opportunity for profitable investment will suddenly appear.
However, cash itself is a non-profitable asset, so the main goal of the cash management policy is to maintain it at the minimum required level, sufficient for the effective financial and economic activities of the organization, including:
timely payment of suppliers' invoices, allowing them to take advantage of the discounts they provide on the price of goods;
maintaining a constant creditworthiness;
payment of unforeseen expenses arising in the course of commercial activities.
As noted above, if there is a large amount of money on the current account, the organization has the costs of missed opportunities (refusal to participate in any investment project). With a minimum stock of funds, there are costs to replenish this stock, the so-called maintenance costs(commercial expenses due to the purchase and sale of securities, or interest and other expenses associated with attracting a loan to replenish the balance of funds). Therefore, when solving the problem of optimizing the balance of money on the current account, it is advisable to take into account two mutually exclusive circumstances: maintaining current solvency and obtaining additional profit from investing free cash.
There are several basic methods for calculating the optimal cash balance: mathematical models of Baumol-Tobin, Miller-Orr, Stone, etc.
Baumol-Tobin model
The most popular model of liquidity management (cash balance on the current account) is the Baumol-Tobin model, built on the conclusions that W. Baumol and J. Tobin came to independently in the mid-1950s. The model assumes that a commercial organization maintains an acceptable level of liquidity and optimizes its inventory.
According to the model, the enterprise begins to operate with the maximum acceptable (expedient) level of liquidity for it. Further, as the work progresses, the level of liquidity decreases (money is constantly spent over a certain period of time). The company invests all incoming cash in short-term liquid securities. As soon as the level of liquidity reaches a critical level, that is, it becomes equal to a certain predetermined level of security, the company sells part of the purchased short-term securities and thereby replenishes the cash reserve to its original value. Thus, the dynamics of the company's cash balance is a "sawtooth" graph (Fig. 1).
Rice. 1. Schedule of changes in the balance of funds on the current account (Baumol-Tobin model)
When using this model, a number of limitations are taken into account:
1) at a given period of time, the organization's need for funds is constant, it can be predicted;
2) the organization invests all incoming funds from the sale of products in short-term securities. As soon as the cash balance falls to an unacceptably low level, the organization sells part of the securities;
3) the receipts and payments of the organization are considered constant, and therefore planned, which makes it possible to calculate the net cash flow;
4) the level of costs associated with the conversion of securities and other financial instruments into cash, as well as losses from lost profits in the form of interest on the proposed investment of free funds, can be calculated.
According to the model under consideration, to determine the optimal cash balance, you can use the optimal order lot (EOQ) model:
where C is the optimal amount of money;
F - fixed costs for the purchase and sale of securities or servicing the loan received;
T - annual need for cash needed to maintain current operations;
r - value of alternative income (interest rate of short-term market securities).
Example 1
Let us determine the optimal balance of funds according to the Baumol-Tobin model, if the planned volume of cash turnover amounted to 24,000 thousand rubles, the cost of servicing one cash replenishment operation was 80 rubles, and the level of losses of alternative income when storing funds was 10%.
According to formula (1), we calculate the upper limit of the organization's cash balance:
The average cash balance will be 97.98 thousand rubles. (195.96/2).
The disadvantage of the Baumol-Tobin model is the assumption of predictability and stability of the cash flow. It also does not take into account the cyclicality and seasonality inherent in most cash flows.
Miller-Orr model
The disadvantages of the Baumol-Tobin model noted above are eliminated by the Miller-Orr model, which is an improved EOQ model. Its authors M. Miller and D. Orr use a statistical method when building a model, namely the Bernoulli process - a stochastic process in which the receipt and expenditure of funds over time are independent random events.
When managing the level of liquidity, the financial manager must proceed from the following logic: the cash balance changes chaotically until it reaches the upper limit. As soon as this happens, it is necessary to buy enough liquid instruments in order to return the level of funds to some normal level (point of return). If the stock of funds reaches the lower limit, then in this case it is necessary to sell liquid short-term securities and thus replenish the stock of liquidity to the normal limit (Fig. 2).
The minimum value of the cash balance on the current account is taken at the level of the insurance stock, and the maximum - at the level of its triple size. However, when deciding on the range (the difference between the upper and lower limits of the cash balance), it is recommended to take into account the following: if the daily volatility of cash flows is large or the fixed costs associated with buying and selling securities are high, then the company should increase the range of variation and vice versa. It is also recommended to reduce the range of variation if there is an opportunity to generate income due to the high interest rate on securities.
