Short -Term Finance And Investments

Question 1

Name the four ways that an organization can generate short term FINANCE?

Answer 1

• Trade Payables
  -Trade Receivables (Factoring and invoicing)
  -Short-term borrowing
• Finance exports

Question 2

What are the short-term investments that an organization can use?

Answer 2

-Interest bearing bank accounts
-Negotiable instruments
-Short-dated government bonds

Question 3

What are the three different methods of Factoring for short term finance?

Answer 3

1. Debt collection
2. Financing- funds advanced to company prior to debt being collected
3. Credit insurance- factor takes responsibility for irrecoverable debt.

Question 4

What are the different interest-bearing accounts to be used for short-term investments?

Answer 4

Bank deposits.
Money markets.

Question 5

What are the 5 things to consider when looking for an investment?

Answer 5

1. Maturity
2. Return
3. Risk
4. Liquidity
5. Diversification

Question 6

What is the formula for Working Capital Cycle?

Answer 6

=Inventory days + trade receivables days- trade payable days

Question 7

What is the optimum level of Working Capital?

Answer 7

No idle cash/unused inventory but does not put strain on liquid resources.

Question 8

What is the Aggressive policy for Working Capital Cycle?

Answer 8

Have the lowest level of cash, inventory and receivables. Short operating cycle. Greatest returns. Risk of liquidity doesn’t have enough to trade.

Question 9

What is the Conservative Policy for Working Capital?

Answer 9

Keep high levels of cash, inventory, receivables. Long operating cycle. Low risk for stock-outs and liquidity. Costs are increased.

Question 10

What are the 4 indicators of overtrading?

Answer 10

1. Rapid increase turnover
2. Rapid increase in current assets
3. Most of increase in assets financed by credit
4. Dramatic drop in liquidity ratios

Question 11

What are the 3 solutions for overtrading?

Answer 11

1. Raising more long term finance in capital, in form of shares and loans
2. Slowing down growth to reduce increases in WC requirements until sufficient cash has been built to finance it.
3. Improving WC management. Reduce inventory. Reduction in receivables days.

Question 12

What are the 6 ways to shorten working capital cycle?

Answer 12

1. Reduce raw materials Inv. Holding
2. Delay payment to suppliers
3. Reduce WIP by improving production techniques.
4. Reduce Finished Goods.
5. Reduce credit given to customers
6. Debt factoring

Question 13

What are the assumptions made when using the Economic Reorder Quantity?

Answer 13

• demand and lead time are constant and known
• purchase price is constant
  -no buffer inventory held as it is assumed it is not needed since demand and lead times are certain.

Question 14

What are the 3 different inventory control systems?

Answer 14

1. Reorder level system
2. Periodic review system
3. Mixed systems (both)