Fin test 2: Non Quan Flashcards
Working Capital Management
a business process that helps companies make effective use of their current assets and optimize cash flow
-ensuring short-term financial obligations and expenses
- contributing towards longer-term business objectives.
Current Assets
a short-term asset that a company expects to use up, convert into cash, or sell within one fiscal year or operating cycle
Net Working Capital
the difference between a company’s current assets and current liabilities on its balance sheet
Current Ratio
a comparison of current assets to current liabilities, calculated by dividing your current assets by your current liabilities
Matching Principle,Aggressive Strategy, and Conservative Strategy for Working Capital
Management
-Matching Principle: short-term financing is used for short-term assets while long-term financing is used for long-term assets.
-Agressive: involves spending more in order to make more
-Conservative: requires you to save working capital in order to lower your risk.
Operating Cycle and Cash Conversion Cycle
-Operating: the amount of time it takes for a company to acquire inventory, sell that inventory and receive cash from customers in exchange for the inventory sold.
-Cash Con: represents the number of days it takes for a company to convert resources into cash.
The operating cycle measures the time it takes a business to convert inventory into cash, while the cash cycle takes into account that a business doesn’t have to pay its suppliers back right away.
Profitability, liquidity, and risk relationships
-Proftiability: a measure of an organization’s profit relative to its expenses.
-Liquidity: the ease with which an asset, or security, can be converted into ready cash without affecting its market price
-Risk Relationship: the greater the risk, the higher the potential for profit or loss
Motives for holding cash
- transaction: the requirement of cash by the business for its day-to-day operations
- Precautionary: to ensure that an individual has a certain reserve to cover any unforeseen transactions.
- Tax
- Agency: managers tend to hold excess cash, which will destroy shareholder value
Float
difference between the cash balances reported in your business accounting and the amount of cash you actually hold in your bank accounts
Types of float
- Collection: created when a firm receives a check, causing an increase in the firm’s book balance but no change in its available balance
- Disbursement :generated when a firm writes a check, causing a decrease in the firm’s book balance but to change in its available balance
- Net: the difference between the disbursement and collection float
Methods of Acceleration of cash collection
- Prompt payment by customers
- Quick conversion of payment into cash
- Decentralized collections
- Lock Box system
Lock-box system
a service provided by banks to companies for the receipt of payment from customers
Concentration banking
the practice of shifting the funds in a set of bank accounts into an investment account, from which the funds can be more efficiently invested
Marketable securities and characteristics
-Marketable securities: financial products that can be converted into cash quickly and affordably
-Characteristics:
~A year or shorter for maturity
~The capability of being purchased or sold on a public stock or bond exchange
~Having a robust secondary market that facilitates liquid buy and sell transactions and provides investors with an accurate price valuation
~NOT cash or cash equivalents, which have reduced risk and more liquidity (money market securities due within 3 months)
Credit policy factors
credit application process, types, limits and terms of credit, collection, monitoring and control, and risk management.
Tight collection policy
less willingness to extend credit to support revenue growth
Sources of credit information
mercantile agencies, reports from local correspondents, reports from traveling salesmen, and merchants’ associations or credit reporting agencies.
Factors of credit analysis
financial efficiency ratios (returns on equity, sales, assets, etc.), capital utilization, cash flow, gross margin, cost, and revenues.
Carrying costs of inventory
the amount that a business spends on holding inventory over a period of time
Safety stock for inventory
an extra quantity of a product which is stored in the warehouse to prevent an out-of-stock situation
Reorder point
the level of inventory at which a business should place a new order or run the risk that stock will drop below a comfortable level, or even down to zero
Short term credit
a business line of credit with a loan term between six months and one year
Sources of short term credit
(1) trade credit,
(2) commercial bank loans,
(3) commercial paper, a specific type of promissory note,
4) secured loans.
Form of trade credit
-open account: an account which remains to be paid
-trade acceptance: f a bill of exchange is accepted by the buyer of the goods
-promissory note: a written agreement between a borrower and a lender saying that the borrower will pay back the amount borrowed plus interest.
Short term bank loans
how quickly the loan needs to be paid off. In most cases, it must be paid off within six months to a year – at most, 18 months
Line of credit
an arrangement between a financial institution—usually a bank—and a customer that establishes the maximum loan amount that the customer can borrow.
Revolving line of credit
a credit line that remains available even as you pay the balance.
Commercial paper
a common form of unsecured, short-term debt issued by a corporation
Advantage of commercial paper
lower interest rates
Pledging accounts rec. and risk of default
-Pledging account: a financing arrangement in which a company uses its accounts receivable (outstanding invoices) as collateral to secure a loan or line of credit from a financial institution, such as a bank.
-Risk of Default: the probability that a borrower fails to make full and timely payments of principal and interest
Inventory as collateral
a short-term loan or a revolving line of credit that is acquired by a company so it can purchase products to sell at a later date.
Warehousing and inventory financing
-Warehousing: a way for businesses to borrow money secured by their inventories.
-Inventory: credit obtained by businesses to pay for products that aren’t intended for immediate sale.
Present value
the current value of a future sum of money or stream of cash flows given a specified rate of return
Future value
the value of a current asset at a future date based on an assumed rate of growth
Yield curves
depicts the interest rates of similar quality bonds at different maturities.
Yield curve theories (Expectations, Liquidity Premium, and Market Segmentation)
Expectations: predict what short-term interest rates will be in the future based on current long-term interest rates.
Liquidity: the yield curve will be sloping slightly upward even when short-term rates are expected to remain constant
Market: the yield curve is determined by supply and demand for debt instruments of different maturities.