When using this model, one should take into account the assumption that the costs of buying and selling securities are fixed and equal to each other.
Rice. 2. Graph of changes in the balance of funds on the current account (Miller-Orr model)
The following formula is used to determine the cusp point:
where Z is the target cash balance;
δ 2 - dispersion of the daily cash flow balance;
r is the relative value of opportunity costs (per day);
L - the lower limit of the cash balance.
The upper limit of the cash balance is determined by the formula:
H = 3Z - 2L. (3)
The average cash balance is found by the formula:
C \u003d (4Z - L) / 3, (4)
Example 2
Calculate the optimal balance of funds using the Miller-Orr model, if the standard deviation of the monthly volume of cash turnover is 165 thousand rubles, the cost of servicing one cash replenishment operation is 80 rubles, the average daily level of losses of alternative income when storing funds - 0.0083%. The minimum balance of funds is 2,500 thousand rubles.
According to formula (2), we determine the target cash balance:
The upper limit of the cash balance is determined by the formula (3):
H \u003d 3 × 2558.17 - 2 × 2500 \u003d 2674.5 thousand rubles.
The average amount of the cash balance is determined by the formula (4):
The main drawback of the model is that the upper limit of the liquidity level corridor is set depending on the lower one, but there is no clear methodology for setting the lower limit. The manager who controls the level of liquidity has to rely on common sense and experience in determining the lower limit, hence the subjectivity of the model estimates arises.
Stone model
The Stone model complements the Miller-Orr model and is based on near-term cash flow projections. Reaching the upper limit of the amount of funds in the current account will not cause their immediate transfer into securities if the organization is expected to have relatively high payments in the coming days, according to forecasts. This allows you to minimize the number of conversion operations and, consequently, reduce the associated withdrawal costs.
It seems that the considered cash flow management mechanism is quite effective, and its implementation will allow maintaining the financial balance of the enterprise in the course of its production and economic activities, increasing the degree of its financial and production flexibility.
E. G. Moiseeva,
cand. economy Sciences, Arzamas Polytechnic Institute
W. Baumol drew attention to the fact that the dynamics of the target cash balance (CA) is similar to the dynamics of inventory and proposed a model for optimizing the target balance of CA, based on the Wilson model.
Assuming that:
1. The need of the enterprise for DS within a certain period (day, week, month) is known and constant;
2. Cash receipts for the same period are also known and constant, then the changes in the target VA balance will look like this (see Fig. 7):
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1 week 2 weeks 3 weeks Time
Rice. 7. Dynamics of the DS balance on the current account
At the end of the first week, you will either have to sell the existing securities (for the amount of the weekly need for DC), or take out a loan for the same amount. And that's what you have to do every week.
Then DSav = , where DS is the weekly (monthly, etc.) need;
DSav - the average balance of money in the current account.
A large balance of DC reduces the cost of selling securities or servicing a loan (the so-called transaction costs), but on the other hand, it also reduces the possible income from securities (because the money is not moving).
The value of these possible incomes can be conditionally taken in the amount of income brought by liquid securities. But at the same time, the availability of securities (credit) will require additional (transactional) costs.
Then the total amount of costs (ZDSob) for maintaining the target balance of CA will be the sum of:
Variable cost (loss of profit) (ZDSper);
Fixed value of transaction costs (ZDSpos);
ZDSob \u003d ZDSper + ZDSpos;
ZDSper = * r,
where DS / 2 - the average balance of money in the current account;
r is the yield on securities.
ZDSpos \u003d F * k,
where F is the amount of transaction costs for one cycle of replenishment of funds on the current account;
k is the number of DS replenishment cycles per year.
But we know that the annual need for DS is equal to:
PDS \u003d k * DS;
Hence: k = ; Substitute the equivalent of "k" in the formula for ZDSpos: ZDSpos = * F;
Or in general terms: ZDSob = * r + * F;
Since we need to minimize the remainder of the DS, we differentiate the value of ZDSob with respect to the DS and equate to zero:
R / 2 - PDS * F / DS2 = 0,
where X = DS; Y = ZDSob;
Hence: DSmin = ; This is the Baumol formula.
Example: Let F = $150; PDS = 100 thousand dollars * 52 weeks = 5200 thousand dollars; r - 15% per annum, or 0.15; Then: DSmin = = $101980
Average current account balance DSav = $50,990, or approximately $51,000.
