Chapters 3-4 Flashcards
what is the net working capital
current assets - current liabilities
2 main objectives for working capital managent
increase profits of a business
ensure there is sufficient liquidity to pay short term debts
what are the general factors affecting working capital levels
nature of the industry
policies of competitors
seasonal factors
what is the aggressive strategy
aims to keep receivables and inventories as low as possible
payables are maximised
what is the conservative strategy
allows high levels of inventory and recievables whilst keeping payables
downside of aggressive strategy
may create trading problems ie stock outs
downside of conservative strategy
compromises liquidity
formula for inventory days
finished goods/ cost of sales x 365
formula for inventory turnover
cost of sales / average inventory
formula for receivables days
receivables / credit sales x 365
formula for payables days
payables / credit purchases x 365
what is the cash operating cycle
the period of time that elapses between cash being used for production and the collection of cash from a customer
how do you work out cash operating cycle
inventory days + receivables days - payable days
what is the sales / net working capital ratio
sales rev / ( receivables + inventory - payables)
what is overtrading
A situation where a business has inadequate cash to support its level of sales
what else can overtrading known as
undercapitalisation
symptoms of overtrading
rapid increase of sales rev
rapid increase in TR and Inv
increase in TP and bank overdraft
how to deal with overtrading
plan introduction of new long term capital
improve working capital management
reduce business activity
what is the economic order quantity
the optimal ordering quantity for an item of inventory which will minimise inventory related costs
formula for total holding costs
Ch x Q/2
what is Q
the initial order
what is Ch
annual cost of holding one unit in inventory
what is D
annual demand
what is Co
cost of placing an order
formula for total ordering costs
Co x D/Q
formula for economic order quantity
Q = square root of 2CoD/Ch
drawbacks of the EOQ model (4)
assumes no bulk discounts
ignores the need to increase order sizes
ignores fluctuations of demand
ignores benefits of holding more stock
3 stages of implementing a new credit strategy
planning
monitoring
collection
what is factoring
an arrangement to have debts collected by a factor company, which advances a proportion of the money it is due to collect
what is a debt factor
a debt factor can be used to chase late payments or to have a wider role in managing receivables
advantages of debt factor
saves in internal admin costs
expertise in credit management will reduce bad debts
disadvantages of debt factor
fees charged by a debt factor
possible loss of customer goodwill if debt factor is too aggressive
what are the 3 problems with managing foreign accounts receivables
harder to do a credit analysis
harder to chase for payments - diff languages and time zones
to pursue debt you need to know the laws of that country
how do you work out if you should extend credit terms
calculate the benefit and the cost then benefit - cost
formula for supplier discount as percentage ( non annual )
discount received/ amount paid if discount take x 100
formula for supplier discount as percentage ( annual )
(1+R)=(1+r) to the power of n
what is R
annual rate
what is r
period rate
what is n
no of periods in a year
what are the three motives for holding cash
transactions motive
precautionary motive
speculation motive
what is the transactions motive
holding cash to pay suppliers
what is the precautionary motive
holding cash for unexpected occurrences
what is the speculation motive
holding cash to take advantage of attractive investment oppurtunities
4 methods of easing cash shortages
delaying non essentials capital expenditure
selling assets previously acquired
accelerating cash inflows
negotiating a reduction in outflows
what are treasury bills
short term government IOUs
what are term deposits
fixed period deposits
what are certificates of deposit
issued by banks, entitle the holder to interest plus principal
what are commercial papers
short term IOUs issued by companies, unsecured
what are drawbacks of the Baumol model
difficult to predict amounts required
unlikely that cash will be used at a constant rate
formula for the miller - orr model
3(3/4 x (transaction cost x variance of cash flows)/interest rate) to the power of 1/3
drawbacks of the Miller-Orr model
estimates are likely to be based on historic information
the model doesnt incorporate seasonality
what is the definition of working capital finance
the approach taken to financing the level, and fluctuations in the level, of working capital
3 types of assets
long term assets
permenant current assets
fluctuating current assets
4 functions of treasury management
liquidity managament
risk management
funding
corporate finance
