faa accounts recievable management
TRANSCRIPT
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CASH & MARKETABLE
SECURITY MANAGEMENT
CASH & MARKETABLE
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)
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CASH MANAGEMENT
Juhi Rupani
MBA Tech (Telecom)
Roll No : 421
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CASH MANAGEMENT
It is the maintaining of liquidity of a firm to minimize the risk ofinsolvency.
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, bykeeping good relationships with bankers and other creditors.
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MOTIVES FOR HOLDING CASH
T
he 3 motives for holding cash as advocated by the BritishEconomist, 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 purchasingraw materials in bulk in anticipation of a fall in price.
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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
Marketable securities are very liquid securities that can
be converted into cash quickly at a reasonable price and
tend to have maturities of less than one year.
MOTIVES FOR HOLDING CASH contd.
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CASH MANAGEMENT SYSTEM
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From the figure we can see that the firm will benefit byspeeding up cash receipts and slowing down cash
payouts.
The firm wants to speed up the collection of accounts
receivable so that it can have the use of money sooner.
Conversely, it wants to pay accounts payable as late as isconsistent with maintaining the firms credit standing
with suppliers so that it can make the most use of the
money it already has.
CASH MANAGEMENT SYSTEM contd.
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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.
CASH MANAGEMENT SYSTEM contd.
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HP AND IBM
Parameter HP IBM
MARKET
CAPITALIZATION
Approx 95004
crores
Approx 563490
crores
SUBSCRIBER BASE
(JUNE 2008)45 million 119.68 million
PRESENCE Global Global
ORIGIN California New York
LISTED ON NYSE NYSE
RANKING IN INDIA 5 7
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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.
IBM manufactures and sells computer hardware and
software (with a focus on the latter), and offers
infrastructure services, hosting services, and consulting
services in areas ranging from mainframe computers to
nanotechnology.
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Speeding Up Cash Receipts &
Slowing Down Cash PaymentsApoorva Charu Sawhney
MBA Tech (IT)
Roll No : 117
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SPEEDING UP CASH RECEIPTS
Acceleration of Collections:
1. Early preparation and mailing of invoice
2. Accelerate payment from customers
3. Reduce time when payments remain uncollected funds
COLLECTION FLOAT: Total time between the mailing of the check by
the customer and the availability of cash to the receiving firm.
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COLLECTION FLOAT TIME-LINE
ORDER
OF
BOBJONES 2048
COLLECTION FLOAT
DEPOSIT FLOAT
MAIL FLOAT
PROCESSING FLOAT AVAILABILITY FLOAT
Customer mails
check
Firm receives
checkCompanys bank
account credited
Company deposits
check
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WAYS TO REDUCE COLLECTION FLOAT
Earlier billing/Outsource the billing function
Pre-authorized debt
Use of Lockbox systems
Concentration banking
Depository transfer check
Automated Clearing House (ACH) Transfer
Wire Transfer
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EARLIER BILLING
Accelerated preparation and mailing of invoices
Use of computerized billing/ fax
Enclose invoices with shipped goods
Request for advance payments of goods
Outsourcing the billing function:
Allows firm to focus on clients
Allows firm to save labour costs Allows firm to relocate resources
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PRE-AUTHORIZED DEBT
Arrangement that allows firms to transfer payments directly from
customer accounts to firms accounts, with customer's advance
authorization.
Reduces mail float and processing float
ADVANTAGES:
Eliminates billing and postage costs, clerical processing costs Eliminates regular billing for customers
Increased working cash
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LOCKBOX SYSTEM
F
irm sets up a lock box service with their bank , customers send theirpayments 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
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CONCENTRATION BANKING
Firms move funds from several geographically situated regional banks
to a main concentration account in a primary bank.
ADVANTAGES:
Improves control over cash inflow/outflow
Reduces idle balances
Allows more effective investments
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DEPOSITORY TRANSFER CHECKS (DTCs)
Firms use pre-printed, non-negotiable check drawn on a local bank,
payable to a single company account at a concentration bank.
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
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AUTOMATED CLEARINGHOUSE TRANSFER
The Automated Clearing House is an electronic system used to
transfer funds between banks.
ADVANTAGES:
Electronic version of DTC, hence is faster
Funds available 1 business day later
Better coordination between bank branches
DISADVANTAGES:
Hard to stop payment on the physical check
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CONTROL OF DISBURSEMENTS
Centralized disbursement system
Payable through drafts (PTD)
Zero-Balance Accounts
Controlled disbursements
Remote Disbursements
Outsourcing
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CENTRALIZED SYSTEM
Payables centralized into one account.
