Financial Management Flashcards
What is the primary focus of working capital management?
The primary focus of working capital management is managing inventory and receivables (current assets and liabilities).
How is Net Working Capital calculated?
NWC = Current Assets - Current Liabilities
What are the characteristics of effective Working Capital Management?
An effective Working Capital Management shortens the cash conversion cycle.
It doesn’t negatively impact operations.
What is the Inventory Conversion Period?
The Inventory Conversion Period is the average time needed to convert materials into finished goods and sell them.
Average Inventory = (BI + E) / 2
Inventory Conversion Period
= Average Inventory / (COGS / 365)
What is the Receivables Collection Period?
Receivables Collection Period refers to the average time needed to collect A/R.
Ending A/R / (Net Sales / 365)
What is the Payables Deferral Period?
Payables Deferral Period is the average time between materials and labor purchase and their A/P payment.
Average Payables = (BP + EP) / 2
Payables Deferral Period = Average Payables / (COGS/365)
What is the Cash Conversion Cycle?
Cash Conversion Cycle is the amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors).
Cash Conversion Cycle =
Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
(Inventory Really (-Pays) Cash)
What traits should Cash and Short-Term Investments have?
Liquid & Safe
What are Letters of Credit used for?
Letters of Credit are used for importing goods. They are being 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.
- Deposits are more timely.
- Interest income from deposits should pay for the
Lockbox fees (If they don’t, the lockbox is not
beneficial).
What is float?
Float refer to the 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 sends enough cash to cover daily checks.
Advantages:
- Checks take longer to clear - more float - Low amounts of cash tied up for compensating (minimum) balances
What are the differences between Treasury Bills, Notes and Bonds?
Treasury Bills: Short term (less than one year)
- Think: $1 Bill
Treasury Notes: Medium-term
- (1 to 10 years)
Treasury Bonds: Long term (greater than 10 years)
- Think: the government is in long-term bondage to
you; they owe you money
What is commercial paper?
Commercial paper is similar to T-Bill, but issued by corporations instead of government.
- Greater than Nine 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:
- Unpredictability of markets.
- Credit crisis emerges and large insurance/investment
companies aren’t lending.
What is Economic Order Quantity?
Economic Order Quantity is the order quantity that minimizes inventory costs.
EOQ: Square Root of (2DO/C)
- D: Unit Demand (Annual)
- O: Order Cost
- C: Cost of Inventory
What is Carrying Cost?
Carrying Cost is the cost of keeping inventory.
What is Order Cost?
Order Cost is the 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 = Average Daily Demand x Average Lead Time
What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it’s needed.
JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high.
What is Factoring of receivables?
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection.
What is a Trade Discount?
Buyer saves if paid early.
Example: 1/10 Net 30
- 1% discount if paid within 10 days - If not, bill is still due in 30 days
What is the cost of forgoing a discount?
(Discount % x 365) / [(100% - Discount) x (Pay Period - Discount Period)]
