Reading 35: Working Capital Management Flashcards
What does accounts receivable turnover measure?
How many times, on average, accounts receivable is created by credit sales and collected over a given period.
Give examples of major drags on liquidity.
Uncollected receivables: The longer receivables are outstanding, the greater the risk that they will not be collected at all.
Obsolete inventory: If inventory remains unsold for a long period, it might indicate that it is no longer usable.
Tight credit: Adverse economic conditions can make it difficult for companies to arrange short-term financing.
Give the formula used to calculate the float factor.
Average daily float / average daily deposit
Identify the motives a company may have for holding inventory.
The transactions motive: Inventory is just kept for the planned manufacturing activity.
The precautionary motive: Inventory is kept to avoid any stock-out losses.
The speculative motive: Inventory is kept to ensure its availability in the future when prices are expected to increase.
Define asset-based loans.
These are loans that are collateralized by the company’s assets. Assets that are used to secure short-term loans usually include current assets, such as receivables and inventory.
Describe the basic structure of a cash management investment policy.
States reasons for the existence of the portfolio and describes its general attributes, such as the investment strategy to be followed.
Identifies the authorities who supervise the portfolio managers and details the actions that must be undertaken if the policy is not followed.
Describes the types of investments that should be considered for inclusion in the portfolio. It contains restrictions on the maximum proportion of each type of security in the portfolio and specifies the minimum credit rating of portfolio securities.
Describe the primary and secondary sources of liquidity.
Primary sources are readily available resources, such as cash balances and short-term funds.
Secondary sources provide liquidity at a higher cost than primary sources. They include negotiating debt contracts, liquidating assets, or filing for bankruptcy protection.
Describe revolving credit agreements.
These are the strongest form of short-term borrowing facilities. They are similar to regular lines of credit with respect to borrowing rates, compensation, and being unsecured. However, unlike regular lines of credit, they are in effect for multiple years, and may have optional medium-term loan features.
Distinguish between a high payables turnover ratio and a low payables turnover ratio.
A high payables turnover ratio might indicate that the company is not making full use of available credit facilities.
A low ratio could suggest that the company has trouble making payments on time.