Sophisticated computer system that provide necessary information
about excess funds.
ADVANTAGES:
Excess funds transferred automatically from other accounts
Disbursements made precisely when required
DISADVANTAGES:
Operating procedures should be common for all accounts and
well-established
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PAYABLE THROUGH DRAFT (PTD)
It is Payable-on-demand When presented to issuers bank for collection, bank presents it for
acceptance. The funds are disbursed after acceptance.
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
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ZERO BALANCE ACCOUNT (ZBA)
One master account services subsidiary accounts.
Just enough cash is transferred daily from the firms 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
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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.
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Electronic Commerce and
OutsourcingAnkit Sharma
MBA Tech (Telecom)
Roll No : 418
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ELECTRONIC COMMERCE
Electronic commerce is the exchange ofbusiness information in an electronic format as
an alternative to the paper based system.
EC spectrum can be divided into: Unstructured messaging: utilize
technologies such as faxes and e-mails
Structured messaging: utilize technologies
such as electronic data interchange (EDI)
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ELECTRONIC FUNDS TRANSFER
Electronic transfer of a certain monetary value takes place inwhich 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 deliveredby EFT or paper check
Wire transfer via an international banking network (generally
carries a higher fee)
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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)
In January 1999, a regulation passed required all federal
government payments except tax refunds and special
waiver situations, be made electronically This will:
provide more security than paper checks and be cheaper to process for the government.
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FINANCIAL EDI
Is the computer-to-computer exchange of payment andpayment-related information between companies using a
standard format.
A bank must be involved.
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
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STEPS IN FINANCIAL EDI
T
he buyer, or originator, electronically extracts payment informationfrom 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.
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COSTS AND BENEFITS OF EDI
CostsCosts
Computer hardware andsoftware expenditures
Increased training costs toimplement and utilize an EDIsystem
Additional expenses toconvince suppliers andcustomers to use theelectronic system
Loss of float
BenefitsBenefits
Information and paymentsmove faster and with greaterreliability
Improved cash forecasting andcash management
Customers receive faster andmore reliable service
Reduction in mail, paper, anddocument storage costs
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OUTSOURCING
Shifting an in-house operation to outside firm in a view toreduce companys costs
Operation to be outsourced is critical but non-core process of
the company
The subcontractor uses special expertise and economies of
scale to perform an outsourced business operation
The company gets the service it needs at a lower cost andhigher quality; can focus on its core business
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OUTSOURCING: IBM
The companys major operations in outsourcing are:
Global technology services: Comprehensive IT services
integrated with business insight working with clients to reduce
costs and improve productivity through accepting the
outsourcing of processes and operations
Global business services: primarily provides professional servicesand application outsourcing services, delivering business value
and innovation to clients through solutions which leverage
industry and business process expertise.
IBM leverages its supply-chain expertise for clients through its
supply-chain business transformation outsourcing service tooptimize and help operate clients end-to-end supply-chain
processes, from procurement to logistics.
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REVENUE FROM OUTSOURCING: IBM
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CASH BALANCES: HEWLETT PACKARD
Total cash and cash equivalents declined approximately 10% to
$10.2 billion in 2008 from $11.3 billion in 2007 due to increased
investment spending on acquisitions and increased borrowings.
Cash balances according to them are sufficient to cover cash
outlays expected in fiscal 2009 associated with additional stockrepurchases, acquisitions, company bonus payments, and other
operating cash requirements.
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GENERAL SCENARIO
In general, firms try to maintain some target level of cash for meeting :
Transaction requirement
Compensating Balances requirement
Beyond this, they invest in marketable securities as near-cash
investments
Interest lost on idle cash balances Greater opportunity cost incurred on maintaining idle cash
balances
Securities are called marketable securities when :
The firm can readily convert them into cash and Intends to do so when it needs cash
If this does not apply, it is called as Investment in securities
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BALANCE SHEET REPRESENTATION
Cash Equivalents
Most liquid assets found within any firms balance sheet.
Readily convertible into cash
Maturity with 3 months
Low risk, Low Return
Includes Treasury Bills, Bank Certificate of Deposits, Other moneymarket instruments.
Short Term Investments
Securities that are held for less than one year
Return on investment in form of :
Financial income i.e. dividend income, interest income
Capital appreciation
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VALUATION OF MARKETABLE SECURITIES
At Acquisition
Marketable Securities are initially recorded at acquisition cost which
includes purchase price plus any commission, taxes or other costs
related to acquisition.
This the same rule as the general rule for valuing assets at acquisition.
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 normaloperations of a firm.
