FI 27 WC Management Flashcards
What is the objective of cash management?
Minimize the opp cost of holding cash balances whilst maintaing flexibility to obtain funds and meet unexpected needs for cash
What is the minimum operating cash balance?
The optimal and lowest possible cash balance that satisfies short term needs without impeding the firm’s ability to make payments
motives for holding cash balances
- speculative - take advantage of bargains such as discounts, interest rates etc.
- reserve for cash needs
- desire to have cash on fand to pay specific bills
- comply with covenants
factors that reduce need for large cash balances
- firm’s ability to borrow - liquidity but not necessarily cash (i.e. LOC)
- firm size - the larger the more invested in stocks and bonds you are
- costs of holding cash rather than investing it
Considerations when investing excess cash
- time horizon
- risk tolerance
- how liquid
- preference of investment type
5 C’s of credit
Character Capacity Capital Colateral Conditions
Factors to consider when determining credit period
- nature of product sold
- customer demand
- credit risk
- proportion of sales made to customer
- competition
- prices charged
Internal control measures to ensure A/R is managed well
aged listing of A/R accounts with follow-up
timely accurate invoicing
encourage cash sales
only provide credit to those eligible
filling orders as received
providing priority to clients who pay quickly
costs of extending credit
- staffing costs
- financing costs
- bad debt costs
Two ways of keeping inventory cash flow costs low
- keeping input costs as low as possible
- maintaining low volumes in inventories
Three methods of inventory management
- EOQ model
- JIT
- Consignment
Costs of carrying inventory
storage handling obsolencence spoilage theft or shrinkage insurance financing costs ordering costs
Two methods of managing AP
- negotiate extended credit terms
- take advantage of discounts
Define cash conversion cycle
Average period between payment to suppliers and the point in time the payment from sales is received from customers
Cash conversion formula
Inventory period + Average collection period - average payables period
What does a positive cash conversion cycle mean?
Not enough cash to cover expenses - need to finance the number of days
Three types of risk associated with short-term financing
Liquidity
Refinancing
Repricing - credit rating changes
Permanent vs seasonal current assets
Perm - miniumum level of current assets required to maintain firms operations regardless of level of sales.
Seasonal - level of current assets needed above permanent current assets
3 strategies of financing working capital
Maturity-matching
Extreme conservative
Extreme aggressive
Costs of carrying inventory
storage handling obsolencence spoilage theft or shrinkage insurance financing costs ordering costs
