Week Ten Flashcards
Discuss the management of net working capital.
Working capital is the funds invested in current assets. Net working capital is current assets minus current liabilities. In managing the level of net working capital, entities are concerned with maintaining liquidity, the need to earn the required rate of return on assets and the cost and risk of short-term funding. Entities use the hedging principle to match the sources of funding with the use of that funding.
Outline the issues underlying the management of cash.
Issues that entities must manage with regard to cash include the need to have sufficient cash, the timing of cash flows, the cost of cash and the cost of not having enough cash. Entities must have sufficient cash on hand to meet their bills on time.
The timing of cash flows may be manipulated to some extent, in order to have sufficient cash at all times and to optimise the returns to cash. The cost of holding cash is the opportunity cost of holding liquid deposits, but the cost of not holding sufficient cash may be the cost of arranging emergency loans, or could be the ultimate penalty: insolvency and business cessation.
Discuss the management of accounts receivable.
Accounts receivable provide benefits for entities but they also involve costs. The value of accounts receivable carried by any entity depends on a number of policies and processes that the entity determines and manages. These policies and processes include credit policies and collection policies and procedures.
Credit policies include the decision to offer credit, selecting suitable customers, setting credit limits and deciding payment terms.
Collection procedures include the monitoring of ageing accounts and putting in place steps to exert pressure on customers to pay.
Identify the issues with respect to the management of inventories.
Managing inventories is an art, although there are techniques managers may use to transform much of the role into a science. Inventories are held to facilitate both production and sales.
The cost of holding inventories includes both ordering and holding costs. Inventories may be managed by entities holding minimum levels at all times while other entities use just-in-time (JIT) techniques to reduce costs.
Compare the sources of short-term finance.
The most common sources of short-term finance for entities include accrued wages and taxes, trade credit, bank overdrafts, commercial bills and promissory notes, factoring or debtor/invoice/trade finance and inventory loans or floor-plan finance.
Compare the sources of long-term debt finance.
Long-term debt finance is supplied to borrowers through financial institutions as intermediaries or directly by the debt markets. Most entities tend to look to the financial institutions as suppliers of intermediated finance in the first instance.
For long-term funding purposes, most financial institutions offer fixed and variable rate business loans, instalment loans, interest-only loans, fully-drawn advances and lease finance. Entities wanting to raise debt finance from the Australian market have corporate bonds, notes and debentures to choose from as the financing media.