The disadvantages of the Baumol model are:
1. Assumption of stability and predictability of cash flows;
2. Failure to take into account the cyclicality and seasonality of fluctuations in the need for DS.
If these conditions are required to be taken into account, then other methods for calculating the optimal value of the target balance of DS must be applied.
Review questions
1. What is Net Working Capital (NFL) and how is it calculated?
2. What do DFTs show?
3. What determines the DFT?
4. What are the types of working capital management policies?
5. What is the main issue in the process of managing accounts payable?
6. How are receivables managed?
7. How are the minimum costs for maintaining the necessary inventories determined?
8. What is the basis of enterprise cash management?
1. The enterprise has the following annual financial balance:
ASSETS LIABILITIES
Fixed assets 3500 Equity 2000
Stocks of raw materials 400 Reserves 1000
Production in progress 200 owes. 2000
Stocks goth. products 600 Short term debt 1000
Accounts receivable 1800 Accounts payable 1200
Short term financial investment 200
Other tech. assets 300
Cash 200
Total assets 7200 Total liabilities 7200
b) determine current financial needs;
c) determine the cash surplus/deficit and the amount of new credit needed;
2. The need for cash from the enterprise - 1000 thousand rubles. per month. It is expected that products shipped to consumers will be paid evenly. The annual interest rate is 20%. The cost of each loan operation or withdrawal of money from the account is 100 rubles.
Required:
a) determine the optimal amount of the cash balance of funds;
3. The enterprise has the following performance characteristics:
Annual sales on credit - 5 million rubles.
The period of repayment of receivables - 3 months.
Profit rate - 20%
The company is considering an offer for discounts of 4 / 10, gross 30. It is expected that the repayment period will be reduced to two months.
You want to determine whether it is worth implementing such a discount policy?
4. The enterprise uses 400 units. material per month. The cost of each order is 200 thousand rubles. The cost of storing each unit of material is 10 thousand rubles.
Define:
a) What is the value of the optimal order?
b) how many orders should be made per month?
c) how often do you need to place orders for the supply of material?
5. Sales on credit from the enterprise amount to 500 thousand rubles. The payment period is 90 days. The cost price is 50% of the sales price.
It is required to determine the average investment in receivables.
One of the most well-known cash management models is the Baumol model. It was developed in 1952 by W.J. Baumol based on the inventory management model EOQ (Economic Order Quantity)). The main assumptions of the Baumol model are:
1. The company's steady need for cash;
2. All cash receipts the company immediately invests in highly liquid securities;
3. The cost of converting investments into cash does not depend on the amount being converted (fixed for one transaction);
4. The enterprise begins work with the maximum expedient cash balances.
The Baumol model is applicable in cases where an enterprise can predict its cash needs with a sufficient degree of certainty. At the same time, as already noted, it is assumed that the enterprise begins to work with the maximum appropriate level of cash Q+m. Then the enterprise evenly (due to sustainable needs) spends these funds over a certain period of time (see Figure 8.5).
Rice. 8.5. Change in cash balances of the enterprise according to the Baumol model
As soon as the cash balances fall to the minimum allowable safety stock m, the enterprise sells part of its short-term investment and replenishes its cash reserve to the initial level.
At the same time, it is assumed (see assumption 2) that the funds received by the enterprise as a result of the sale of products, goods, services are transferred as they are received into short-term investments.
Let us introduce the following notation:
V- the projected total need for funds for the period (usually a year);
c- costs of converting short-term investments into cash (transaction costs);
r is the average annual return on short-term investments.
The number of conversions of securities into cash during the period will be .
General costs of the enterprise TC related to cash management for the period will be:
where the first term is transaction costs and the second term is opportunity costs.
To determine the amount of replenishment of cash balances Q opt ., with which TC minimally differentiate the function TC(Q) on Q:
Equating expression (8.2) to zero, we find the value Q corresponding to the minimum of the function TS:
A graphical illustration of cost minimization using the Baumol model is shown in Figure 8.6.
Rice. 8.6. Cost minimization according to the Baumol model.
Graphs in fig. 8.6 are built under the following conditions: V= 2000 thousand rubles, c= 0.1 thousand rubles, r= 5%, m= 50 thousand rubles.
Calculation by formula (8.8.3) showed that Qopt≈ 89.44 thousand rubles The same result can be obtained graphically with an acceptable degree of accuracy.
