What are your further ideas regarding plans and strategies companies should consider for managing cash flow? Especially during uncertain times?

Question from Teacher: What are your further ideas regarding plans and strategies companies should consider for managing cash flow? Especially during uncertain times?

Allan’s Post:

The main reason why management needs to control cash and have enough cash at hand is to pay its suppliers, employees, and creditors. Any amount classified as cash means that amount is readily available to pay debts. (Porter & Norton, 2018). The control of cash allows management to function smoothly in every business. One way to control outflow of cash is to assign the responsibility to only a handful of individuals for disbursement, whereas all transactions need to be documented using computerized documents such as Purchase order, Sales receipts and eventually payment through a check.

Cashflow statements is one tool that management uses to calculate and maintain cash at hand to pay it obligations. Excess cash can be invested in various securities which the company needs to monitor on an ongoing basis.

According to Macy’s statement of cash flows, they reported cash of $1.715 Billion at the end of the period. Most of the increase came from operating activities as it shows an increase of almost 400% but since they repaid $2.399 Billion debt that impacted overall cash flows to decrease by $39M from prior year. The company also paid $90M in cash dividends and it seems like Macy’s is doing well with liquid assets and has enough to pay off its debt obligations.

From a work life situation, the current measures we have put in place are on travel spends where anything over $1000 per employee needs to be approved by three different levels of upper-level management that will scrutinize every penny for this spend.

Matthew’s Post:

Cash managers have an extremely important job in handling the amount of cash that is on hand and making sure that there isn't an over abundance of cash on hand at any given time. There are important reasons to make sure that there is enough cash on hand to pay any creditors on time, taxing agencies, suppliers, employers, etc. (Porter, Norton 2018). There are two tools that can be used to help to manage cash flows. The first tool is the bank reconciliation. This is a form that is used by an accountant to resolve or reconcile differences in bank statements with the balance show for a particular account (Porter, Norton 2018). The other tool that can be used is the establishment of a petty cash fund. Petty cash is money kept on hand for small purchases in place of writing a check (Porter, Norton 2018).

When looking at the annual report for Lockheed Martin in 2021, it shows total cash and cash equivalents at year end of $3.604 billion. They opened the year with $3.160 billion on hand and their net cash provided by operating activities for 2021 was $9.221 billion. Expenses such as net cash used for investing activities for 2021 was $1.161 billion and $7.616 billion for net cash used for financing activities. A good rule of thumb for businesses is to have enough on hand cash that can cover three to six months of operating costs (Khartit 2022). If you take look at the cash funds used for expenses, keeping around $3.6 billion on hand falls in that range of three to six months worth of expenses.

References:

Warren’s Post:

Hello class,

Calculate the average life, average age, and asset turnover ratios. Discuss what each ratio tells you in the context of your chosen company.

T-Mobile uses the straight-line method of depreciation as this method gives a more accurate estimate of asset age (T-Mobile US Inc, 2022). The useful life of an asset, also known as economic life or service life, is an estimate of how long you can reasonably expect to use an asset for the benefit of your organization (Porter & Norton, 2018). It also tells you how long the asset will remain functional and generate income. The three ratios that are used for the purpose of monitoring depreciation are the average life ratio (ALR) which measures the average life of the asset. T-Mobile’s ALR is 7.95 years 95188/11967 (Property & Plant/Depreciation Expense).

The average age ratio for T-Mobile is 4.44 years 53102/11967 (Accumulated depreciation/Depreciation Expense).

The final ratio is the asset turnover ratio (ATR), which measures the number of assets needed for every dollar of sales. The ATR for T-Mobile is .380. ATR for the technology industry will typically be around 0.61. T-Mobile absorbed much of Sprint’s bad debt and technology and inventory that has phased out. The next fiscal year 2023 will see a slimmer wireless competitor with cutting-edge technology.

Calculate the accounts receivable turnover ratio and convert that ratio into days. Discuss what each ratio tells you in the context of your chosen company.

The accounts receivables turnover ratio (ARTR) measures the number of times a company collects its average accounts receivable balance. An efficient company has a higher accounts receivable turnover ratio while an inefficient company has a lower ratio. T-Mobile’s ARTR is 18.84, which is a good indication of how well T-Mobile collects its receivables. On average T-Mobile collects its receivables in 19 days on average.

Shannon’s Post:

Week 3 Discussion – Long-Term Asset and Accounts Receivable Analysis Case Study

Target Corporation – 2021 Annual Report

Average Life = Property, Plant, and Equipment/Depreciation Expense

Target Average Life Ratio: 49,384 million / 2,470 million = 19.99

Average Age = Accumulated Depreciation/Depreciation Expense

Target Average Age Ratio: 20,278 million / 2,470 million = 8.21

Asset Turnover = Net Sales/Average Total Assets

Target Asset Turnover Ratio: 93,561 million / 47,013.5 million = 1.99

The age and composition of long-term assets should be analyzed because of they are often the most productive assets of many companies. To help a corporation determine the average life of their long-term assets, the average life ratio can be determined by dividing property, plant and equipment by the depreciation expense. Additionally, to determine the average age of long-term assets, accumulated depreciation is divided by the depreciation expense. Finally, to determine how many dollars of assets are needed to every dollar of sales, the asset turnover ratio can be calculated by dividing net sales by average total assets (Porter & Norton, 2018).

In 2021, Target Corporation reported $49,384 million in property and equipment, $2,470 million in depreciation expense, $20,278 million in accumulated depreciation expense, $93,561 million in net sales and $47,013.5 million in average total assets. By using the calculations for each ratio, it is determined that Target Corporation’s the average life of their long-term assets is 19.99 years, the average age of their long-term assets is 8.21 years, and the asset turnover ratio is 1.99 – meaning that each dollar of assets produced $1.99 of sales. According to csimarket.com, the average asset turnover ratio in the retail industry was 1.77 (.

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Target Accounts Receivable Turnover Ratio: 93,561 million / 1,135 million = 82.43

Number of Days’ Sales in Receivables = Number of Days in the Period/Accounts Receivable Turnover Ratio

Target Number of Days’s Sales in Receivables: 360/82.43 = 4.37 days

By dividing Target’s net credit sales by their average accounts receivable, it was determined that Target’s accounts receivable turnover ratio was 82.43, meaning the company turns over its accounts receivable over 82 times per year. Dividing the number of days in the period by the accounts receivable turnover ratio tells investors that it took Target 4.37 days or less on average to collect its accounts receivable.