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MI > Working capital > Flashcards

Working capital Flashcards

1
Q

What is the working capital cycle?

A
  • Purchase from supplier
  • Manufacture
  • Sell to customers
  • Receive cash
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2
Q

What is a purchase from suppliers classed as?

A

Payables

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3
Q

What is manufacturing classed as?

A

Inventory

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4
Q

What is the sale of goods classed as?

A

Receivables

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5
Q

What is receiving cash classed as?

A

Cash

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6
Q

How is the receivables collection period worked out?

A

Receivables/revenue x 365

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7
Q

How is the payables payment period calculated?

A

Payables/purchases x 365

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8
Q

How is the inventory turnover period calculated?

A

Inventory/COS x 365

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9
Q

What is the formula for the inventory turnover ratio?

A

COS/Inventory

Number of times stock is sold in the year

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10
Q

How is the current ratio calculated?

A

Current assets/current liabilities

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11
Q

How is the quick/liquidity ratio calculated?

A

Current assets - inventory/current liabilities

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12
Q

What are the steps to calculate year end cash balance?

A
  • Calculate annual sales revenue
  • Calculate COS
  • Calculate inventory balance
  • Calculate trade payables balance
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13
Q

How can GP margin be used to work out cost of sales?

A

GP is a % of revenue, COS makes us the remainder

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14
Q

What is the formula for working capital?

A

Inventories + Receivables - Payables

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15
Q

What 2 actions are appropriate e if the cash budget identified a short-term cash deficit?

A
  • Arrange an overdraft
  • Implement better credit control procedures
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16
Q

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?

A

Decrease

17
Q

When trying to decide on optimal level of current assets, what is the trade off between?

A

profitability and risk

18
Q

How can the cash operating cycle be reduced?

A
  • Reducing the credit period extended to receivables
  • Extending the period of credit taken from suppliers
  • Reducing the production period
19
Q

What are 2 symptoms of overtrading?

A
  • A lengthening of the cash operating cycle
  • A rapid increase in sales
20
Q

What are 2 inventory holding costs?

A
  • Insurance
  • Opportunity cost of capital tied up
21
Q

What can be expected when inventory is ordered frequently?

A

Higher ordering costs and lower average inventory

22
Q

What is the most suitable organisation for a company with lots of inventory?

A

ABC system

23
Q

What is the key trade off that lies at the heart of working capital management?

A

liquidity and profitability

24
Q

What tasks do the treasury department undertake?

A

Credit control
Short term investment

MI (10 decks)

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