Miller-Orr model
In 1966, Merton Miller and Daniel Orr (M.H.Miller, D.Orr) developed a cash management model that is much closer to reality than the Baumol model. It helps answer the question: how should an enterprise manage its cash supply if it is impossible to predict the daily outflow or inflow of cash. Miller and Orr used the Bernoulli process in building the model, a stochastic process in which the receipt and expenditure of money from period to period are independent random events.
The basic premise of the Miller-Orr model is that the distribution of daily cash flow balances is approximately normal. The actual value of the balance on any day may correspond to the expected value, be higher or lower than it. Thus, the cash flow balance varies by day randomly; no trend is foreseen.
The implementation of the model is carried out in several stages [ Kovalev]:
1. The minimum amount of cash is set ( L), which it is advisable to constantly have on the current account (determined by an expert based on the average need of the enterprise to pay bills, possible requirements of the bank, creditors, etc.).
2. According to statistical data, the variation of the daily receipt of funds to the current account (σ 2) is determined.
3. Opportunity costs are determined r- expenses for keeping funds in the current account (usually they are taken in the amount of daily income rates for short-term securities circulating on the market) and expenses c on the mutual transformation of cash and securities (this value is assumed to be constant per transaction).
4. Calculate the range of variation of the cash balance on the current account R according to the formula
5. Calculate the upper limit of cash on the current account H, above which it is necessary to convert part of the funds into short-term securities:
H=L+R (8.5)
6. Determine the cusp point ( Z) - the value of the balance of funds on the current account, to which it is necessary to return if the actual balance of funds on the current account goes beyond the interval ( L, H):
An example of a graph depicting the dynamics of cash using the Miller-Orr model is shown in fig. 8.7.
Rice. 8.6. Dynamics of cash balances of the enterprise using the Miller-Orr model [ Kovalev, p. 547].
At the point in time t 1 there is a purchase of securities for the amount ( H – Z), and at the moment t 2 securities are sold with net proceeds ( Z – L).
When using the Miller-Orr model, attention should be paid to the following points[ Brigham, Gapensky, pp.312-313].
1. The target account balance is not an average between the upper and lower limits, since its value approaches its lower limit more often than its upper limit. Setting the target balance to the average between the limits will minimize transaction costs, but setting it below the average will result in a reduction in the opportunity cost. Based on this, Miller and Orr recommend setting a target balance of , if L= 0; this minimizes the overall cost.
2. The value of the target cash balance and, therefore, the limits of fluctuation, increase with growth c and σ 2 ; increase c makes it more costly to hit the upper limit, and a larger σ 2 leads to more frequent hits of both.
3. The value of the target balance decreases with an increase r; since if the bank interest rate increases, then the value of opportunity costs increases and the firm seeks to invest funds, and not keep them in the account.
4. The lower limit does not have to be zero, but can be positive if the firm has to maintain a compensatory balance or if management prefers to have a cash buffer.
5. The experience of applying the described model has shown its advantages over purely intuitive money management; however, if the firm has several alternative options for investing temporarily free cash, and not the only one in the form of buying, for example, government securities, then the model ceases to work.
6. The model can be supplemented with the assumption of seasonal revenue fluctuations. In this case, cash flows will not follow the normal distribution, but will take into account the likelihood of an increase or decrease in the balance of funds, depending on whether the company is experiencing a period of recession or recovery. Under these assumptions, the value of the target cash balance will not always be equal between the upper and lower limits.
Stone model
The Stone model, in contrast to the Miller-Orr model, pays more attention to the management of the target balance than to its definition; However, they are similar in many respects Brigham, Gapensky, p. 313-314]. The upper and lower limits of the account balance are subject to change depending on the information on cash flows expected in the next few days. The concept of Stone's model is presented in fig. 8.7. As in the Miller-Orr model, Z is the target account balance that the firm is aiming for, and H and L- respectively, the upper and lower limits of its fluctuations. In addition to the above, the Stone model has external and internal control limits: H and L- external, and ( H – X) and ( L + x) are internal. In contrast to the Miller-Orr model, when immediate actions are taken when control limits are reached, in the Stone model this does not always happen.
Rice. 8.7. Dynamics of cash balances when using the Stone model [ Brigham, Gapensky, p. 313].