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THREE CLASSES OF MARKETABLE SECURITIES
For the purposes of valuation after acquisition, there are three classes
of marketable securities:
Debt held to maturity
Trading securities
Securities available for sale
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DEBT HELD TO MATURITY
Debt securities for which a firm has both the positive intent & ability
to hold to maturity
Shown on the balance sheet at the amortized acquisition cost
Amortized acquisition cost means that the securities are amortized
like a mortgage or bond The acquisition cost is assumed to be the present value.
The maturity value and maturity date are known from the bond
certificate.
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TRADING SECURITIES
Trading securities are assumed to be held for short-term profit
Characterized by frequent & active buying & selling with the object of
generating profit
Typically only financial institutions hold trading securities
Since trading securities are acquired for short-term profit, unrealized
gains or losses that result from adjustments to market value pass
through the income statement & increase or reduce net income
before there is a sale of the securities
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COMPARISON
Trading Securities
The unrealized holding gain
or loss for trading securities
is considered income; it isclose to income and
increases or decreases net
income.
Securities Available for Sale
While the unrealized
holding gain or loss for
available for sale securitiesis not closed but remains on
the balance sheet. When
these securities are sold,
this account must then be
closed.
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MARKETABLE SECURITIES PORTFOLIO
Ready cashsegment
(R)
Controllablecash segment
(C)
Free cashsegment
(F)
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READY CASH SEGMENT (R)
Optimal balance of marketable securities held to take care of probable
deficiencies in the firms cash account
Can be sold quickly to build up cash
Ideally, Cash Inflows >= Cash Outflows, each day
Ready cashsegment
(R)
Controllable
cash segment(C)
Free cashsegment
(F)
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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 cashsegment
(R)
Controllablecash segment
(C)
Free cashsegment
(F)
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FREE CASH SEGMENT (F)
free marketable securities available for unassigned purposes
It is just extra idle cash with the company invested in Marketable
securities.
Ready cashsegment
(R)
Controllablecash segment
(C)
Free cashsegment
(F)
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VARIABLES FOR SELECTION
Variables for selection for Marketable Securities :
Safety
Marketability
Yield
Maturity
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SAFETY
With regard to the principal amount
Refers to the likelihood of getting back the same number of
rupees you originally invested (principal)
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MARKETABILITY
Also known as Liquidity
The ability to sell a significant volume of securities in the short
period of time in the secondary market without significant price
concession
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YIELD
Also known as Return
The variability in the market price of a security caused by the
changes in interest rates
LowerInterest Risk
HigherInterest Risk
Time
Yield
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MATURITY
The life of a security i.e. amount of time before the principal
amount of a security becomes due
Longer the maturity, greater the yield , but also more exposure to
yield risk.
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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
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CONTROVERSY ABOUT MARKETABLE SECURITIES
The accounting for marketable securities has been controversial. The
accounting issues are:
Whether to report these instruments at historical cost (or some
method based on historical cost) or at market value, and
If at market value, whether to report the changes from period toperiod as part of that periods income or to await the period when
the firm sells or otherwise disposes of the instrument to record
the gain or loss in income.
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Common Investment
Instruments
Meenal Shah
MBA Tech (IT)Roll No : 119
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Money Market
A segment of the financial market in which financial instruments
with high liquidity and very short maturities are traded.
There are two modes of investment in money market viz
Direct Investment in Money Market Instruments &
Investment in Money Market Funds.
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Common Money Market Instruments
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
Yield determined by money market forces
one of the safest money market instruments
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Common Money Market Instruments
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.
CDs are issued in denominations of Rs. 0.5 million.
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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
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Common Money Market Instruments
Inter- corporate Deposits
Inter-corporate deposits are unsecured loans offered by one
company to another company, and usually carry a term of six
months
Advantage : no legal issues
Disadvantage : high risk
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Common Money Market Instruments
Ready Forward or Repo or Buyback
Short term loans in which two parties agree to sell and repurchase
the same security.
Between the parties approved by RBI
Repo - the seller sells securities with an agreement to repurchase
the same at a mutually decided future date and price
Reverse Repo - the buyer purchases the securities with an
agreement to resell the same to the seller on an agreed date at a
predetermined price.
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Common Money Market Instruments
Mutual Funds Schemes Mutual fund is the most popular investment instrument for a
common man as it offers a diversified professionally managed
basket of securities at a low cost.
T
he mutual fund industry offers various types of investmentschemes like equity instrument, debt instrument or balanced
instruments. These could be broadly classified as
Open-ended scheme.
