Working capital Flashcards
What is the working capital cycle?
- Purchase from supplier
- Manufacture
- Sell to customers
- Receive cash
What is a purchase from suppliers classed as?
Payables
What is manufacturing classed as?
Inventory
What is the sale of goods classed as?
Receivables
What is receiving cash classed as?
Cash
How is the receivables collection period worked out?
Receivables/revenue x 365
How is the payables payment period calculated?
Payables/purchases x 365
How is the inventory turnover period calculated?
Inventory/COS x 365
What is the formula for the inventory turnover ratio?
COS/Inventory
Number of times stock is sold in the year
How is the current ratio calculated?
Current assets/current liabilities
How is the quick/liquidity ratio calculated?
Current assets - inventory/current liabilities
What are the steps to calculate year end cash balance?
- Calculate annual sales revenue
- Calculate COS
- Calculate inventory balance
- Calculate trade payables balance
How can GP margin be used to work out cost of sales?
GP is a % of revenue, COS makes us the remainder
What is the formula for working capital?
Inventories + Receivables - Payables
What 2 actions are appropriate e if the cash budget identified a short-term cash deficit?
- Arrange an overdraft
- Implement better credit control procedures
If an increase in inventory levels is funded by an increase in the bank overdraft, what will be the effect on the quick (liquidity) ratio?
Decrease
When trying to decide on optimal level of current assets, what is the trade off between?
profitability and risk
How can the cash operating cycle be reduced?
- Reducing the credit period extended to receivables
- Extending the period of credit taken from suppliers
- Reducing the production period
What are 2 symptoms of overtrading?
- A lengthening of the cash operating cycle
- A rapid increase in sales
What are 2 inventory holding costs?
- Insurance
- Opportunity cost of capital tied up
What can be expected when inventory is ordered frequently?
Higher ordering costs and lower average inventory
What is the most suitable organisation for a company with lots of inventory?
ABC system
What is the key trade off that lies at the heart of working capital management?
liquidity and profitability
What tasks do the treasury department undertake?
Credit control
Short term investment
