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Financial Management > Chapters 3-4 > Flashcards

Chapters 3-4 Flashcards

1
Q

what is the net working capital

A

current assets - current liabilities

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2
Q

2 main objectives for working capital managent

A

increase profits of a business

ensure there is sufficient liquidity to pay short term debts

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3
Q

what are the general factors affecting working capital levels

A

nature of the industry

policies of competitors

seasonal factors

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4
Q

what is the aggressive strategy

A

aims to keep receivables and inventories as low as possible

payables are maximised

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5
Q

what is the conservative strategy

A

allows high levels of inventory and recievables whilst keeping payables

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6
Q

downside of aggressive strategy

A

may create trading problems ie stock outs

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7
Q

downside of conservative strategy

A

compromises liquidity

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8
Q

formula for inventory days

A

finished goods/ cost of sales x 365

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9
Q

formula for inventory turnover

A

cost of sales / average inventory

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10
Q

formula for receivables days

A

receivables / credit sales x 365

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11
Q

formula for payables days

A

payables / credit purchases x 365

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12
Q

what is the cash operating cycle

A

the period of time that elapses between cash being used for production and the collection of cash from a customer

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13
Q

how do you work out cash operating cycle

A

inventory days + receivables days - payable days

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14
Q

what is the sales / net working capital ratio

A

sales rev / ( receivables + inventory - payables)

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15
Q

what is overtrading

A

A situation where a business has inadequate cash to support its level of sales

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16
Q

what else can overtrading known as

A

undercapitalisation

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17
Q

symptoms of overtrading

A

rapid increase of sales rev
rapid increase in TR and Inv
increase in TP and bank overdraft

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18
Q

how to deal with overtrading

A

plan introduction of new long term capital
improve working capital management
reduce business activity

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19
Q

what is the economic order quantity

A

the optimal ordering quantity for an item of inventory which will minimise inventory related costs

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20
Q

formula for total holding costs

A

Ch x Q/2

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21
Q

what is Q

A

the initial order

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22
Q

what is Ch

A

annual cost of holding one unit in inventory

23
Q

what is D

A

annual demand

24
Q

what is Co

A

cost of placing an order

25
Q

formula for total ordering costs

A

Co x D/Q

26
Q

formula for economic order quantity

A

Q = square root of 2CoD/Ch

27
Q

drawbacks of the EOQ model (4)

A

assumes no bulk discounts
ignores the need to increase order sizes
ignores fluctuations of demand
ignores benefits of holding more stock

28
Q

3 stages of implementing a new credit strategy

A

planning
monitoring
collection

29
Q

what is factoring

A

an arrangement to have debts collected by a factor company, which advances a proportion of the money it is due to collect

30
Q

what is a debt factor

A

a debt factor can be used to chase late payments or to have a wider role in managing receivables

31
Q

advantages of debt factor

A

saves in internal admin costs

expertise in credit management will reduce bad debts

32
Q

disadvantages of debt factor

A

fees charged by a debt factor

possible loss of customer goodwill if debt factor is too aggressive

33
Q

what are the 3 problems with managing foreign accounts receivables

A

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

34
Q

how do you work out if you should extend credit terms

A

calculate the benefit and the cost then benefit - cost

35
Q

formula for supplier discount as percentage ( non annual )

A

discount received/ amount paid if discount take x 100

36
Q

formula for supplier discount as percentage ( annual )

A

(1+R)=(1+r) to the power of n

37
Q

what is R

A

annual rate

38
Q

what is r

A

period rate

39
Q

what is n

A

no of periods in a year

40
Q

what are the three motives for holding cash

A

transactions motive
precautionary motive
speculation motive

41
Q

what is the transactions motive

A

holding cash to pay suppliers

42
Q

what is the precautionary motive

A

holding cash for unexpected occurrences

43
Q

what is the speculation motive

A

holding cash to take advantage of attractive investment oppurtunities

44
Q

4 methods of easing cash shortages

A

delaying non essentials capital expenditure

selling assets previously acquired

accelerating cash inflows

negotiating a reduction in outflows

45
Q

what are treasury bills

A

short term government IOUs

46
Q

what are term deposits

A

fixed period deposits

47
Q

what are certificates of deposit

A

issued by banks, entitle the holder to interest plus principal

48
Q

what are commercial papers

A

short term IOUs issued by companies, unsecured

49
Q

what are drawbacks of the Baumol model

A

difficult to predict amounts required

unlikely that cash will be used at a constant rate

50
Q

formula for the miller - orr model

A

3(3/4 x (transaction cost x variance of cash flows)/interest rate) to the power of 1/3

51
Q

drawbacks of the Miller-Orr model

A

estimates are likely to be based on historic information

the model doesnt incorporate seasonality

52
Q

what is the definition of working capital finance

A

the approach taken to financing the level, and fluctuations in the level, of working capital

53
Q

3 types of assets

A

long term assets
permenant current assets
fluctuating current assets

54
Q

4 functions of treasury management

A

liquidity managament
risk management
funding
corporate finance

Financial Management (8 decks)

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