Assume that the account balance has reached the external upper limit (point A in fig. 8.7.) at the time t. Instead of automatically converting the value ( H– Z) from cash to securities, the financial manager makes a forecast for the next few days (in our case, five). If the expected balance of funds at the time ( t+ 5 ) will remain above the internal limit ( H– x), for example, its size is determined at the point V, then the sum ( H– Z) will be converted into securities. Further dynamics of the cash balance in this case will correspond to the thick line starting at the time t.If the forecast shows that at the moment ( t+ 5 ) the value of the cash balance will correspond to the point WITH, then the firm will not buy securities. Similar reasoning is true for the lower limit.
Thus, the main feature of the Stone model is that the actions of the firm at the current moment are determined by the forecast for the near future. Therefore, reaching the upper limit will not cause an immediate transfer of cash into securities if relatively high cash outflows are expected in the coming days; thereby minimizing the number of conversion operations and, consequently, reducing costs.
Unlike the Miller-Orr model, the Stone model does not specify methods for determining the target cash balance and control limits, but they can be determined using the Miller-Orr model, and x and the period for which the forecast is made - with the help of practical experience.
A significant advantage of this model is that its parameters are not fixed values. This model can take into account seasonal fluctuations, since the manager, when making a forecast, evaluates the features of production in certain periods.
The disadvantage of the Stone model is the emergence of subjectivity. If the manager makes a mistake with the forecast, then the firm will incur the costs associated with storing an excess amount of cash (in the case of an upper limit) or lose liquidity for a short time (in the case of a lower limit). However, correct short-term forecasting of the size of the cash balance can reduce transaction costs.
Simulation
Simulation modeling is the most accurate of the considered models, but at the same time the most time-consuming. The modeling technique is described by Brigham and Gapensky ([ Brigham, Gapensky, p. 314-316].
Modeling starts with a preliminary cash flow budget. After that, an assumption about the probabilistic nature of the indicators is introduced into the forecasting methodology.
It is supposed to calculate the volume of monthly sales ( S) a random variable with a normal distribution. Let us denote the coefficient of variation in the volume of monthly sales as CV, and its standard deviation as s S. We will also assume that over time, the relative variability of the sales volume is constant.
Then the standard deviation of the sales volume for i-th month will be equal to:
where Si- volume of sales i th month.
The receipt of proceeds from sales is related to the actual, and not to the expected volume of sales, that is, the scheme for receiving payments is based on information about real sales that took place in the past.
The essence of the Monte Carlo method is based on studying the operation of a model of a system when it receives random input data with specified characteristics (distribution type, variance, etc.) and restrictions. In our case, it is necessary to model (at a given level of significance) the value of a possible shortage of funds from an enterprise by months and plan the corresponding values as a target balance. The key indicator here is the level of significance set by the manager - the probability with which the results obtained (target residual) are statistically significant. The recommended level is around 90%.
Brigham and Gapensky point out that it is possible to introduce the assumption that monthly sales volumes depend on each other; that is, for example, if the actual implementations in i-th month will be below their expected level, this should serve as a signal of a decrease in sales revenue in the following months. In this case, the uncertainty of cash flows will increase and, therefore, to ensure the desired level of security, it is necessary to set the target cash balance at a relatively higher level [ Brigham, Gapensky, p. 316].
The main advantage of simulation modeling is the relatively high accuracy of the results obtained.
However, it should be noted that the use of this method for financial forecasting in practice is practically impossible without the use of a computer. In addition, to obtain reliable results, it is desirable to have information on the company's cash flows for at least two previous years in order to obtain a representative sample of initial data.
Accounts receivable management.
Accounts receivable, or accounts receivable, is one of the most important and significant elements of the company's current assets in terms of specific weight. Modern trade practice increasingly relies on the buyer receiving a deferral of payments for delivered products, which results in the formation of significant accounts receivable from the seller (supplier).
The level of receivables of the enterprise is determined by:
Type of products sold
Degree of saturation of the market with this type of product
The system of calculations adopted at a particular enterprise
General economic factors
Receivables management is a classic example of risk-return trade-offs: the optimal level of receivables is determined on the basis of a trade-off between the increase in sales and, as a result, profits as a result of lower credit requirements for customers, and the parallel rising costs of financing an increasing level of receivables and increase in probable losses on bad debts. At the same time, the basic laws of financial management are clearly observed: the expected return varies inversely with the liquidity of the asset (in this case, accounts receivable) and in the same direction as risk. At the same time, attempts popular in the domestic literature to attribute debts for shipped products to the object of receivables management, which significantly exceed in their urgency the industry average indicator of the receivables circulation period, or even a period of 12 months, are obviously untenable: such “receivables” are already cannot be considered as an integral part of current assets.
