Working Capital Flashcards
What is working capital?
Receivables + Inventory +/- Cash - Payables
What should management be concerned with?
Liquidity and profitability
How can they improve liquidity?
Hold large cash balances
Offer reduced credit terms
Hold sufficient inventory
Delay payment to suppliers
How can they improve profitability?
Reduce cash balances to invest
Offer extended credit terms
Hold reduced inventory
Pay promptly
What is the average inventory period?
Average inventory/cost of sales x 365
If you have info available use material purchases as denominator
What is the inventory turnover ratio?
Cost of sales/average inventory
What is the average collection period?
Average receivables/sales revenue x 365
If you have info, use credit sales as denominator
What is the average payables period?
Average payables/cost of sales x 365
If you have the info, use purchases as denominator
What is the length of the cycle?
Inventory + avg collection period - avg payable period
What is overtrading?
Sells too much product without capital to cover costs
What is the current ratio?
Current assets/current liabilities
What is the quick ratio?
( Current assets - inventory )/ current liabilities
What are the costs associated with holding inventory?
Holding costs
Ordering costs
Shortage costs
What are the inventory control systems?
Re-order level system
Periodic review
ABC system
Just in time system
Perpetual inventory methods
What are the downsides to trade payables and the advantages of trade credit?
Suppliers may withdraw credit status, delayed payment = increased prices
Convenient, useful, short-term
What is the ideal level of trade receivables?
Trading-off costs of extending credit and benefits of granting credit
What are the steps to reduce the risks of late payment?
Raise invoices on time
Respond to queries promptly
Follow-up on overdue invoices promptly
Put accounts on stop if credit terms exceeded
Regularly review credit terms
How can trade receivables be financed?
Invoice discounting - selling invoices to a discounting company
Receivables factoring - debt factor takes over accounting and collection, credit control and finance against sales
What does trade credit insurance cover?
Insure receivables ledger
Includes first loss
Insured up to a limit
Premium paid varies with above factors
What is involved in good cash management?
Accurate budgeting/forecasting
Planning short-term finance
Planning investment of surpluses
Cost-efficient transmission
What are the sources of short time finance/option for investment?
Receivables factoring, invoice discounting, overdrafts, bank loans, leases
Treasury bills, deposit accounts, gilts, bonds, equities
What are the responses to different cash positions?
Short-term surplus - pay supplier early, increase rec and inventory, invest short term
Short-term deficit - increase payables, reduce rec and inventory, overdraft
Long-term surplus - invest long term, expand, replace NCA, increase dividends
Long-term deficit - raise long-term finance, divestment, sell NCA, controlled shutdown
