Financial Management Flashcards
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
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
Inventory Conversion Period : Average Inventory / Sales Per Day
Average Inventory : (BI + E) / 2
What is the Receivables Collection Period?
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 A/P payment
Payables Deferral Period : Average Payables / (COGS/365)
Average Payables : (BP + EP) / 2
What is the Cash Conversion Cycle aka Net Operating Cycle?
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)
Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
= Cash Conversion Cycle
Minimizing “Net OC” = great way to increase LIQUIDITY
What traits should Cash and Short-Term Investments have?
Liquid
Safe
For what are Letters of Credit used?
Help enhance credit rating so you can get a lower cost of borrowing
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- lockbox is not beneficial)
What is float?
Occurs when there is a difference between the balance in a company’s cash accounts & the balance in the bank’s records.
Checks Outstanding
- Uncleared Deposits
= FLOAT
Good Float = Bank Bal > Book Bal.
Benefits = More cash earning interest in bank longer
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 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: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.
What is Economic Order Quantity?
The order quantity that minimizes both ordering & carrying costs.
EOQ ASSUMES demand is known & constant throughout year, so stockout costs nor safety stock costs are considered.
EOQ : Square Root of (2SO/C)
S : Annual Sales
O : Order Cost
C : Cost of Inventory
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 to avoid stockout costs.
ROP = Safety Stock + (Lead time * Sales in 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
If given to customer = “cost”
If received from vendor & not taken advantage of = “opportunity cost”
How is the APR of Quick Payment Discount calculated & what does is tell?
The cost of forgoing a discount.
[360/(Pay Period - Discount Period)] * [Discount/(100% - Discount%)]
Ex: What’s the cost of foregoing a discount of 1/10, net 30?
[360 / (30-10)] * [1% / (100%-1%)] = 18.2%
What is the Prime Rate?
A benchmark used for lending only to the best customers
Most customers will be charged Prime + 3%- for example
If the lending institution and the customer are not in the same country- the LIBOR rate is often used
