Session 2

Question 1

How do you calculate working capital?

Answer 1

Working Capital: (shareholders equity + non-recurring liabilities) - non-recurring assets

OR

Working Capital: (shareholders equity + the long-term loans) - the fixed assets

Question 2

What does it mean that a company has negative working capital?

Answer 2

It means that the company does not have great short term liquidity and the company needs to be taken into account based on their industry and economic activity.

Question 3

How do you calculate working capital?

Answer 3

Current assets(Except cash)-Current Liabilities (Except bank overdrafts)

OR

Accounts Receivable + Inventory
- Accounts Payable
AR + I - AP

Question 4

Why do Americans only have one working capital?

Answer 4

Working capital is long term analysis.

The operating Working capital is short term.

Seeing Americans only look at the short term horizon, they do not distinguish the two and call OWC the WC.

Question 5

What does the Operating Working Capital represent?

Answer 5

It indicates the power relationships and strategic positions

Question 6

How does OWC show power relationships?

Answer 6

If people trust you will pay because you are a strong player, you will have more accounts payable.

If not the suppliers will push you to pay before.

Same thing with customers. If you can force the retailers to pay in advance is because they need you more than you need them => lower accounts receivable

Question 7

What does it mean if your Operating Working Capital is above Zero (OWC > 0)?

Answer 7

The business needs the related amount to supplement the financing of its operations (Most frequent case)

Question 8

What does it mean if your Operating Working Capital is equal to Zero (OWC = 0) ?

Answer 8

The company has a good turnover of stocks, short duration of accounts receivable, longer duration of accounts payable.

Question 9

What does it mean if your Operating Working Capital is below Zero (OWC < 0)?

Answer 9

⇒ A favorable strategic factor for the development of the growth policy.

⇒ A sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis)

Question 10

What do the turnover ratios describe?

Answer 10

3 ratios describe the short term policy of the company

Question 11

What are the three turnover ratios?

Answer 11

Accounts Receivable Turnover ratio (DSO)

Accounts Payable Turnover ratio (DPO)

Inventory Turnover ratio (DIO)

Question 12

How do you calculate the Accounts Payable Turnover ratio (DPO) ?

Answer 12

[Accounts Payable / Cost of Sales or Purchases (incl. VAT)] × 365

Question 13

How do you calculate the Accounts Receivable Turnover ratio (DSO) ?

Answer 13

[Accounts receivable / Sales (incl. VAT)] × 365

Question 14

How do you calculate the Inventory Turnover ratio (DIO)?

Answer 14

[Inventory / Sales (excl. VAT)] × 365

Question 15

When do we use the AR turnover ratio (DSO)?

Answer 15

We want to know how long do customers take to pay us.

Question 16

When do we use the AP turnover ratio (DPO)?

Answer 16

When we want to know Duration of payment of the suppliers’ liabilities

Question 17

When do we use the Inventory turnover ratio (DIO)?

Answer 17

Duration for the company to sell its inventory

Question 18

How do we calculate the Cash Conversion Cycle (CCC) ?

Answer 18

Days of inventory
+Days of Accounts Receivable
– Days of Accounts Payable

DIO+DSO-DPO

Question 19

What does the Cash Conversion Cycle (CCC) tell us?

Answer 19

The number of days it takes for a company to turn its resource inputs into cash.

Question 20

What are the three income elements?

Answer 20

Operating income

Financial income

No recurring items

Question 21

What is Operating income?

Answer 21

The difference between operational activities costs and revenues.

The income derived from the main business activity (operating cycle)

The most relevant indicator of the profitability of a company.

Question 22

What is Financial income?

Answer 22

The result that follows the modes of financing business activities

It represents the cost of financing

Highlights the financial burden of the business

Question 23

What is Non-recurring income?

Answer 23

Derived essentially from the sales of some fixed assets

basically independent from operating activities

Question 24

What are common size financial statements?

Answer 24

Income statement items expressed in % of sales (dividing each item amount by the sales)

Question 25

What are common size financial statements used for?

Answer 25

they provide a quick and comprehensive look and a consistent means of comparison between companies of different sizes

Question 26

How do you calculate the growth of net sales ?

Answer 26

(Net Sales 2 - Net Sales 1)/Net Sales 1

(NS2 - NS1)/NS1

Question 27

How do you calculate Gross profit?

Answer 27

Revenue - Cost of Goods Sold

Question 28

What are the categories of Cashflows?

Answer 28

⇒ operating activities

⇒ investing activities

⇒ financing activities

Question 29

How do you calculate cashflows for Operating activities?

Answer 29

Net income
+ Non cash expenses
- Non cash Gains
- Change in OWC

Question 30

How do you calculate cashflows for Investing activities?

Answer 30

-Acquisition of fixed assets
+ Disposal of fixed assets

Question 31

How do you calculate cashflows for Financing activities?

Answer 31

+ Issuance of equity (stocks)
+ Cash from loans
- Repayment of loans
- Repurchase of stocks
- Dividends paid

Question 32

How do you calculate net cashflows

Answer 32

+Operating cashflows
+Investing cashflows
+Financing cashflows

Question 33

What is the relationship between cash and profit?

Answer 33

A company can make profits with little cash It may have liquidities without making a profit.

OR the company can have slim profits but make a lot of cash and then invest it.

In the income statement, some of the costs and revenues are not paid in cash.

Question 34

What is the Short-term horizon of the Cash vs Profit dynamic?

Answer 34

The company can have a net loss for a quarter without causing irreparable harm.

However, if the company runs out of cash, it will face a highly problematic situation

Question 35

What is the Short-term horizon of the Cash vs Profit dynamic? For FAMILY business

Answer 35

Cash Flow is critical as it permits growth and as it goes along with the patient capital of the families who are owners and who look for longer term investments.

Question 36

What is the Short-term horizon of the Cash vs Profit dynamic? For NON-FAMILY business

Answer 36

Profits and Earnings Per Share are critical for long term success