SU8 - The Management of Working Capital

Question 1

What is the objective of a financial manager?

Answer 1

To manage the CCC (Cash Conversion Cycle) efficiently in order to maintain adequate levels of cash.

Question 2

Explain the Operating Cycle (OC).

Answer 2

It may be described as the period of time that elapses between the building up of inventory and the cash being allocated from the sale of that inventory.

Question 3

What are the components of the Operating Cycle (OC).

Answer 3

1. Average age of inventory (AAI)

2. Average collection period (ACP) of sales

Question 4

What is the formula for Operating Cycle (OC)?

Answer 4

OC = AAI + ACP

Question 5

Explain the Cash Conversion Cycle.

Answer 5

The time period that elapses between buying the products and actual payment is referred to as the average payment period (APP).

The CCC represents the total number of days in the operating cycle of the firm less the APP.

Question 6

What is the formula for the Cash Conversion Cycle (CCC)?

Answer 6

CCC = AAI + ACP - APP

Question 7

What does the CCC indicate.

Answer 7

It indicates for a how many days the company’s money is tied up

Question 8

Explain Spontaneous financing .

Answer 8

Spontaneous financing arises from the normal operations of the firm, that is buying goods and services from creditors and paying their accounts later.

Question 9

How do we the total inventory costs (TIC)?

Answer 9

By adding ordering costs and carrying costs.

Question 10

What is the objective of inventory management?

Answer 10

To maintain a balance between the rising and falling costs that will result in the lowest total cost of inventory for a firm.

This can be achieved by determining the economic ordering quantity (EOQ)

Question 11

What is the formula for EOQ?

Answer 11

EOQ = Square the answer of [2(FxS)] / CxP

EOQ = economic ordering quantity or the optimum quantity to be ordered with each order placed
F = fixed costs of placing and receiving an order
S = annual sales in units
C = caring costs expressed as a percentage of inventory value
P = purchase price per unit

Question 12

How do you calculate average inventory on hand?

Answer 12

(Inventory at beginning of period + inventory at end) / 2

Question 13

How do you calculate the reorder point?

Answer 13

Reorder point = lead time in days x daily requirement

Question 14

The formula to manage bad debt is

Answer 14

(Bad debts/Credit Sales) x 100

Question 15

How do we calculate the cost of forgoing a settlement discount (2/10 net 30)?

Answer 15

[CD / (1-CD)] x (365/N)

If the amount is higher than my borrowing rate at the bank, it would be best to borrow and settle the account.