Close-ended scheme
Interval scheme
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Selecting Securities for Portfolio Segments
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Selecting Securities for Portfolio Segments
Ready Cash
Segment
Controlled Cash Segment Free Cash Segment
Criterion 1.1. Safety andSafety and
2.2. ability toability to
convert to cashconvert to cash
1. Date to cash should
be known
2. Mature at time ofcash needs
1.1. Base choice on yieldBase choice on yield
subject to risksubject to risk--returnreturn
tradetrade--offs.offs.2. Marketability with
some loss of principal
tolerable if yield is
high
SelectT
reasuries CDs, commercial paper,and inter-corporate
deposit
Any money marketAny money marketinstrumentinstrument may bemay be
selected for this segmentselected for this segment
f l
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Portfolio Management
A portfolio is a group of investments. A well-managed portfolio isdiversified to ensure a continuous ROI over time.
There are three major portfolio management policies:
Aggressive policy: (capital appreciation)
Defensive policy: (capital preservation) Balanced policy: (Total Return)
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RATIO ANALYSIS
Swati Seshadri
MBA Tech (IT)
Roll No: 118
CURRENT RATIO
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CURRENT RATIO
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 HPs
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.
FORMULA : CURRENT ASSETS + CURRENT INVESTMENTS
CURRENT LIABILITIES + SHORT-TERM DEBT
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 0.98 1.21 (19) 1.4
IBM 1.15 1.2 (4)
ACID TEST RATIO
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ACID TEST RATIO
FORMULA :
CURRENT ASSETS + CURRENT INVESTMENTS PREPAID EXPENSES - INVENTORY
CURRENT LIABILITIES + SHORT-TERM DEBT
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 0.75 0.96 (22) 0.8IBM 0.99 1.05 (6)
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
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HP Cash and cash equivalents at October 31, 2008
totaled $10.2 billion, a decrease of $1.1 billion
from the October 31, 2007 balance of $11.3
billion.
The amount and terms of any acquisition-related
borrowings affects liquidity and financial condition
and potentially credit ratings. Thus HP's liquidity
reduced in 2008 due to it acquisition of EDS.
HP uses cash generated by operations as the
primary source of liquidity. Internally generated
cash flows support business operations, capital
expenditures and the payment of stockholder
dividends.
IBM IBM's liquidity positions were strong as the cash
on hand was $12,741 million. Total debt
decreased $1,349 million year to year, and the
company generated $18,812 million in operating
cash flow in 2008.
The company provides for additional liquidity
through several sources: maintaining a sizable
cash balance, access to global funding sources, a
committed global credit facility and other
committed and uncommitted lines of credit
worldwide
LIQUIDITY RATIO ANALYSIS
DEBT TO EQUITY RATIO
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DEBT TO EQUITY RATIO
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 stockholders 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
shareholders equity being halved.
FORMULA : TOTAL DEBTSHAREHOLDERS EQUITY
2007-08 2006-07 YOY (%)
HP 0.46 0.21 119
IBM 2.52 1.23 105
DEBT TO TOTAL ASSETS RATIO
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DEBT TO TOTAL ASSETS RATIO
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.
FORMULA : TOTAL DEBT
TOTAL ASSETS
2007-08 2006-07 YOY (%)
HP 0.16 0.09 77
IBM 0.31 0.29 7
LONG TERM DEBT TO TOTAL CAPITALIZATION RATIO
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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.
FORMULA : LONG-TERM DEBTTOTAL CAPITALIZATION
2007-08 2006-07 YOY (%)
HP 0.13 0.10 30
IBM 0.34 0.30 13
DEBT RATIO ANALYSIS
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DEBT RATIO ANALYSIS
IBM: Global Financing is a segment of the company and as such, is supported by the companys
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 companys access to capital markets or its ability to meet its obligations.
Stockholders equity of $13,465 million decreased $15,004 million versus 2007.
Total debt of $33,926 million decreased $1,349 million from prior year-end levels. and
the company generated $18,812 million in operating cash flow in 2008.
Within total debt, on a net basis, the company utilized $2,444 million in net cash to retiredebt versus $12,112 million in net cash proceeds in 2007. The net cash used to retire debt in
2008 was comprised of: $10,248 million in cash payments to settle debt and net payments of
$6,025 million in short-term borrowings, partially offset by $13,829 million of new debt
issuances.
INTEREST COVERAGE RATIO
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INTEREST COVERAGE RATIO
FORMULA : EBIT
INTEREST EXPENSES
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 31.83 30.17 6 24.2
IBM 25.84 24.71 5
This ratio shows the companys ability to meet its interest payments to avoid
bankruptcy. It shows a firms 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.
