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Summary Advanced Corporate Finance
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Summary of the master Finance course Advanced Corporate Finance, from the first period. The first page shows the summarized academic papers and articles.
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Summary Advanced Corporate Finance1
Summary Advanced Corporate Finance – Annamarie de Ruijter – Vrije Universiteit – 2019/20
,Supply Chain Finance Fundamentals: What it is, what it’s not and how it works
Supply chain finance (SCF) or reverse factoring is a way to optimize working capital or cash flow and
reduce supply chain risk, usually set-up by the big buyer. The buyer can increase the time to pay a
supplier, improve the number of payable days outstanding and frees up cash that would otherwise
be trapped inside the supply chain. The supplier has the option to get paid early both without
affecting their balance sheets and at favorable rates. SCF programs have two methods:
1. The buyer extents payments terms with all suppliers, to get access to more working capital.
2. Suppliers get paid early by selling their invoices to financial institutions (banks).
Platform providers facilitate the SCF ecosystem with cloud-enabled service. A health indicator is how
efficient capital flows between buyers and suppliers, slow movements create unnecessary costs. The
process boils down to five steps:
1. The supplier submits an invoice.
2. The buyer approves the invoice and uploads it into the SCF platform.
3. The supplier selects invoices for early payment.
4. The funder receives and processes the requests and provides early payment to the supplier.
5. Once the invoice has matured, the buyer must pay either the funder or supplier.
Benefits from SCF are the win-win situation for buyers and suppliers, strengthens health and
relationships within the supply chain, the additional working capital can be used to generate income
and gain strategic advantage in the market; and facilitates growth, stability and innovation.
Short-term finance and the management of working capital
Long-term investments are only beneficial if attention is also paid to short-term decisions, such as
current assets and liabilities (<1 year) and net working capital (current assets – liabilities) including
inventories, trade receivables, cash, overdrafts and short-term loans. The two objectives of working
capital management are to increase profitability and ensure sufficient liquidity to meet short-term
obligations, these will however often conflict. Clear policies are needed around the total investment
in current assets, the investment in each type of current asset and the way they are to be financed.
Policies should also reflect optimal management decisions, the nature of business, seasonal trends
and policies of close competitors. Different policies:
1. Aggressive: lower levels of working capital, increases profitability but also risk.
2. Conservative: lager levels of working capital, reducing profitability and also risk.
3. Moderate: a middle path between the above approaches.
Short-term finance includes overdraft, short-term bank loans and trade credit. An overdraft is an
agreement with the bank to borrow a certain limit without the need for discussion. A short-term
loan is a fixed amount of debt finance borrowed from a bank, with repayment made within one year.
Trade credit is an agreement to take payment at a later date than that on which the goods and
services are supplied. Short-term finance is often cheaper and more flexible but riskier than long-
term finance, interest rates are lower but more volatile. This trade-off is made easier by dividing
assets in three types: non-current (long-term), permanent current (to sustain normal levels of
business) and fluctuating current assets (asset variations due to normal business activity). Policies:
1. Matching (a): finance fluctuating current assets with short-term funds and the other two
with long-term funds (maturity matches with asset types).
2. Conservative (b): finance some fluctuating current assets as well, less risk but higher costs.
3. Aggressive (c): finance fluctuating and some permanent current assets with short-term
funds, higher risk and profitability.
2
Summary Advanced Corporate Finance – Annamarie de Ruijter – Vrije Universiteit – 2019/20
, The three
approaches
relative to
proportions of
long- and
short-term
debt used to
finance
working
capital.
The cash conversion cycle (CCC) is the time between the outlay of cash on raw materials and the
inflow from the sale of finished goods, so the number of days for which financing is needed.
CCC = inventory days + trade receivables days – trade payables days
The amount of working capital needed can be estimated from forecast sales and the CCC, but care
must be taken in periods of reduced activity. The CCC can be reduced by decreasing inventory (more
effective production planning, JIT planning or outsourcing) or receivables (reduced customer credit
period, incentives for early payment and chasing slow payers) and increasing payables (deferral
payments).
Overtrading is supporting a too large volume of trade with insufficient working capital, which can
cause liquidity problems. It arises from a rapid increase in turnover or current assets, in the early
years of a new business or non-replacement of long-term loans after repayment. Strategies to deal
with overtrading are introducing new (equity) capital, improving working capital management or
reducing business activity. The practice of working capital management between countries varies
greatly and the amount of capital is mostly consistent with the power and position in the supply
chain.
The management of inventory is a tradeoff between benefits of buffers in the production process
and satisfying customer demand; and costs such as holding (insurance, rent), replacement (machines,
obsolete inventory), inventory itself and opportunity costs of cash tied up in inventory. The economic
order quantity (EOQ) model
assumes costs and demand are
constant; and no buffers are
needed. The annual holding cost is
the average inventory level in units
(Q/2) multiplied by the holding
cost per unit per year (H). The
annual ordering cost is the
number of orders per year (S/Q)
multiplied by the ordering cost per
order (F):
TC = (Q x H) / 2 + (S x F) / Q
Total costs are minimized if holding and ordering costs are equal, Q is now the economic order
quantity: Q = (2 x S x F) / H and the average inventory level: Q/2
However, there is a growing trend for companies to minimize the time between delivery and use of
inventory (no buffer), such as the just in time (JIT) policy. It can be achieved by developing closer
relationships with suppliers, changing factory layouts to reduce queues in WIP or reducing the size of
production batches.
The management of cash is a trade-off between holding cash to meet short-term needs or return
that could have been earned if invested. Reasons why companies hold cash:
3
Summary Advanced Corporate Finance – Annamarie de Ruijter – Vrije Universiteit – 2019/20
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