Prelim Flashcards
dio formula
ave. inventory/cogs x 365
dso formula
Accounts receivable/total sales x 365
dpo formula
acxounts payable/cogs x 365
ccc formula
=dio + dio - dpo
formula of double digits method
2/n
measures the ave. number of days the company takes to sell its inventory
days inventory outstanding (dio)
measures the ave. number of days it takes for the company to collect payment after a sale
days sales oustanding (dso)
measures the ave. number of days the company takes to pay its suppliers
days payable outstanding (dpo)
measures the time it takes for a company to convert its inventory into sales and then convert those sales into cash through receivables collection
operating cycle
key financial metric that measures the time it takes for a company to convert its investment in inventory and other resources into cash flows from sales
cash conversion cycle
refers to the process of managing an organization’s financial resources to ensure that it has enough cash flow to meet its obligations while also maximizing the return on investments and minimizing financial risks
treasury management
importance of treasury management
ensuring liquidity
managing financial risks
optimizing returns
key responsibilities of treasury managers
cash management
financing and investments
risk monitoring
regulatory compliance
objectives of treasury management
liquidity management
risk management
capital management
key components of treasury management
cash management
risk management
financial planning
basics of cash management
forecasting
collections
disbursements
reconciliation
how companies manage cash
banking relationships
investment strategies
digital payment solutions
it represents the difference b/w a company’s current assets and current liabilities. It’s a vital metric that reflects a company’s short term liquidity and operational efficiency
net working capital
nwc formula
ca-cl
current ratio
ca/cl
quick ratio
ca-inv/cl
strict ratio
ca-ar/cl
importance of ccc
liquidity management
operational efficiency
working capital optimization
key steps in the cash conversion cycle
purchasing inventory
selling products
collecting cash
paying suppliers
monitoring nwc
current ratio
quick ratio
optimizing networking capital
maximize profitability
improve cash flow
enhance efficiency
maximize risk
components of net working capital
current assets
accounts receivables
inventory
current liabilities
importance of net working capital
liquidity and solvency
operational efficiency
growth and expansion
financial stability and investor confidence
Optimizing net working capital enhances
profitability by minimizing unnecessary
investments in current assets.
maximize profitability
Efficient net working capital management frees up cash for investments and operational expenses
improve cash flow
Optimizing working
capital processes reduces
operational inefficiencies
and streamlines
workflows.
enhance efficiency
Effective net working
capital management
mitigates financial risks
associated with liquidity
and cash flow.
minimize risk
Adequate net working capital ensures a
company can meet its short-term
financial obligations, preventing liquidity
problems and potential insolvency.
liquidity and solvency
Efficient management of working capital
optimizes the use of resources,
minimizing unnecessary inventory and
receivables, leading to improved
operational efficiency and profitability.
operational efficiency
A healthy net working capital position
allows businesses to invest in growth
opportunities and expansion plans, as
they have sufficient funds to finance new
projects.
growth and expansion
Strong net working capital signals
financial stability and responsible
management, attracting investors and
lenders, creating a positive reputation
and fostering confidence.
financial stability and investor confidence
Strong net working capital signals
financial stability and responsible
management, attracting investors and
lenders, creating a positive reputation
and fostering confidence.
financial stability and investor confidence
it also involves making smart investment decisions with the company’s excess cash to earn additional income without taking too much risk
optimizing returns
treasury management ensures that the company has enough cash on hand to meet its short-term obligations, such as paying bills, salaries, and suppliers.
ensuring liquidity
proactive treasury management helps identify and mitigate financial risks, protecting organization from potential market fluctuations and economic uncertainties
managing financial risks
simple techniques to keep cash flow positive
effectice invoicing
inventory management
cost control
working capital optimization
timely and accurate invoicing, with clear payment terms and follow up procedures to ensure prompt customer payments
effective invoicing
optimizing inventory levels to minimize holding costs and free up cash tied up in excess stock
inventory management
closely monitoring and managing operating expenses to identify opportunities for cost savings and efficiency improvements
cost control
aligning the timing cash inflows and outflows to maintain a positive cash flow positions and avoid potential liquidity issues
working capital optimization
factors affecting nwc
inventory management
credit terms
cash flow management
is the amount of money a business needs to keep on hand to cover its day-to-day operations. This includes cost pf goods sold, operating expenses, and any other ongoing expenses. This can be calculated by adding up all of the company’s fixed asset and current liabilities. Also known as the base level of funding
Permanent funding requirement
Key characteristics of permanent funding requirement
constant needs
long-term
stable
essential
permanent funding is required to cover ongoing operating expenses and fixed assets
constant needs
these funds are needed for the entire life of the business and are not expected to fluctuate significantly
long-term
permanent funding requirements remain relatively consistent over time
stable
without permanent funding, the business could not function and meet its basic needs
essential
example of permanent funding needs
workung capital needs
growth investments
cash flow management
is the additional financing needed to meet temporary peaks in demand. These peaks are often driven by seasonal factors like weather or holidays. This is a short term financing need that often arises during specific months of teh year
seasonal funding requirement
key characteristics of seasonal funding requirement
fluctuating demand
temporary needs
predictable pattern
seasonal business usually experiences predictable patterns of high and low demand. Understanding these patterns allows for effective planning and budgeting
predictable pattern
seasonal funding is temporary and is needed only during periods of peak demand. its used to finance inventory, production, and sales during those specific times.
temporary needs
businesses with seasonal demand experience periods of high sales followed by periods of low sales. These fluctuations impact cash flows and working capital needs
fluctuating demands
is a necessary component of a business’s long-term financial strategy. It represents the consistent financial resources required for ongoing operations
permanent funding
is crucial for businesses experiencing fluctuations in demand or production. It addresses the temporary need for extra financial resources during peak seasons.
seasonal funding
prioritizes minimizing funding costs. This is achieved by borrowing onlh the exact amount required for short periods. This strategy assumes accurate sales forecasting and efficient inventory management. It requires a high degree of confidence in predicting demand and managing operations
Aggressive seasonal funding strategy
characteristics of aggressive seasonal funding strategy
- Minimal permanent funding
- high leverage
- potential for higher returns
- risk of financial distress
this strategy relies heavily on short-term financing to meet seasonal demands
minimal permanent funding
businesses take on more debt to finance seasonal operations
high leverage
agressive fundibg strategies can lead to higher profitability during peak seasons
potential for higher returns
if sales fall short, businesses face challenges in meeting debt obligations
risk of financial distress
a less risky approach to financing seasonal need. This strategy involves maintaining a higher level of cash on hand throughout the year. The company avoids potential financial strain but may miss out on opportunities for higher returns on investments
conservative seasonal funding requirement
characteristics of conservative seasonal funding strategy
- Larger cash buffer
- lower debt levels
- lower risk
- stable operations
this strategy uses larger cadh buffer to meet peak funding needs. This reduces the need to borrow excessively during peak seasons.
larger cash buffer
a conservative approach prioritizes minimizing borrowing, keeping debt levels low, and avoiding excessive interest payments
lower debt levels
the lower debt levels associated with this strategy translate to lower financial risk for the business
lower risk
consistent cash flow and minimal debt make it easier to maintain stable operations even during seasonal fluctuations
stable operations