Hps interest coverage ratio is better than that of IBM.
RECEIVABLE TURNOVER RATIO
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RECEIVABLE TURNOVER RATIO
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.
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
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RATIO ANALYSIS
Divi Khanna
MBA Tech (Telecom)
Roll No: 420
PAYABLE TURNOVER RATIO
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PAYABLE TURNOVER RATIO
Cash generated by Global Financing was primarily deployed to pay
intercompany payables and dividends to the company (IBM).Hence the
payables showed a decrease which increases the 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
PAYABLE TURNOVER IN DAYS
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PAYABLE TURNOVER IN DAYS
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.
FORMULA : DAYS IN A YEAR
PAYABLE TURNOVER RATIO
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 53 55 (4) 53
IBM 46 53 (13)
INVENTORY TURNOVER RATIO
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INVENTORY TURNOVER RATIO
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.
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
INVENTORY TURNOVER IN DAYS
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INVENTORY TURNOVER IN DAYS
The decrease in inventory turnover in days for HP was due primarily to
more efficient inventory management, higher cost of goods sold
during the fourth quarter of 2008 as a result of increased revenues andthe effect of the EDS acquisition.
FORMULA : DAYS IN A YEAR
INVENTORY TURNOVER
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 32 37 (14) 34
IBM 18 18 (0)
OPERATING CYCLE
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OPERATING CYCLE
IBM is making attempts to reduce its OC .This is shown by the greater
decrease in the OC as compared to that of HP.
IBM maintains a very short inventory turnover in days .However its receivable
turnover in days is very high, leading to its greater operating cycle.
FORMULA : INVENTORY TURNOVER IN DAYS + RECEIVABLE TURNOVER IN DAYS
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 92 93 (1) 110
IBM 118 128 (8)
CASH CYCLE
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CASH CYCLE
The combined effect of changes in the payable, receivable and inventory
turnover ratios for HP(as already mentioned above) contributed to the
decrease in FY 2008 cash conversion cycle compared to the prior year.
IBMs cash cycle is quite high as compared to HP.T
hus to a certain extent HPscash management is better as it is quick to collect cash from its sales once the
purchases have been paid for.
FORMULA : OPERATING CYCLE PAYABLE TURNOVER IN DAYS
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 34 38 (11) 58
IBM 72 75 (4)
TOTAL ASSET TURNOVER RATIO
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TOTAL ASSET TURNOVER RATIO
IBMs 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).
Hps 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.
FORMULA : NET SALES
TOTAL ASSETS
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 1.04 1.17 (11) 0.8
IBM 0.92 0.8 15
GROSS PROFIT MARGIN
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GROSS PROFIT MARGIN
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.
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
PRE-TAX MARGIN
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PRE-TAX MARGIN
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
companys tax rate.
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
NET PROFIT MARGIN
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NET PROFIT MARGIN
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.
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
PROFITABILITY RATIO ANALYSIS
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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
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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
It is the ratio of money gained or lost on an investment relative to the
amount of money invested.
IBM has shown a substantial increase in the ROI due to decrease in total
assets and an increase in the net income.
10% decrease in case of HP because of a decrease in total asset turnover
ratio and net profit margin increased only marginally.
RETURN ON EQUITY
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RETURN ON EQUITY
FORMULA : EAT
SHAREHOLDERS EQUITY
2007-08 (%) 2006-07 (%) YOY (%) INDUSTRY
AVERAGE
HP 21.39 18.85 14 49.7
IBM 91.6 36.59 150
Return on Equity measures the rate of return on the ownership interest of
the common stock owners.
It measures a firm's efficiency at generating profits from every unit of
shareholders' equity
IBM has very firm investment opportunities for its future stakeholders.
IBM is a better investment firm for its stakeholders.
DU PONT APPRAOCH ROI AND ROE
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DU PONT APPRAOCH ROI AND ROE
FORMULA(ROI) : NET PROFIT MARGIN x TOTAL ASSET TURNOVER
2007-08 (%) 2006-07 (%) YOY (%)
HP 7.34 8.18 (10)
IBM 11.22 8.64 30
FORMULA(ROE) : NET PROFIT MARGIN x TOTAL ASSET TURNOVER x
EQUITY MULTIPLIER
2007-08 (%) 2006-07 (%) YOY (%)
HP 21.36 18.86 13
IBM 91.25 36.55 150
SUGGESTIONS
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SUGGESTIONS
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.
Increase other current assets for payment of short term liability.
Curtail long term borrowings from short term funds so that financial
obligation may be managed properly.