Working Capital Flashcards
Production cycle
the time needed to convert raw materials into finished goods. The longer the duration of this cycle, the higher the level of working capital that would be expected to be devoted to the process.
What is float?
the length of time between the writing of a check and the actual transfer of the funds
What is disbursement float
The time between the writing of a check by a firm and the removal of the funds from the firms account. Efficient firms will seek to increase disbursement float
What is receipt float?
The time between the writing of a check by a customer and when those funds become available to the party to which the check was made. Efficient firms seek to decrease receipt float
Cash conversion cycle
the time between paying cash for raw materials and collecting cash from the sale of products made with those raw materials
Remote disbursing
involves paying bills with checks drawn on accounts with banks in remote locations. Used to increase payment float
Concentration banking
Funds collected in multiple local banks are transferred regualrly and automatically to the firms primary bank. Used to accelerate the flow of cash to a firms principal bank. can be used to facilitate the investment of excess cash
Depository transfer checks
used to accelerate transfer of a firms cash between its accounts at different financial institutions
Draft payment
Legal instrument called a draft that is drawn on an account of a bank and is guaranteed by the bank. Ex. bank drafts, money orders, certified checks.
Lock box systems
Customers remit payments to a firms post office box where they are collected and then processed and deposited by a firms bank. May reduce float by several days.
In selecting short term investments for excess cash, a firm should be concerned with….
Safety of principal
Price stability of the investment instrument
Marketability (Ability to readily convert the investment to cash without undue cost)
What type of investment security is expected to have the highest yield
Corporate bonds - bc they are more risky than US treasury bills and federal agency securities, and since the interest they pay is taxable, they would be expected to have the highest yield
Sharpe ratio
Risk/reward ratio.
the mean return/standard deviation. The higher the ratio, the greater the reward per unit of risk.
Liquidity risk
the risk assoc with the ability to sell an investment in a short period of time without having to make significant price concessions
Treasury Bills
debt obligations of the US gov.
Maturity of one year or less.
Backed by the full faith and credit of the US gov.
Considered the safest securities available to the us investor.
Highest desirable form of temp investment
Commercial paper
form of unsecured, short term promissory note. can only be issued by large firms with high credit ratings
Bankers’ acceptances
drafts that are frequently used in financing of foreign transactions
Repurchase agreement
provides for the seller to repurchase the instrument with no loss in value, for as short a period as one day
What is the overall objective of accounts receivable management
to maximize profits, not to minimize losses.
What type of inventory management approaches seeks to minimize total inventory costs by considering both the restocking cost and the carrying costs?
Economic order quantity - seeks to determine the order size that will minimize total inventory cost (both order cost and carrying costs)
Activity based costing
is a system of costing that assigns cost to activities performed in the org and then to products according to their use of the various activities
Economic order quantity formula
the absolute value of ((2 x annual demand x cost per order) / carrying cost per unit)
Materials requirement planning
approach to manufacturing and inventory mgmt focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as WIP and raw materials
What factors are included in deciding when to reorder inventory?
function of the minimum level of inv to be maintained (referred to as safety stock) and the length of time it takes to receive inv after it is ordered (lead time or delivery-time stock) Reorder point = safety stock + delivery-time stock
Hedging principle of financing
short term liabilities should be used to finance short term assets
