Financial Management Flashcards
What is the primary focus of working capital management?
Managing inventory & receivables
Managing and financing CA & CL
Sources of ST funds
Hedging may occur
- A/P trade credit
- ST bank loan (annualize the rate)
- Informal line of credit
- Revolving credit
- Letter of credit
- Commercial paper (unsecured)
- A/R (pledging, factoring, securitization)
- Inventory (lien, warehouse)
How is Net Working Capital calculated?
NWC = Current Assets - Current Liabilities
Cash Management 3 goals
Sufficient amount to:
- take purchase discounts
- maintain credit rating
- meet unexpected needs
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycle
Don’t negatively impact operations
What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell them
Inv Conv Pd = Avg Inv / COGS Per Day
sometimes Sales/Day
What is the Receivables Collection Period?
DSO
Average time needed to collect A/R
RCP = Average Receivables / Credit Sales Per Day
What is the Payables Deferral Period?
Average time between materials and labor purchase and their cash pmt
Payables Deferral Period = Avg Payable/COGS per day
What is the Cash Conversion Cycle?
The longer the cycle, the more financing required
Amount of time between cash outflow (vendor) and cash inflow (customers)
= Inv Conv Pd + Rcbl Collec Pd – Pbl Deferral Pd
What traits should Cash and Short-Term Investments have?
Liquid
Safe
For what are Letters of Credit used?
Used for importing goods.
Issued by importer’s bank.
What is the advantage of using Trade Credit?
No interest cost if paid timely.
What is a Lockbox System?
What are the advantages?
Customer Payments are sent to a bank-managed PO box.
Employees don’t have access to cash.
Cash Conversion sped up
Interest income from deposits should pay for the Lockbox fee
What is float?
Time it takes to mail a payment and have it clear your bank account
Maximize float on cash payments
Minimize float on cash receipts
What are Zero Balance Accounts?
Regional bank informs of cash to cover daily checks
Deposit that amount only, daily
Advantages: float period
No cash tied up for compensating (minimum) balances
What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 Bill Treasury
Notes: Medium term (less than 10 years- more than 1)
Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government
Greater than 9 Months Maturity
Unsecured Issued by large firms
What are the advantages and disadvantages of Commercial Paper?
Advantages: Financing at less than Prime.
No compensating balances required.
Disadvantages: No secondary market
What is Economic Order Quantity?
The order quantity that minimizes ordering and carrying costs
EOQ = Sq Root of (2DO/C)
D = Unit Demand/yr
O = Unit Order Cost
C = Unit Carrying Cost/yr
What is Carrying Cost?
- Storage
- Interest
- Spoilage
- Insurance
- Property Tax
What is Order Cost?
Cost of executing an order and starting product production.
What is inventory reorder point?
How low inventory should get before it should be re-ordered.
IOP = Avg Daily Demand x Avg Lead Time
MRP
Material Requirements Planning
Manufacture based on FORECASTS
weakness: “push-through” system
What is a Just In Time (JIT) system?
Demand-pull system
JIT is valuable when:
- Order Cost is low
- Cost of Carrying Inventory is high
- Good supplier relationships
