An Observation for the Further Formulation of Policies By Prof. Dr.Eric Y Nasution.

An Observation for

the Further Formulation of PoliciesBy Prof. Dr.Eric Y Nasution

FINANCING FUNCTION: From the point of view of liabilities + stockholders’ equity.

CURRENT LIABILITIES (short-term loan + payables + accrual, etc.)LONG-TERM LIABILITIES (long-term loan + bond + lease + other)EQUITY (preferred stock + common stock + retained earning)

INVESTMENT FUNCTION: From the point of view of assets acquisition.

CURRENT ASSETS (cash, receivable, inventories, marketable securities)FIXED ASSETSLONG-TERM INVESTMENT (securities investment, long-term receivable + deposit, etc.)

OPERATIONAL FUNCTION: From the point of view of: *the firm’s capacity to earn income*the firm’s dividend policy

*SALES NET PROFIT CAPACITY*DIVIDEND PAY OUT POLICY % OF NET PROFIT

(In Million US$) Amount % Assets: Current assets 8.0 22.9 Fixed assets (net book value ) 25.0 71.4 Investments (securities) 2.0 5.7 Total assets ** 35.0 100.0 Liabilities & Equity: Current liabilities 5.0 14.3 Bond payable, 5 yr. (2010), 10% p.a. 5.0 14.3 Equity: Capital stock, $ 1 par, 15 million o/s shares 15.0 42.8 Additional paid-in capital 5.0 14.3 Retained earnings 5.0 14.3 Total liabilities & equity * 35.0 100.0

* FINANCING FUNCTION ** INVESTMENT FUNCTION

2006 Pro forma 2007 (In Million US$) Amount % Amount % GROWTH Sales 100.0 100.0 120.0 100.0 20.0% Cost of goods sold 80.0 80.0 100.0 83.3 25.0% Gross margin 20.0 20.0 20.0 16.7 Selling, general & administrative 15.0 15.0 16.0 13.3 6.7% Operating profit (ebit)* 5.0 5.0 4.0 3.4

Interest expense 0.5 0.5 Other expenses 1.5 1.2 Profit before tax 3.0 3.0 2.3 1.9 Income tax 1.1 0.8 Net profit ** 1.9 1.9 1.5 1.3 EPS (based on 1 m o/s shares) - $ 1.9 1.5 DPS (based on a 50% pay out policy) - $ 0.95 0.75

* CAPACITY TO EARN WITH 20% GROSS PROFIT MARGIN, 5% EBIT MARGIN TO DERIVE A 5% NET PROFIT MARGIN (2006 PERFORMANCE) **CAPACITY TO DISCTRIBUTE DIVIDEND BASED ON A 50% PAY OUT POLICY

THE HIGHER THE CAPITALIZATION VALUE THE HIGHER THE WEALTH

HIGHER SALES REDUCED COST HIGHER NET PROFIT HIGHER EPS HIGHER MARKET PRICE CAPITALIZATION VALUE * Note: * Capitalization = Price x outstanding shares in the market

LIQUIDITY RIGHT MIX OF CURRENT ASSETS OVER LIABILITIES CASH ACCORDING TO ITS MOTIVES : 1. TRANSACTION MOTIVE TO FINANCE OPERATION 2. PRECAUTIONARY MOTIVE CASH BUFFER 3. SPECULATIVE MOTIVE TO INCREASE PROFIT PROPER CASH MANAGEMENT CASH BUDGET

RECEIVABLE CREDIT POLICIES 1. STANDARD 2. PERIOD 3. DISCOUNT 4. DEFAULT EVALUATION 1. FINANCIAL STATEMENT 2. CREDIT RATING 3. CHECK 4. ANALYSIS: liquidity, ability to pay, the 4 Cs (character, collateral, capital, and capacity) STRATEGIC DIRECTION: long receivables >< S. T. loans, factoring receivables, extending payables, or sell short- term investment (time deposit, CD, CP, etc)

(continued …..)

