faa accounts recievable management

8/9/2019 FAA Accounts Recievable Management

1/101

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)


2/101

CASH MANAGEMENT

Juhi Rupani

MBA Tech (Telecom)

Roll No : 421


3/101

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.


4/101

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.


5/101

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.


6/101

CASH MANAGEMENT SYSTEM


7/101

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.


8/101

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.


9/101

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


10/101

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.


11/101

Speeding Up Cash Receipts &

Slowing Down Cash PaymentsApoorva Charu Sawhney

MBA Tech (IT)

Roll No : 117


12/101

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.


13/101

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


14/101

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


15/101

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


16/101

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


17/101

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 clerical functions (bank handles receiving, totaling,depositing)

Early knowledge of dishonored checks


18/101

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


19/101

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


DISADVANTAGES:

funds not immediately available on DTC receipt

Mail-based collection of check


20/101

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


21/101


22/101


23/101


24/101

CONTROL OF DISBURSEMENTS

Centralized disbursement system

Payable through drafts (PTD)

Zero-Balance Accounts

Controlled disbursements

Remote Disbursements

Outsourcing


25/101

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


26/101

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


27/101

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


28/101

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.


29/101

Electronic Commerce and

OutsourcingAnkit Sharma

MBA Tech (Telecom)

Roll No : 418


30/101

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)


31/101


32/101

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)


33/101

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.


34/101

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


35/101

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.


36/101

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


37/101

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


38/101

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.


39/101

REVENUE FROM OUTSOURCING: IBM


40/101

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.


41/101


42/101

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


43/101

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


44/101

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.


45/101

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


46/101

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.


47/101

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


48/101


49/101

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.


50/101

MARKETABLE SECURITIES PORTFOLIO

Ready cashsegment

(R)

Controllablecash segment

(C)

Free cashsegment

(F)


51/101

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)


52/101

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)


(C)

Free cashsegment

(F)


53/101

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)


(C)

Free cashsegment

(F)


54/101

VARIABLES FOR SELECTION

Variables for selection for Marketable Securities :

Safety

Marketability

Yield

Maturity


55/101

SAFETY

With regard to the principal amount

Refers to the likelihood of getting back the same number of

rupees you originally invested (principal)


56/101

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


57/101

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


58/101

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.


59/101

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


60/101

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.


61/101

Common Investment

Instruments

Meenal Shah

MBA Tech (IT)Roll No : 119


62/101

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.


63/101


64/101

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


65/101


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.


66/101


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


67/101


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


68/101


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.


69/101


70/101


71/101


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


72/101

Selecting Securities for Portfolio Segments


73/101

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


74/101

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)


75/101

RATIO ANALYSIS

Swati Seshadri

MBA Tech (IT)

Roll No: 118

CURRENT RATIO


76/101

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


77/101

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


78/101

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


79/101

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


80/101

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


81/101

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


82/101

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


83/101

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


84/101

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


85/101


86/101

RATIO ANALYSIS

Divi Khanna

MBA Tech (Telecom)

Roll No: 420

PAYABLE TURNOVER RATIO


87/101


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


88/101

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


2007-08 2006-07 YOY (%) INDUSTRY

AVERAGE

HP 53 55 (4) 53

IBM 46 53 (13)

INVENTORY TURNOVER RATIO


89/101

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


90/101

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


91/101

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


92/101

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


93/101

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


94/101

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


95/101

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


96/101

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


97/101

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


98/101

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


99/101

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


100/101

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


101/101

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.

faa accounts recievable management

Documents