Financial Mgmt Flashcards
What is the primary focus
of working capital management?
Managing inventory & receivables (CA + CL)
How is Net Working Capital calculated?
NWC = CA - CL
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?
Avg Inventory
Sales Per Day
Avg time needed to convert DM to FG & sell them
What is the Receivables Collection Period?
Avg AR
Daily Credit Sales
Avg time needed to collect AR
What is the Payables Deferral Period?
Avg Payables / (COGS/365)
Avg time b/t materials and labor purchase and their AP payment
What is the Cash Conversion 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
(Inventory Really (-Pays) Cash)
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 Paymts sent to a bank-managed PO box
- Employees don’t see cash
- Deposits more timely
- Interest income from deposits pays for Lockbox fees
What is float?
- Time it takes to mail payment & clear bank acct
- Maximize float on cash payments
- Minimize float on cash receipts
What are Zero Balance Accounts?
What are the advantages?
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, tNotes and tBonds?
Treasury Bills: Short term (< 1 yr) i.e. $1 Bill
Treasury Notes: Med term (1 - 10 yrs)
Treasury Bonds: LT (10+ yrs)
Govt in long-term bondage to you; they owe you money
What is commercial paper?
- Similar to T-Bill- but issued by corps
- 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 ins/investmt companies aren’t lending.
What is Economic Order Quantity?
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?
The cost of keeping inventory.
What is Order Cost?
Cost of executing an order
and starting product production.
What is inventory reorder point?
Avg Daily Demand x Avg Lead Time
Minimum inventory before re-ordering.
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 = low
and Cost of Carrying Inventory = high
What is Factoring of receivables?
Receivables are sold to a financing company that pays 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
- Ex: 1/10 Net 30
- 1% Discount if paid in 10 days
- Reg price due in 30 days
What is the cost of forgoing a discount?
Discount % x 365
(100% - Discount) x (Pay Period - Discount Period)