TRADE CREDIT PURCHASING POLICY (based on thorough SOURCING) WAIVING CASH DISCOUNT (lessening cost)

PAYING THE BILL AT MATURITY (lessening cost)

FINANCIAL INSTITUTIONAL FINANCING:

1.SHORT-TERM LOAN

2. COMMERCIAL PAPER FINANCING

SHORT-TERM INVESTMENT (as a buffer fund):

1.BUFFER FUND AS A PRECAUTIONARY MOTIVE

2.PROFITABILITY >< RISK OF MONEY MARKET INSTRUMENTS

VERTICAL (common-s)

HORIZONTAL LIQUIDITY + OPERATION

INCOME STATEMENT: FROM BOTTOM SALES *Net profit margin of 1.9% ($ 1.9 m over the $ 100 m sales)

BALANCE SHEET: FROM BOTTOM (whether assets, liabilities or equity) TOTAL ASSETS *Fixed assets of 71.4% ($ 25 m over the $ 35 m assets)

FROM YEAR TO YEAR (or period to period):

*Sales (from $ 100 to $ 120) 20% per yr.*COGS (from $ 80 to $ 100) 25% per yr.etc.

*Working capital (curr. assets : curr. liability)*Quick ratio (liquid assets : curr. liability)*Receivable in days of sales (receivable : sales x 360 days)*Payable in days of purchases (payable : purchases x 360 days)*Asset turn over (sales : fixed asset x 360 days)etc.

DEFINITION: Liquidity is described as near money (cash + marketable securities) and the availability of assets that can be readily convertible into near money. (van Horne, p. 429)

TYPES OF LIQUID ASSETS*MONEY CASH (BANK NOTES, SAVING + CHECKING DEPOSIT)*NEAR MONEY MARKETABLE SECURITIES (MONEY MARKET INVESTMT) RECEIVABLES + INVENTORIES(Note: Time to convert + certainty = dimensions to consider )

LIQUIDITY MANAGEMENT (USING A CASH BUDGET)*BORROWING IN CASE OF A DEFICIT*INVESTING IN CASE OF A SURPLUS

STRATEGIC FINANCING > < STRATEGIC INVESTING

DESCRIPTION January February March

BEGINNING BALANCE 50 50 50TOTAL RECEIPTS 660 680 890CASH AVAILABLE 710 730 940CASH EXPENDITURES:*PURCHASES – December 360 January 600 February 390*LABOR, INCL. OVERTIME 150 200 160*SGA EXPENSES 100 100 100CASH EXPENDITURES 610 900 650 MINIMUM CASH BALANCE 50 50 50CASH NEEDED 660 950 700CASH SURPLUS/(DEFICIT) 50 ( 220 ) 240STRATEGIC RECOMMENDATION invest borrow investNOTE: Invest may be loan pmt, or for borrow see strategic financing.

1. BORROWING FROM SHORT-TERM LOAN FACILITIES (incl. that of COMMERCIAL PAPER facility)

2. SHORTENING PERIOD FOR RECEIVABLE + EXTENDING THOSE FOR PAYABLES

3. FACTORING RECEIVABLES (AT A COST)

4. DISCOUNTING MONEY MARKET INVESTMENTS (C.D., C.P., B.A., etc.)

5. SELLING OTHER ASSETS

  ---------------------------------------------------------------------------------------------- K E Y M O N E Y R A T E S ---------------------------------------------------------------------------------------------- Day, date, year   The key U.S. and foreign annual interest below are a guide to general levels but don’t always represent

actual transaction. FEDERAL FUNDS: high: 6.75%, low: 6.75%, near closing bid: 6.75%, and offered: 6.813%. CALL MONEY: 7.50%. The change on loans to brokers on stock exchange collateral. DEALER COMMERCIAL PAPER: 30-day: 6.77%, 60-day: 6.86%, and 90-day: 6.96%. High-grade unsecured

notes sold through dealers by major corporation. CERTIFICATES OF DEPOSIT: one-month: 7.36%, two-month: 7.70%, three-month: 7.79%, six-month:

8.30%, and one-year: 8.80%. Average of top rates paid by major New York banks on primary new issues of negotiable C.Ds, usually on amounts of $ 1 million and more. The minimum unit is $ 100,000. Typical rates in the secondary market: one-month: 8.09%, three-month: 8.66%, and six-month: 8.96%.

LIBOR (for US dollars): one-month: 6.93538%, three-month: 7.11000%, six-month: 7.29000%, one-year: 7.5000%. British Bankers’ Association average of inter-bank offered rates for dollar deposits in London market.

ASIAN DOLLARS (In Singapore, 4:30 p.m. local time): one-week: 6.81000%, one-month: 6.93560%, two-month: 7.01000%, three-month: 7.11750%, six-month: 7.29500%, nine-month: 7.41000%, twelve-month: 7.50250%.

