Three Companies Financial Records (Essay Sample)

FINSLP5
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FINSLP5
Question 1
It is possible to use the various effective cash management indicators in estimating whether or not, a firm has strong cash management techniques. For instance, a keen look at the dividend payout ratio depicts the sustainability of the cash the company will be paying the shareholders, while the dividend yield will show how much the company is earning from the dividends. Therefore, I would use the high dividend payout ratio for the Coca-Cola Company of 2.72 given the relative stability for the last 3 years as a sign of effective cash management over PepsiCo (Brigham & Houston, 2012). PepsiCo has a lower dividend payout ratio of 0.66 that it may not even cut in future just in case of any financial crisis.
In addition, the employment of capital budgeting techniques that consider time value of money is a recipe for effective cash management especially the net present value approach (Brigham & Ehrhardt 2008). However, a company must consider having both equity and debt in its capital structure and must carefully consider the risks involved especially in the evaluation of bonds. A company should pay attention to the opportunity costs inherent in the holding or selling of bonds.
Question 2
Effect on revenues from sales
More often than not, some customers would delay in making their payments beyond the credit period. Hence, the company must put into consideration the effect that such expectations will have on its sales revenues from which it fetches cash for its overall operations (Brigham & Houston, 2012). In response to this uncertainty, a company should consider spicing its credit policy with discounts to hasten timely payments of credit from its customers.
Impact on cost of sales
It is prudent that a company gets enough cash to replace its stock in time. Nevertheless, this may not be possible considering possible delays in payments of credit (Brigham & Houston, 2012). Consequently, a company must consider the trade-off between maintaining adequate stock and meeting the expectations of its customers in its credit policy as far as credit policy is concerned.
Bad debts possibility
More often, almost all companies experience bad debts that they must write off, and these translate into expenses for the company (Brigham & Houston, 2012). Notably, bad debts are expenses that do not generate any revenue and at the same time a necessary evil that all businesses must recognize it their credit policies.
Effect on sources of financing
A company that offers credit to its customers must also identify its sources of financing, without which it may not effectively run its normal operations (Brigham & Houston, 2012). A delay in paying credits implies that companies must go extra miles in sourcing for operating funds.
Question 3
An easy short-term financial management policy is a policy that is very strict on the period within which a company ought to make payments or receive its collections from the debtors. This kind of a financial management policy puts the company and its creditors on the edge since payments and receipts must be met on a specific date and time without which other forms of fines are imposed in the name of “interests” (Brigham & Houston, 2012). On the other hand, a tight short-term financial management policy refers to the financial management policy that permits flexibility of the terms of payments provided that the payment period falls within the definition of the short term period, commonly within a year. An organization propagating a financial management policy of this nature often stresses on flexibility in paying its short-term debts.
However, whether tight or easy, both companies employ short-term investment and financial plans for the management of their finances that must be met within a year or less than a year (Brigham & Ehrhardt 2008). Quite often, the management of a company may opt to authorize the very tight credit terms depending on whether or not the percentage of accounts receivables is increasing.
Question 4
A comprehensive monitoring of accounts receivable is necessary for the success of any business given the fact that there is no effective collection of accounts receivables without its prerequisite, monitoring. There are various techniques that companies can use to monitor their accounts receivable (Brigham & Houston, 2012). For instance, the use of a credit application form that highlights the contact information of the debtors is often overlooked, yet it is a great step forward in ensuring that debtors are reachable.
Credit applications enable the organization to fast track the payment history of the debtors with other organizations before a decision to award a credit or not (Brigham & Ehrhardt 2008). In addition, the other techniques of monitoring accounts receivable include keeping of accurate contact information with regards to the procedure and credit policy of the organization especially when it comes to issuing and payment of purchase orders among other activities of the business.
Interestingly, accounts receivables can now be monitored via the accounting software package, which produces the aging accounts receivable report (Brigham & Houston, 2012). The report categorizes debtors into various buckets that include and not limited to 0-30 days old, 31-60 days old, 61-90 days old among others.
However, the package allows for analysis of issues such as distance from date of billing, time bucket size, and unapplied credits (Brigham & Houston, 2012). Another technique is the trend line that compares the percentage of bad debts to sales over a given period. Similarly, the trend line analysis considers issues such as changes in credit policy, changes in products or business lines, and changes in business conditions. However, the use of ratio analysis that gives credit collection period and the application of the three analyses is recommended for effective monitoring of accounts receivables.
Question 5
Maturity matching approach to financing assets means that the company coord...