Ch21 Working capital management Flashcards
Cash budget
a part of short-term financial plan, which is a detailed forecast incorporating the statement of comprehensive income, statement of cash flows, and statement of financial position over the coming fiscal year
allows the firm to closely monitor its sources (cash inflows) and uses (cash outflows) of cash and to plan the management of these cash inflows and outflows in a timely fashion and at an acceptable cost
Cash management
to minimize opportunity cost of holding cash balances while maintaining a reasonable degree of flexiblity to obtain funds and meet unexpected needs for cash
Minimum operating cash balance
the optimal and lowest possible cash balance that satisfies short-term cash needs without impeding the firm’s ability to make payments and without holding large balances in low- or zero-interest accounts.
Compensating balance
the minimum specified amount that a borrower must maintain in a bank account as required by the lender
reporting for investment
- cash equivalent investment:
must have a maturity date of 3 months or less
from the date of purchase and with
insignificant risk - marketable security:
investment that doesn’t qualify as a cash equivalent
five C’s of credit
charater - willingness to pay on time
capacity - ability to pay on time
capital - capital sources (& equity) to support capacity
collateral - pledged as security
conditions - general economic conditions
AR management
- credit period
- discount for early pmt
- monitor
Discount for early pmt
compare the PV of current policy with the PV of new policy
Cost of extending credit to customers
- staffing costs - process and collect receivables
- financing costs - finance outstanding balance of receivables
- bad debt costs - for delinquent customers
effectiveness of AR management
- AR turnover ratio
sales / average AR - average collection period - days’ sales in receivables
365 / AR turnover ratio
(average AR/sales) x 365 - compare collection period with credit term, if less, AR management is effective
Inventory management
- keep input costs low: most competitive prices of purchase -
- maintain optimal volumes of inventory
- EOQ, economic order quantity
- JIT
- consignment: A ownership, B saves inventory cost
Cost of inventory
- ordering
- financing
- shipping and handling
- storage
- insurance
- obsolecence
- spoilage
- theft and shrinkage
effectiveness of inventory management
- inventory turnover
COGS / average AR - days’ sales in inventory
365 / inventory turnover
AP management
Supplier credit
Cost of foregone discount:
Effective annual interest rate = (1+ cash discount/(price - cash discount)) ^ (365/extra days) - 1
Effectiveness of payable management
- average payables period (days payable outstanding)
(average balance of AP/cost of sales) x 365
