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OCS > F: Working Capital > Flashcards

F: Working Capital Flashcards

1
Q

What is invoice factoring?

A

• sell debts to factor
• the collect debt for fee
• 80% advance, remaining once payment collected
• With/without recourse: with means burden of irrec on AB
 Damage relations
 Damage reputation

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2
Q

What is invoice discounting?

A
  • Similar to factoring but control remains with AB
  • Confidential: maintain relationships and relations
  • 80% advance
  • More flexible with large invoices rather than widespread credit control approach
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3
Q

What is JIT’s aim?

A
  • Minimise inventory levels

* Improve customer service by timing and quantities at competitive prices

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4
Q

What are JIT’s assumptions?

A
  • Hold very little stock: buy when required
  • Reduce waste
  • As few as possible suppliers: high quality, frequent, reliable, AB has close relationship
  • More flexible prices: adapt to constraints, work flow
  • Reduced capital tied up: currently 72 days
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5
Q

What is EOQ’s aim?

A

Optimum order quantity
Minimises total cost of holding and ordering inventory
Satisfy demand

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6
Q

What are the assumptions?

A

Demand is constant and known: variation? Seasonality?
Lead times are constant and known: some existing suppliers, some new
Purchase price constant: unknown, unrealistic
No buffer stock held: we hold to avoid stockouts

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7
Q

What are the main types of short-term finance?

A
  • TP
  • factoring or invoice discounting of TR
  • bank overdrafts and short-term loans
  • financing exports
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8
Q

What are the benefits of bank overdrafts as short-term cash requirement?

A
  • flexible

- only pay for what is used, so generally cheaper

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9
Q

What are bank loans?

A
  • contractual agreement for a specific fund, period and interest rate
  • less flexible than overdraft
  • provide greater security than overdraft
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10
Q

What are some short-term interest-earning investments cash surpluses can be spent on?

A
  • interest-bearing bank accounts
  • negotiable instruments
  • short-dated government bonds
  • other short-term investments
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11
Q

What are the two types of interest bearing accounts?

A
  • bank deposit accounts

- money market deposits

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12
Q

What is a bank deposit account?

A
  • some are instant access, highly liquid
  • some allow withdrawal without notice
  • some require notice period before withdrawal
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13
Q

What is a money market deposit?

A

amounts of money deposited through a bank in the money markets

  • markets for short term borrowing and lending
  • attractive interest yields
  • cant be withdrawn until deposit matures
  • short term investments should be large amounts to reap benefits
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14
Q

What are some examples of negotiable instruments?

A 
bank notes
bearer bonds
Certificates of Deposit
bills of exchange
treasury bills
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15
Q

What are the most negotiable instruments as short-term investments

A

Certificates of Deposit
Treasury bills
bills of exchange

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16
Q

What is a Certificate of Deposit?

A
  • evidence of a short-term deposit with a bank for a fixed term and earning a specified amount of interest
  • amount is 100k<
  • holder of the CD at maturity has the right to take the deposit with interest
  • present to a bank who will collect it from bank holding instrument
  • cant withdraw before maturity
  • can sell CD if cash is needed early
17
Q

What are treasury bills?

A
  • maturity of less than a year (most have 3 months)
  • used by govt for short-term cash requirements
  • have high credit quality, low risk and yield as govt backed
  • redeemable at face value
  • attractive as they are risk-free and liquid
  • there is a large and active secondary market
18
Q

What is the main objective of working capital management?

A

get the balance of current assets and current liabilities right: cash flow vs profits trade off

19
Q

How is the working capital cycle calculated?

A

cash operating cycle = inventory days + trade receivable days - trade payable days =working capital cycle

20
Q

What is the optimum level of working capital?

A

amount that results in no idle cash or unused inventory but does not put a strain on liquid resources

21
Q

What is an aggressive working capital management policy?

A

reduce costs by holding low capital

  • produces shorter operating cycle
  • greater risk of illiquidity
  • greatest returns
  • short-term finance sourced
22
Q

What is a conservative working capital management policy?

A
  • reduce risk through higher levels of cash, inv and rec
  • produces long operating cycle
  • risk such as stock-outs or liquidity problems are low but costs are increased
23
Q

What is overtrading?

A

when a business does not have sufficient capital to fund the increase in profitability or investment
-resources surpassed by activity

24
Q

What are some indicators of overtrading?

A
  • rapid increase in turnover (revenue)
  • rapid increase in the volume of current assets
  • most of the increase in assets being financed by credit
  • dramatic drop in liquidity ratios
25
Q

How are inventory periods interpreted? (72 days)

A
  • high inv days means conservative policy or stock-piling for new launch
  • if low inv, might show JIT concept or cash flow crisis and need for more aggressive working cap finance policy
  • need to compare inv days to other companies
  • inv levels are a balancing act
26
Q

What are trade receivable days?

A

the length of time credit is extended to customers

avg receivables x 365 / credit sales

27
Q

What are the trade payable days? (115 days)

A

average period of credit extended by suppliers

=average payables x 365/credit purchases

28
Q

What are the limitations of ratios?

A
  • SOFP values at the time may not be typical
  • may not represent average e.g seasonal
  • ratios subject to window dressing/manipulation
  • historic
  • maybe be distorted by inflation/rapid growth
29
Q

What are the 4 key aspects of receivables management?

A
  1. Assessing creditworthiness of customers
  2. Setting credit limits
  3. Invoicing promptly and collecting overdue debts
  4. Monitoring the credit system

OCS (6 decks)

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