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This post addresses several finance issues.

1. What is float? What are its four basic components? Which of these components is the same from both a collection and a payment perspective?

2. What is a collection policy? What is the typical sequence of actions taken when by a firm when attempting to collect an overdue account?

3. What is the financial planning process? What is a strategic plan? Describe the roles that financial managers play with regard to strategic planning.

4. What does the word sustainable mean in sustainable growth model? In what ways can the sustainable growth model highlight conflicts between a firm's competing objectives?

5. What is the firm's goal in short-term investing? How does it use money market mutual funds? Describe some of the popular money market financial instruments in each of the following groups: U.S. Treasuries, federal agency issues, bank financial instruments, corporate obligations.

6. The owner of a hot dog cart purchases inventory with credit every morning and sells all of the inventory by 2 o'clock in the afternoon. The hot dogs an drinks are sold only for cash. Will the owner have a negative cash conversion cycle?

7. Why does it make sense to let the firm's cash balance or a short-term liability account serve as the plug figure in pro forma projections? Why not use gross fixed assets as the plug figure?

8. Why might pro forma statements and the equation for external funds required (EFR) yield different projections for a firm's financing needs?

9. Explain how slower inventory turnovers, slower receivables collections, or faster payments to suppliers would influence the numbers produced by a cash budget.

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1. What is float? What are its four basic components? Which of these components is the same from both a collection and a payment perspective?

Float refers to a small percentage of the company's money supply that they keep in an account to cover checks that are written and deposits that come in, in case there is overlap. This presents checks from being presented that cannot be covered due to a lack of funds in the company's bank account. This is a very common practice. It basically entails "floating money" from outstanding checks to incoming deposits. The basic components of float include mail float, processing float, availability float, and clearing float. The mail float and processing float would be applicable to both a collection and a payment perspective. The mail float deals with the time delay from mailing out the necessary payments as related to the time it takes for the receiver to accept and then deposit the payment. The processing float refers to the time it takes to process the actual payment, which includes clearing each involved bank or financial institution respectively. The availability float refers to the checks that a company has deposited but has not cleared the bank. It typically takes anywhere from a few to several days for a check to clear the bank, depending on the size of the check being deposited. Checks that are written for larger amounts take more time to clear the bank than checks written for smaller amounts. The clearing float refers to the time it takes for the money to be withdrawn from the sender's bank account, and for the check to be returned as paid to the sender.

2. What is a collection policy? What is the typical sequence of actions taken when by a firm when attempting to collect an overdue account?

A collection policy is a company's specific policy on how they proceed to collect accounts. All companies that run accounts receivables have collection policies that are tailored to their individual company, due to the circumstances involved with each organization. The typical sequence of actions taken by a firm when attempting to collect an overdue account include 1) attempting to contact the debtor by telephone to speak directly with the party that is responsible for the debt. 2) Mailing out another invoice (or copy of the last invoice would be acceptable with a new date) demanding payment of the debt, and specifically stating that the debt is overdue. 3) If no response is obtained by telephone or through the mail, the third step would be for the company to send an official notice by certified mail of the past due debt. If the debt does end up being litigated in court, this would prove that a person had to sign for the mail containing the invoice, which would prevent the party from alleging that they never received the company's invoice in the mail. Depending on the amount of the overdue account, a company may have policies in-place that turn the account over to their legal and/or collections department. That department would specialize in collecting on the overdue accounts. If the amount is large enough to be considered substantial to the company, the company may turn the account over to an attorney or professional collection agency, or may file a small claims lawsuit in court in order to recover the money due to the company.

3. What is the financial planning process? What is a strategic plan? Describe the roles that financial managers play with regard to strategic planning.

The financial planning process is a process performed by management where the goals, needs, and resources of the company are analyzed. A plan is then prepared based on the three criteria for the organization, which enables the company to use as a strategic tool and also as a guideline in order to keep their finances organized, healthy, and in-line with all current budgets and forecasts, which are also used as part of the financial planning process. A strategic plan is a process that management goes ...

Solution Summary

The solution provides a detailed discussion for all nine questions, answered separately. All questions are included. This solution is written based on 25+ years of professional experience in the accounting and finance industry.

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