CFA 39: Working Capital Management Flashcards
working capital management
Teh management of a company’s short-term assets (such as inventory) and short-term liabilities (such as money owed to suppliers).
drag on liquidity
When receipts lag, creating pressure from the decreased available funds.
pull on liquidity
When disbursements are paid too quickly or trade credit availability is limited, requiring compies to expend funds before they receive funds from sales that could cover the liability.
credit-worthiness
The perceived ability of the borrower to pay what is owed on the borrowing in a timely manner and represents the ability of a company to withstand adverse impacts on its cash flows. Credit-worthiness allows the company to obtain lower borrowing costs and better terms for trade credit and contributes to the company’s investment flexibility, enabling it to exploit profitable opportunities.
liquidity ratios
Measure a company’s ability to meet short-term obligations to creidtors as they mature or come due. Focuses on the relationship between current assets and current liabilities and the rapidity with which receivables and inventory can be converted into cash during normal business operation.
current ratio
ratio of current assets to current liabilities
quick ratio
ratio of quick assets to current liabilities
quick assets
Those assets that can be most readily converted to cash.
accounts receivable turnover
ratio of sales on credit to the average balance in accounts receivable
inventory turnover
ratio of cost of goods sold to the balance in inventory
number of days of receivables
number of days of the current asset or liability that are on hand; accounts receivable/ average day’s sales on credit
number of days of inventory
length of time on average that the inventory remains within the company during the fiscal period
number of days of payables
A measure of how long it takes the company to pay its own suppliers
operating cycle
A measure of the time needed to convert raw materials into cash from a sale. It consists of the number of days of inventory and the number of days of receivables.
net operating cycle (cash conversion cycle)
A measure of the time from paying suppliers for materials to collecting cash from the subsequent sale of goods produced from these supplies.
target balance
A minimum level of cash to be held available - estimated in advance and adjusted for known funds transfers, seasonality, or other factors.
discount interest
difference between the purchase price and the face value
nominal rate
A rate of interest based on the security’s face value
yield
Actual return on investment if it is held to maturity.
passive strategy
Characterized by one or two diecision rules for making daily investments
active strategy
Involves constant monitoring and may involve matching, misatching, or laddering strategies
matching strategy
An active investment strategy that includes intentional matching of the timing of cash outflows with investment maturities.
mismatching strategy
An active investment strategy whereby the timing of cash outflows is not matched with investment maturities.
laddering strategy
A form of active strategy which entails scheduling maturities on a systematic basis within the investment portfolio such that investments are spread out equally over the term of the ladder.
captive finance subsidiary
A wholly-owned subsidiary of a company that is established to provide financing of the sales of the parent company.
credit scoring model
statistical model used to classify borrowers according to credit-worthiness
float
Managing Accounts Receivable
amount of money that is in transit between payments made by customers and the funds that are usable by the company
float factor
dividing the average daily deposit in dollars to the average daily float
aging schedule
Managing Inventory
breakdown of the accounts into categories of days outstanding.
transactions motive
Managing Inventory
In the context of inventory management, the need for inventory as part of the routine production-sales cycle
precautionary stocks
Managing Inventory
A level of inventory beyond anticipated needs that provides a cushion in the event that it takes longer to replenish inventory than expected or in the case of greater than expected demand.
stock-out losses
Managing Inventory
Profits lost from not having sufficient inventory on hand to satisfy demand.
economic order quantity-reorder point (EOQ-ROP)
Managing Inventory
An approach to managing inventory based on expected demand and the predictability of demand; the ordering point for new inventory is determined based on the costs of ordering and carrying inventory, such that the total cost associated with inventory is minimized.
anticipation stock
Managing Inventory
Inventory in excess of that needed for anticipated demand, which may fluctuate with the company’s sales or production seasonality.
Just in Time Method (JIT)
A system that minimizes in-process inventory stocks - raw materials and in production - by evaluating the entire system of the delivery of materials and production. Materials are then reordered when a reorder point is reached.
Manufacturing Resource Planning (MRP)
The incorporation of production planning into inventory management. A MRP analysis provides both a materials acquisition schedule and a production schedule.
trade credit
Managing Accounts Payable
A spontaneous form of credit in which a purchaser of the goods or service is, effectively, financing its purchase by delaying the date on which the payment is made. May involve a discount for early payment such as 2/10 net 30.
disbursement float
Managing Accounts Payable
The amount of time between check issuance and a check’s clearing back against the company’s account.
committed lines of credit
Managing Accounts Payable
“regular” bank line of credit; unsecured and pre-payable without any penalties. Most common interest rates negotiated are borrowing at the bank’s prime rate or at a money market rate plus a spread.
revolving credit agreements
Managing Accounts Payable
The strongest form of short-term bank borrowing facilities; they are in effect for multiple years (i.e. 3-5) and may have optional medium-term loan features.
asset-based loans
Managing Short Term Financing
A loan that is secured with company assets.
assignment of accounts receivable
Managing Short Term Financing
The use of accounts receivable as collateral for a loan.
factor (i.e. to “factor” accounts receivable)
Managing Short Term Financing
A common or underlying element with which several variables are correlated.
inventory blanket lien
Managing Short Term Financing
Lender has a claim on some or all of the company’s inventory, but the company can sell the inventory in the ordinary course of business.
trust receipt arrangement
Managing Short Term Financing
Lender requires the company to certify that the goods are segregated and held in trust, with proceeds of any sale remitted to the lender immediately.
warehouse receipt arrangement
Managing Short Term Financing
Similar to the trust receipt arrangement, but there is a third party (i.e. a warehouse company) that supervises the inventory.
