Module 5

Question 1

what is gross working capital?

Answer 1

the firm’s investment in curr assets to generate sale/profits/net CF

Question 2

what is net working capital?

Answer 2

CA - CL

Question 3

what is working capital management?

Answer 3

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)

Question 4

ROI formula?

Answer 4

(NP after tax / total assets) x 100

Question 5

what is liquidity risk?

Answer 5

inefficient cash collection from debtors and cash sales – inability to pay creditors/general expenses

Question 6

what is business risk?

Answer 6

firm is unable to pay its normal operating expenses (insufficient cash or exposure to economic conditions)

Question 7

what is financial risk?

Answer 7

debt ratio

Question 8

what is market risk?

Answer 8

activities occurring on the market affected the business

Question 9

what is exchange rate risk?

Answer 9

future cash flows exposed to change in currency economic resources

Question 10

basic WCC for a manufacturer?

Answer 10

buy mat > manufacture inv > sell/on credit > get money > pay creditors > repeat

Question 11

three components of the cash conversion cycle?

Answer 11

inv days + debtors coll - creditors payment

Question 12

consequences of holding too much inv?

Answer 12

• obsolescence, carrying costs

- no lost sales = customer satisfaction

Question 13

consequences of holding too little inv?

Answer 13

• stock outs = lost sales, increased ordering costs

- reduced carrying costs/obsolescence

Question 14

consequences of increased debtors collection period?

Answer 14

• more credit sales

- reduced cash flows, bad debts increase

Question 15

consequences of decreased debtors collection period?

Answer 15

• improved cash flows, decreased BD

- lower credit sales

Question 16

what is factoring?

Answer 16

means selling your accounts receivable to a lender / financial institution

Question 17

what is factoring with recourse?

Answer 17

when subsequent to taking over the debtors book, there are bad debts in it which lenders can claim back (subject to the contract)

Question 18

what is factoring without recourse?

Answer 18

the lender buys the book while accepting that there may be BD in it

Question 19

operating cycle formula?

Answer 19

inv days on hand + debtors collection period

Question 20

how to shorten the WCC?

Answer 20

dec IDOH

dec DCP

Question 21

what is spontaneous financing?

Answer 21

trade credit that arises spontaneously in the firm’s day to day operations

Question 22

what we do if we forecast an inc in sales?

Answer 22

• relax credit terms = inc sales = inc debtors

Question 23

what happens in an aggressive approach to WC?

Answer 23

• 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)

Question 24

what happens in an conservative approach to WC?

Answer 24

• 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)

Question 25

managing outstanding amounts receivable by using age analysis?

Answer 25

• evaluates pmt patterns
• identify / track delinquent debtors
• assess debtor quality
• costly process

Question 26

examples of short term credit?

Answer 26

• commercial paper (unsecured)
• accs receivable, investment bank loans (sec)
• trade payables, accruals

Question 27

adv and disadv of short term credit?

Answer 27

• flexible – can get funds easily

- riskier, rates are volatile, more expensive

Question 28

possible costs of stretching the accs payable?

Answer 28

• cost of cash discounts forgone
• late payment penalty / interest
• bad relationship with supplier
• deteriorating credit rating

Question 29

motives for holding cash?

Answer 29

• for transactions
• as a precaution
• spare cash for good opportunity (speculative)
• compensating bal % of loan required by banks