TREASURY BILLS: Results of the Monday (date) auction of short-term U.S. government bills, sold at a discount from face value in units of $ 100,000 to $ 1 million: 8.10% p.a. for 13 weeks and 8.65% for 26 weeks.

Source: A model made up from The Wall Street Journal money rates.

WORKING CAPITAL FACILITIES: Provided by commercial banks on an individual or syndicated bases.

COMMERCIAL PAPER FACILITIES: Provided by investment banks or financing companies on an individual basis.

TERMS & CONDITIONS: Amount, purposes, tenor, interest rate (x% over prime rate, Sibor or Libor), repayment scheme (if any), collaterals (mortgage, bank guarantee, corporate guarantee, receivable, pari passu, or clean), fees, and other terms & conditions agreed upon by both parties (bank + client).

1. CLIENT ISSUES C.P.2. BANK REMITS FUND

DISCOUNTING C.P. TO THE MARKET (FOR LIQUIDITY)

LOAN FACILITY (BOTH FORMULA)

Add-on i = 6% x 3 x $ 1,000 plus (2% x $ 1,000) = $ 20 per tenor 12 4 effective interest cost p.a. = ($ 20 x 4)/$ 1,000 8%

True discount $ 1,000 - $ 1,000/(6% x 3) : 12 + 1 $ 14.78 plus (2% x $ 1,000)/4 = $ 19.78 effective interest cost p.a. = ($ 19.78 x 4)/$ 1,000 7.91%

COMMERCIAL PAPER (TRUE DISCOUNT only)

True discount $ 1,000 - $ 1,000/(6% x 3) : 12 + 1 $ 14.78 plus (2% x $ 1,000)/4 = $ 19.78 effective interest cost p.a. = ($ 19.78 x 4)/$ 1,000 7.91%

* Using either add-on and/or true discount formula.

SHORTENING RECEIVABLE EXTENDING PAYABLE ( 1/10, NET 30 POLICY) ( 2/15, NET 45 POLICY)

NOTE: Shortening and extending period includes a negotiation of the size of discount to be offered in either case.

x===========x========================x 0 15th 45th

FORMULAE: discount/(1 – discount) x 360 days/(net – discount period)

RECEIVABLE COST 1/(100 – 1) x 360/(30 – 10) = 18.18% p.a. *

PAYABLE COST 2/(100 – 2) x 360/(45 – 15) = 24.49% p.a. **

* The company’s cost ** The supplier’s cost (company’s gain)

Company’sReceivable$ 1,000 FACTORED TO

FINANCING COMPANY

The company will receive 80% as PROCEED FACTORING COST TO THE COMPANY:

Interest cost: (10% x $ 1,000 x 80%)=$ 80Fee/transaction: 2% x $ 1,000 20Saving: $ 1/month x 12 ( 12)Net cost disbursement $88NET COST 8.8% p.a. ($ 88/$ 1,000)

PRIMARY MARKET ($ 1,000 CD, 90-day TENOR-Jan., at 6% p.a., ½% fee)

*Proceeds = $ 1,000/{(6% x 90) : 360} + 1 $ 985.22 Less ½% fee = ½% x $ 1,000 ( 5.00 ) Net amount invested in 90-day CD $ 900.22

SECONDARY MARKET (after holding for 30 days, CD’s interest = 4% p.a.)

*Proceeds = $ 1,000/{(4% x 60) : 360} + 1 $ 993.38

PROFIT & LOSS

PRIMARY MARKET INVESTMENT $ 900.22 SECONDARY MARKET DISCOUNTED PROCEED 993.38 PROFIT & LOSS $ 93.16 RATE OF RETURN 9.3%

WHAT CAN WE REDISCOUNT? 1. CERTIFICATE OF DEPOSIT (C.D.) A negotiable security issued by a bank 2. COMMERCIAL PAPER (C.P.) A promissory note issued by a non-bank 3. BANKER’S ACCEPTANCE (B.A.) A draft (L/C certificate) accepted by a bank 4. GOVERNMENT SECURITIES a. Treasury bill (1 week, 1 month, 3 month) b. Treasury note (1 month – 1 year)

SELLING OTHER ASSETS

OTHER THAN REDISCOUNTING THE MARKETABLE SECURITIES OWNED BY THE

COMPANY, OTHER ASSETS MAY INCLUDE: 1. INEFFICIENT FIXED ASSETS

2. ASSETS OWNED BY THE SUBSIDIARY 3. CANCELLATION OF LONG-TERM DEPOSIT

4. OTHERS

GOD BLESS YOU