An important element of receivables management is the ranking of receivables according to the timing of their occurrence (drawing up the so-called "aging register" of receivables), as well as monitoring its turnover (turnover of funds in settlements). The latter is carried out on the basis of a number of turnover indicators, which are discussed in the corresponding section of the course.
A very popular tool for controlling receivables is to compare the average maturity of accounts receivable with the average maturity of debt on supplier accounts (accounts payable). With all the conventions of such a comparison (due, in particular, to the different nature of the obligations and, in some cases, different volumes), it can show whether the enterprise is a net creditor that finances investments in the working capital of its customers at its own expense, or, conversely, a net borrower using the funds of its counterparties. Here it should be noted, however, that the arguments about the management of accounts receivable based on the analysis of the operating and financial cycles of an enterprise, popular with many domestic theorists, in practice, face significant limitations. The operating cycle of an enterprise is, as is known, equal, on the one hand, to the sum of the duration of the production process3 and the average maturity (circulation period) of receivables, and on the other hand, the sum of the duration of the financial cycle and the average maturity (circulation period) of debt on supplier accounts (accounts payable ). If we approach the problem of receivables management “mechanically”, then the problem of minimizing the duration of the financial cycle4 (namely, for this period, the enterprise’s funds are diverted from circulation and the enterprise has to use financing from its own funds or attract a loan) can be solved in two ways5. On the one hand, it is possible to tighten the conditions for the release of products on credit, which should reduce the period of circulation of receivables, but at the same time reduce the volume of sales (profit). On the other hand, you can "pull" with the payment of suppliers' invoices. Within certain limits, this may “work”, however, if this technique is abused, the supplier will be objectively forced to revise the terms of delivery or simply include the cost of financing its increased receivables in the delivery price. The result is an increase in costs and a drop in profits. The art of government here consists precisely in avoiding both dangers as much as possible.
From a practical point of view, the most important tool for managing the receivables of an enterprise is its credit policy, represented by two interrelated activities: granting a deferral of payments and collection of debts.
The credit policy of the enterprise involves making decisions on five main issues [ Levy, Sarnat]:
1. Determining the period for which the payment is deferred;
2. Definition of lending instruments, i.e. legal form of registration of a commercial loan;
3. Formation of credit standards - a set of criteria and procedures for determining "good" and "bad" in terms of providing a deferral for customer payments;
4. Collection policy - certain procedures for the control of receivables and the procedure for actions in cases of delays in payments should be established;
5. Incentives that may be offered to customers to expedite payment of bills (usually discounts).
In the conditions of developed countries, the seller will rely on knowledge of the client's credit history, on the study of the client's financial statements, etc. In domestic conditions, the main sources of information about the creditworthiness of customers are
· Own experience of the company
· Information from confidential sources - for example, a bank where a potential client is served.
· Information from supplier firms that have already worked with this client.
For large contracts, it is possible to conduct special investigations by the security service.
An analysis of the current situation in Russia shows that spontaneously, on the basis of the interaction of market factors, domestic enterprises develop their own credit policy, which is already quite comparable to that which has developed in countries with a developed market economy. The result is the establishment of a certain balance between sales on a prepaid basis, with payment after the fact and with a deferred payment - a balance, the violation of which in one direction leads to a drop in sales, in the other direction to an unjustified increase in the risk of non-receipt of payment.
Inventory Management
Inventory management of the enterprise is the responsibility not so much of the financial as of the production manager. However, due to certain traditions, as well as the fact that many small and medium-sized firms simply do not have inventory management specialists, this function is often assigned to the financial manager. In addition, even in the presence of an advanced inventory management service at the enterprise, the financial manager remains an extremely important and non-trivial side of the problem - the assessment of the cost of investments in inventories. It is the accounting of the cost of investments in reserves that radically distinguishes modern models of their management from traditional rationing procedures.
From the point of view of financial management, the management of investments in inventories has certain specifics compared to the management of, for example, investments in fixed assets. These features, in particular, are expressed in the following [ Levy, Sarnat]:
· In practice, as a rule, it is impossible to unambiguously assess the profitability of investments in stocks; as a consequence, the main goal of inventory management is to minimize the costs of maintaining them;
· Decisions related to inventory management are repetitive; these decisions determine how often and how much inventory must be updated.
