Firstly, let us note that the equilibrium bidding schedule is flatter in the limit order market (8.15) than in the uniform price market (8.17); this is because with price discrimination, competition for liquidity provision intensifies. Figure 8.1 plots the bid schedule under the discriminatory (8.16) and the uniform pricing rules (8.18) for different numbers of dealers: competition modifies only the slope of the uniform pricing schedule, but for the discriminatory schedule it also changes the intercept.
As mentioned, the model in Viswanathan andWang (2002) does not allow for asymmetric information among market participants. Biais, Martimort and Rochet (2000) introduce adverse selection in a model with the discriminatory pricing rule and show how imperfect competition among dealers within an LOB can be modelled as a game with multiple principals, where each dealer (principal) chooses his optimal trading strategy under the participation and incentive constraints of the investor (agent).
The overall sentiment of investors towards the asset class corporate bonds is mirrored in mutual fund flows. Monthly and weekly statistics, for example, from Investment Company Institute, AIG and Trim Tabs, track the net flows into the major asset classes and their subcomponents. They also give an indication about the portion of cash held in mutual funds. The published numbers can help to explain movements in credit spreads that are not directly related to changes in the fundamental environment for credit. For example, they partly reflect risk appetite of investors. This is especially true, when looking at flows into high-yield bond funds. Major shifts in the asset allocation of institutional investors can also be observed from the data. Yet, published information on mutual fund flows tends to be behind the curve, in other words it is a lagging indicator for the activity of market participants and thus for credit spreads. But the analysis may help to spot long-term trends in the relative attractiveness of different asset classes.
Accounts payable may be affected by adjustments— decreased by vendor credits, for example, or increased by interest charges on delinquent accounts. The danger isn’t great from inappropriate crediting, but be cautious nonetheless. These adjustments should be treated with as much care as adjustments to accounts receivable. Supporting documentation for any vendor adjustment should be required.
As part of the process, the ACCOUNTS PAYABLE will be recording purchases. Most of that information comes from the vendor invoices, including vendor name, amount, and payment terms. If the invoice doesn’t arrive before close of business at the end of the month, the amount is accrued through adjusting entries to the current period. (That’s where accrual accounting comes in.) The transaction process, whether automated or manual, follows the three steps outlined earlier.
ACCOUNTS PAYABLE reviews are usually done once or twice monthly, although they can be done more frequently for special items such as postage, petty cash, or freight deliveries. The important thing, from a cash management standpoint, is to pay bills exactly on time and not early, to better maximize cash flow.
Despite the advantages of automation, there’s nothing wrong with a manual ACCOUNTS PAYABLE system. As long as the system performs the necessary tasks, such as assigning the right amount to the right account, tracking payments, and performing other basic accounting tasks, a manual system can be as effective as an automated one. But no matter how basic, each system must contain two primary components:
ACCOUNTS PAYABLE subledger summary Each ACCOUNTS PAYABLE system must contain a comprehensive set of vendor ledgers—whether they are recorded on index cards, in a ledger book, or on the back of candy wrappers stuffed in used envelopes—that track purchases and other financial obligations. Each record must be kept up to date with current purchases and total amounts, and they must all be sorted or categorized for easy access. After that, the format is up to your company’s accounting department.
In the early stages, the bad debt accrual does not appear on the books, since we don’t know which accounts will go bad. To accommodate this need, some companies, espe-cially those that are audited, set up accounts based on aging categories or on a certain rate multiplied by sales. To set up such an account in the amount of $5,000, for example, the accountant debits Bad Debt Expense for $5,000, credits Reserve for Bad Debt Expense for $5,000, and notes this transaction as “Records accrual for bad debts.”
Bad debts can result from many things, but they all boil down to one simple definition from an accounting point of view: bad debts are uncollectible amounts. In the end they are written off the books to keep the accounts in balance.
