Topic 9- Short-term Capital Management

Question 1

What is the significance of working capital management?

Answer 1

• Working Capital= Current Assets- Current Liabilities
• Essential to run the business
• Most projects require it
• Primary Elements is net working capital are inventory, cash, receivables & payables

Question 2

What is the operating cycle?

Answer 2

The time span between when firm orders inventory to when firm secured cash for finished goods

Question 3

What is the cash cycle?

Answer 3

The time span between when a firm buys its initial inventory with cash and when firm generates cash from the sale of the finished goods produced from inventory

Question 4

What are benefits of trade credit?

Answer 4

• Easy & useful to use, it therefore has less transaction costs than other sources of funding
• it can be used as required as it is quite flexible
• on occasion it might be the only source of funding available to a firm

Question 5

What are benefits of holding inventory?

Answer 5

• Prevent stock-outs

- Seasonality in demand

Question 6

What are costs of holding inventory?

Answer 6

• Order costs (e.g shipping, inspection handling)
• Carrying Costs (any costs incurred to store inventory e.g. warehouse)

Goal= minimize amount of cash tied up in inventory

Question 7

What are tools used to minimize inventory costs?

Answer 7

• Just in time (only order inventory when you need it, requires a good relationship with supplier)

Question 8

What happens when a firm increases its order size?

Answer 8

• As the firm increases its order size, the number of orders falls & therefore the order costs decline
• However, an increase in order size also increases the average amount in inventory, so that the carrying cost of inventory rises
• The trick is to strike a balance between these two costs