Module 5 Flashcards
what is gross working capital?
the firm’s investment in curr assets to generate sale/profits/net CF
what is net working capital?
CA - CL
what is working capital management?
it is the admin and mgmt of the firms CA and the financing needed to support these CA (mix of CA and debt to inc profitability)
ROI formula?
(NP after tax / total assets) x 100
what is liquidity risk?
inefficient cash collection from debtors and cash sales – inability to pay creditors/general expenses
what is business risk?
firm is unable to pay its normal operating expenses (insufficient cash or exposure to economic conditions)
what is financial risk?
debt ratio
what is market risk?
activities occurring on the market affected the business
what is exchange rate risk?
future cash flows exposed to change in currency economic resources
basic WCC for a manufacturer?
buy mat > manufacture inv > sell/on credit > get money > pay creditors > repeat
three components of the cash conversion cycle?
inv days + debtors coll - creditors payment
consequences of holding too much inv?
- obsolescence, carrying costs
- no lost sales = customer satisfaction
consequences of holding too little inv?
- stock outs = lost sales, increased ordering costs
- reduced carrying costs/obsolescence
consequences of increased debtors collection period?
- more credit sales
- reduced cash flows, bad debts increase
consequences of decreased debtors collection period?
- improved cash flows, decreased BD
- lower credit sales
what is factoring?
means selling your accounts receivable to a lender / financial institution
what is factoring with recourse?
when subsequent to taking over the debtors book, there are bad debts in it which lenders can claim back (subject to the contract)
what is factoring without recourse?
the lender buys the book while accepting that there may be BD in it
operating cycle formula?
inv days on hand + debtors collection period
how to shorten the WCC?
dec IDOH
dec DCP
what is spontaneous financing?
trade credit that arises spontaneously in the firm’s day to day operations
what we do if we forecast an inc in sales?
- relax credit terms = inc sales = inc debtors
what happens in an aggressive approach to WC?
- uses a larger proportion of short-term financing
- low investment in inventory
- strict credit terms
- less long-term debt, low current ratio
(high risk, high return)
what happens in an conservative approach to WC?
- high inventory levels
- relaxed credit terms
- less use of short-term debt, more l/t
(more int expense, penalties for early settlement, low risk, low return)
managing outstanding amounts receivable by using age analysis?
- evaluates pmt patterns
- identify / track delinquent debtors
- assess debtor quality
- costly process
examples of short term credit?
- commercial paper (unsecured)
- accs receivable, investment bank loans (sec)
- trade payables, accruals
adv and disadv of short term credit?
- flexible – can get funds easily
- riskier, rates are volatile, more expensive
possible costs of stretching the accs payable?
- cost of cash discounts forgone
- late payment penalty / interest
- bad relationship with supplier
- deteriorating credit rating
motives for holding cash?
- for transactions
- as a precaution
- spare cash for good opportunity (speculative)
- compensating bal % of loan required by banks
