Week 3- Working Capital Management

Question 1

What does working capital management calculate?

Answer 1

How to maximise shareholder wealth in the short run

Question 2

What is working capital?

Answer 2

Current Assets such as inventory, accounts receivable and cash

Current Liabilities such as accounts payable ( trade creditors) and short term debt

Question 3

What is the formula for Net WC?

Answer 3

Net WC = Current assets - Current liabilities

Question 4

What is the objective of WCM?

Answer 4

Aims to free up as much cash as possible so that it can be invested into somewhere else to maximise shareholder wealth.

Question 5

How can a manager free up current assets (4 ways)?

Answer 5

1) reducing amount of inventory without endangering production
2) determining the optimal cash balance
3) Collect money from customers asap
4) Maintain good relationship with customers and take as much credit terms as possible without endangering supplies

Question 6

What is the WCM trade off?

Answer 6

Current assets give the lowest returns so managers need to minimize them as much as possible but they are also essential to business survival ie. paying suppliers so you always need to maintain a sustainable level.

Question 7

What are the measures of NWC?

Answer 7

Operating Cycle and Cash Conversion Cycle

Question 8

WHat is the Operating Cycle?

Answer 8

Measures the time elapsed from the firms receipt of raw materials to its collection of cash from the sale of finished goods `

Question 9

What is the cash conversion cycle?

Answer 9

the elapsed time between the points at which a firm pays cash for raw materials and at which it receives cash for finished goods

Question 10

What is the difference in time between the opertaing cycle and CCC?

Answer 10

The amount of time for which trade creditors are willing to extend credit for

Question 11

WHat are the main components of the CCC? (3)

Answer 11

Inventory holding period
Trade Receivable days
Trade paybale days

Question 12

What is the inventory holding period?

Answer 12

average length of time needed to convert raw materials into finished goods and then to sell those goods

Question 13

What is Trade Receivable days?

Answer 13

The time it takes to collect cash from customersrade

Question 14

what is payable days?

Answer 14

the length of time between the purcahse of raw materials and the payment for cash for them

Question 15

What is the formula for the opertaing cycle?

Answer 15

IHP + TRD

Question 16

WHat is the formula for the CCC?

Answer 16

Operating cycle -TPDs

Question 17

WHat is the IHP ratio?

Answer 17

(Average inventory held/ cost of goods sold) x 365

Question 18

What is the TRD ratio?

Answer 18

(Average trade receivables/credit sales) x 365

Question 19

What is the TPD ratio?

Answer 19

(Average Trade payables/Credit purchases) x 365

Question 20

What is current ratio formula?

Answer 20

Current assets/current liabilities (should be 1:1)

Question 21

what is the acid test ratio formula?

Answer 21

(Current assets -inventory)/current liabilities

Question 22

What is the objective of Inventory management?

Answer 22

Turn over inventory asap without losing sales from stock outs

Question 23

What are the three types of inventory?

Answer 23

Raw material
Work in progress (wip)
Finished goods

Question 24

What are the three types of cost?

Answer 24

Ordering cost
holding cost
stock out cost

Question 25

What is the stock out cost?

Answer 25

The loss of contribution because customers have to go elsewhere

Question 26

What are the two inventory management models?

Answer 26

Basic EOQ model Stock out EOQ model

Question 27

What is the symbol for demand?

Answer 27

X

Question 28

What is the symbol for ordering cost?

Answer 28

A

Question 29

What is the symbol for holding cost/unit/average?

Answer 29

C

Question 30

What is the symbol for stock out/overdraft?

Answer 30

D

Question 31

What is the symbol for quanity ordered each time?

Answer 31

Q

Question 32

What is the symbol for cost of replenishing the accounts?

Answer 32

A

Question 33

what is the symbol for the opportunity cost of interest rate foregone?

Answer 33

C

Question 34

What is the objective of credit management?

Answer 34

To collect accounts receivable as quickly as possible without sale from high pressure collection techniques

Question 35

What are the three main steps of credit managemnet?

Answer 35

Credit selection and standards credit terms credit monitoring

Question 36

What is debt factoring?

Answer 36

When you sell your debts back to the bank to raise money quickly

Question 37

What are teh disadvantages of factoring?

Answer 37

Expensive because you have to pay a factoring fee Signals to the market that the firm has cash flow problems The bank may not treat customers as nicely when collecting the debts as you would which could affect your future relationship with the customer

Question 38

What are the motives for holding cash (4)?

Answer 38

1) To conduct normal business transactions 2) compensating motives- firms required to maintain compensating balance with a bank from which they have borrowed money 3) for contingency for uncertainty 4) enables firms to take advantage of bargain purchases that may only be availiable for limited periods

Question 39

What is an issue with EOQ models?

Answer 39

Assumes we know all teh figures (like demand) in advance

Question 40

What are the reasons why firms offer credit sales?

Answer 40

1) Other firms do so you have to to stay competitive 2) some firms cant raise funding quickly so offering credit is a competitev advantage for these customers