Ch.8 Working Capital Management Flashcards
What is meant by the term working capital?
- Current Assets less current liablities
- Cash and liquid assets that can be quickly converted to cash
How can working capital be increased or decreased?
- increased by collecting cash, increasing debt, selling assets and investments, selling equity
- Decreased by Using cash, repaying debt, purchasing assets and investments, paying dividends and stock buy back
What is meant by the term permanent current assets?
- the minimum/base amount of current assets in the past few years. Base assets need to do business. Anything over that amount is fluctuating current assets
What are the 2 current asset investment strategies
- Restrictive current asset investment strategy…maintaining low asset volumes and using practices such as JIT. Less liquidity
- ## Relaxed CA investment strategy, higher levels of inventory and terms. Less risk due to higher liquidity.
What are two key considerations when determining credit extension policies?
- is the policy to strict? excludes potential customers
- Too lenient? increase risk too much.
What are the five Cs of credit?
- Character - honesty of credit apps/customers
- Capacity - financial ability of customers to pay obligations
- Capital - Customers ST and LT financial resources
- Collateral - assets of the customer
- Conditions - economic environment
What are the four steps in the credit scoring process?
- Differentiating standard and high risk accounts based on income
- Weighting the characteristics of applicants for creditworthiness
- Setting cutoff scores for clear approval or denial
- Applying further analysis to applicants whose scores fall between the cutoff points.
Compare and contrast the four basic forms of credit extension.
- Open Account (invoicing method)
- Installment Credit (equal payments) utilities…
- Revolving Credit (Credit Card…)
- L/C legally tied obligation to pay
What is an open item system of cash application?
-Open AP/Open AR
Apply by invoice tracking mechanism
What are the most common terms of sale?
- Cash before Delivery
- Cash on delivery
- Cash Terms
- Net terms
- Discount
- Monthly Billing - Power bill
- Draft - Gym payment
- Seasonal Dating - after Christmas collections…
What are some of the advantages and disadvantages of accepting credit cards in a business-to-business (B2B) setting?
- Advantages
No need for credit dept, does not have to finance A/R, credit card company absorbs bad debt loss, sales increase, paid more quickly - Disadvantages
Relinquish control over credit decisions, loses promotional opportunities, incurs discount costs and transaction fees, CC compliance
What are the four principal types of cash flows with which treasury professionals must work?
- Outflows
- Inflows
- Concentration/Funding flows(Cash Pooling)
- Liquidity Management(ST and LT Financing/ Paydowns)
What is float?
- time interval or delay between the start and completion of specific cash outflow/inflow. Mail time…
What is the working capital cash conversion cycle? Identify its major components.
-From borrow to paydown AP Inventory Sells Collection
What are the elements of a basic inventory policy?
- Reasons for Holding inventory
- Types of Inventory
- Levels of inventory
- Obsolescence and spoilage
- Benefits and costs of inventory
Describe the basic types of inventory.
- Raw Materials, WIP, Finished goods, scrap, stores and supplies
What are multicurrency accounts?
- Bank allows you to hold another currency in a specific account to prevent FX risk
What are the principal benefits of using a netting system in managing multinational working capital?
-Inter company cash transfers that reduce the number of cross border transactions.
instead of 50 wires, just one
In designing a disbursement system, what four goals must an organization keep in mind?
- Information Access
- Fraud prevention
- Relationship Maintainance with payees
- Timing of payments
What is an export credit agency?
- they assist in the fianicng of goods and servidces from their country to international markets
What are the benefits of establishing an in-house bank?
-Good for large global companies. Reduces costs FX risk, prevents a bunch of treasury depts, centralized control and management
What are the 3 Current Asset Financing Strategies
- Maturity Matching - ST assets or fluctuating assets are matched with ST debt. LT assets or permanent assets are match with LT debt.
- Conservative Financing - LT debt supports both ST and LT assets
- Aggressive Financing - only LT debt for fixed assets. ST financing for most fluctuating and permanent assets
