Working cap Flashcards
The aggressive approach
Profit focused - ST finance to finance permanent + fluctuating current assets
Why profit focused? ST FINANCE IS CHEAP!!!
RISK: no guarantee of ST finance - only use if the organisation is confident of always being able to raise the required ST finance
The conservative approach
Liquidity focused - LT finance to finance permanent + fluctuating current assets
The matching approach
ST finance: fluctuating current assets
LT finance: permanent current assets
Average inventory period
Average inventory/CoS x 365
Inventory turnover ratio
CoS/inventory
Receivables collection period
average rec/revenue x 365
Payables period
average pay/CoS x 365
If given total purchases use that (CoS includes labour cost)
Current ratio
Current assets / current liabilities
Quick ratio
Current assets - inv / current liabilities
Reorder level system
Reorder a set quantity when inventory reaches a set level
Periodic review system
Review at fixed time intervals
ABC system
Categorise class A, B, C etc based on most to least effort to manage
Aims to reduce work involved in inventory control in a business whcih may have several ‘000 types of inv items.
EOQ model
Sq rt (2cd / h
2 x cost of placing order x estimated usage of inv item / cost of holding item
Roles of trasury mgmt in a business
Credit control
Managing cash surpluses + deficits by making short-term investments
Managing day-to-day capital to optimse cash flow (inventory, rec, pay etc)
NOT capital investment appraisal - role of mgmt accounting
Costs of holding inventory
Purchase price (ie cost of inv itself) Holding costs - opportunity cost of cap tied up, insurance, obsolescence, pilferage Re-order costs - delivery etc
