ONLINE CHAPTERS
FIGURE 18.2 TRADE-OFF OF SHORT-TERM FINANCIAL COSTS
Cost ($)
Optimum balance
Account balance ($)
*Cost 1 **Cost 2
Operating assets
Cash and marketable Opportunity cost of Illiquidity and
securities funds and tax costs solvency costs
Inventory Carrying cost of Order and setup costs
inventory, including associated with
financing, warehousing, replenishment and
obsolescence costs, etc. production of
finished goods
Accounts receivable Cost of investment in Opportunity cost of
accounts receivable and lost sales due to overly
bad debts restrictive credit policy
and/or terms
Short-term financing
Accounts payable, Cost of reduced liquidity Financing costs resulting
accruals, and notes caused by increasing from the use of less
payable current liabilities expensive short-term
financing rather than
more expensive long-
term debt and equity
financing
Effect of an increase in account balance
Total cost (cost 1 + cost 2)
Cost 1*
Cost 2**
See the problem and
solution explained step by
step on the Coursemate
website.
SMART
CONCEPTS