No matter how well companies plan, how vigilant they are in verifying credit, and how efficient they are in collecting debts, it’s inevitable some companies will have to write off an occasional bad debt. Some old accounts are worth pursuing, while others are never going to pay. Accounts that are past 120 days may need to be turned over to a collection agency. But if the customer has skipped town or gone out of business, it may be necessary to bite the bullet and write off the debt. A bad debt flows through the receivable system like a credit memo. In the end, you debit the bad debt expenses account and get on with life.
Smart companies and some that are regulated know they will have a certain percentage of bad debts and they reserve funds against the inevitable occurrence. Depending on the nature of the business, it may be worth doing just that, by estimating the projected level of bad debt and establishing a separate account of funds to offset those losses.
Did you know that there is one day of the week that is statistically proven to be the worst for starting a successful diet? Any guesses? The worst day to start a diet is … tomorrow!
The longer you wait to put your plan into action, the less likely it is to have a permanent effect. If you truly want to resolve yourself to getting rid of debt, you need to take the first step today. I don’t care if you’re reading this book on a lounge chair in the Bahamas on your vacation, you can begin making immediate changes. Just say no to that souvenir.
The importance of position in framing plans (and creating value) is evident in the more complex strategies employed by the entertainment industry.
An entertainment industry myth is that owning a hit television show or movie is the key to a winning strategy. “Content is king” is an old catchphrase of the media and the entertainment world. At the extreme, it is true—but it is more a truism, no more a guide to strategy than is advice to only buy stocks that are about to rise. The largest value is derived not from ownership of any one media property, but from aggregating them (or, in the argot of the industry, “packaging” them). The package and the supporting infrastructure create the strategic position from which individual options (or plans) can be framed.
Owning rights to one future Disney movie or one Steven Spielberg movie is itself no guarantee of economic wealth. In fact, most of Disney’s animated movies and most of Spielberg’s movies have lost money when costs were measured narrowly against box office receipts.3 Why, then, have these films been creators of great corporate and personal wealth?
Although many plans begin as dreams, a dream is not a plan. The crucial distinction is that a plan deploys resources against an objective. Until the resources are in place, we are dealing merely with a dream.
The corollary of this statement is that plans do not need to be captured in writing. A strategic position itself is the source of flexibility, and a smart leader can build flexibility into his or her plans. We shall explore the view that position is a necessary, but not a sufficient, condition for the generation of a plan. The option may exist in principle, but it typically requires intelligence, information, and creativity to frame it and analytical skills to value it. These steps are the prerequisite to an actionable real option: namely, (1) frame, (2) analyze, (3) act.
To put it more simply, to make the distinction between plans and dreams, just ask if the plan is currently actionable. If so, you own a real option. The financial analogy is that to exercise a financial option, you first have to own it. To own it entails a cost or a premium. In the end, your profit will be the value of the option minus the cost of the option.
Real options derive from plans. But a real option is ambiguous in regard to the moment of ownership because full ownership may not arise from a single event. Let us explore this point for a hypothetical case.
In late November 2008, the Treasury and the Federal Reserve announced a facility to finance the issuance of non-mortgage asset-backed paper in order to support lending to consumers and small businesses.
The consumer asset-backed securities market offers
- liquidity to lenders that provide loans to small businesses
- to consumers through auto loans, student loans and credit cards.
Because this assetbacked market stopped functioning, it has become difficult for consumers and businesses to obtain affordable and sufficient credit. The Treasury indicated that the lack of affordable consumer credit undermines consumer spending and weakens the economy. In an effort to make credit available, the Treasury will provide $20 billion in credit protection from EESA funds to the Federal Reserve in connection with the Federal Reserve’s $200 billion Term Asset Backed Securities Loan Facility (“TALF”). In addition, the Federal Reserve announced a program to purchase $600 billion in mortgage-backed securities and direct obligations of Fannie Mae, Freddie Mac and Ginnie Mae. These new programs exceed the $700 billion approved by Congress in October.
The Federal Reserve’s aim is to:
- reduce the costs
- increase the availability of loans for home purchases.
In turn, more home purchases would support the declining real estate market.
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