The decision regarding the optimal level of inventory should be based on a trade-off between the costs of maintaining an unreasonably high level of inventory and the risk of downtime and delays in production and sales of products due to their depletion.
Not having in mind to give an overview of existing methods and models of inventory management (this is the subject of a separate course), we will focus on the classification of costs associated with inventory and formalize the most well-known management model.
The first group includes costs that increase with an increase in inventory:
· The cost of financing investment in reserves;
The cost of storage
· Processing costs (relocation, delivery to places of sale, etc.);
· Inventory insurance;
· Property tax;
· Obsolescence and loss of value.
Costs that decrease with an increase in inventory (per one unit of inventory) can be summarized in three subgroups:
· Costs of placing an order (fixed per order);
· Loss of discounts provided depending on the volume of purchases;
· Costs of possible depletion of stocks.
The most well-known inventory management model that implements the compromise formulated above is the well-known model EOQ(Wilson formula), according to which the optimal order size Q* is
Q* = 2SC2 (8.8)
In formula (8.8) through S the annual requirement for stocks is indicated (in units), through From 1- variable costs per unit of inventory, through From 2- fixed costs per order.
Literature
1. Brigham Y., Gapensky L. Financial management: Full course. In 2 volumes. T.2 / Per. from English. ed. V.V. Kovaleva. - St. Petersburg: School of Economics, 1997.
2. Van Horn J. Fundamentals of financial management: TRANS. from English / Ed. I.I. Eliseeva. - M.: Finance and statistics, 2000.
3. Kovalev V.V. Introduction to financial management. - M.: Finance and statistics, 2004.
4. Financial management: theory and practice: Textbook / Ed. E.S. Stoyanova. - 5th ed., revised. and additional - M .: Publishing house "Perspective", 2000.
5. Cheng F. Lee, Joseph I. Finnerty. Corporate finance: theory, methods and practice. Per. from English. - M.: INFRA-M, 2000.
6. Shim Jay K., Siegel Joel G. Financial management / Translated from English. - M.: Information and publishing house "Filin", 1996.
7. Levy H., Sarnat M. Principles of Financial Management. – Prentice Hall, Englewood Cliffs, 1988.
Cash flow management methods.
Baumol's model is simple and sufficiently acceptable for an enterprise whose cash costs are stable and predictable. In reality, this rarely happens; the balance of funds on the current account changes randomly, and significant fluctuations are possible.
The initial provisions of the Baumol Model are the constancy of the cash flow, the storage of all reserves of monetary assets in the form of short-term financial investments and the change in the balance of monetary assets from their maximum to a minimum equal to zero.
Based on the presented graph, it can be seen that if the replenishment of cash balances through the sale of part of short-term financial investments or short-term bank loans was carried out twice as often, then the size of the maximum and average cash balances at the enterprise would be half as much. However, each transaction for the sale of short-term assets or obtaining a loan is associated with certain expenses for the enterprise, the amount of which increases with an increase in the frequency (or reduction in the period) of replenishment of funds. Let's denote this type of expenses with the index "P o" (expenses for servicing one operation of replenishing cash expenses).
Rice. 2.1.1 Formation and spending of the balance of funds in accordance with the Baumol Model.
To save the total cost of servicing replenishment operations, you should increase the period (or reduce the frequency) of this replenishment. In this case, the size of the maximum and average cash balances will increase accordingly. However, these types of cash balances do not bring income to the enterprise; moreover, the growth of these balances means the loss of alternative income for the enterprise in the form of short-term financial investments. The amount of these losses is equal to the amount of cash balances multiplied by the average interest rate on short-term financial investments (expressed as a decimal fraction). Let us designate the size of these losses by the index "P D" (loss of income when storing cash).
The mathematical algorithm for calculating the maximum and average optimal cash balances in accordance with the Baumol model is as follows (2.1.5 and 2.1.6, respectively):
; (2.1.5)
where YES max - the optimal size of the maximum balance of the company's cash assets;
The optimal size of the average balance of the company's cash assets;
Р О - expenses for servicing one operation of replenishment of funds;
P D - the level of loss of alternative income during the storage of funds (average interest rate on short-term financial investments), expressed as a decimal fraction;
PO DO - the planned volume of cash turnover (the amount of money spent).
