Working Capital

Question 1

The capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.

Answer 1

Working Capital

Question 2

What does managing the balance sheet allow you to do?

Answer 2

• improve performance without > sales or < costs
• more efficient converting inputs into cash
• speeds up the “cash conversion cycle”
• more independent from raising money, you have more $$

Question 3

What is the formula for Working Capital ?

Answer 3

Current Assets - Current Liabilities

Question 4

What are all the current assets ?

Answer 4

Cash
Equivalents
Inventory
Accounts Receivable (AR)

Question 5

What are all the current liabilities ?

Answer 5

Accounts Payable
Accrued Expenses
Current Maturities of LT debt

Question 6

The process of how the cash into the company is flowing in and out to create company value

Answer 6

Production Cycle

Question 7

Production Cycle process for making plastic cups. Money comes into the company. What is the flow?

Answer 7

1. Goes OUT to buy RAW materials
2. Raw moves to WIP, Cash for LABOR
3. WIP moves to FGs, Cash for Labor
4. FGs move to Sales
5. Sales become AR

Question 8

What are the Working Capital Accounts that you and your employees can affect on a daily basis?

Answer 8

1. Accounts Receivable
2. Inventory
3. Accounts Payable

Question 9

What are the the 3 levers to Increase Working Capital ?

Answer 9

• DSO (Low)
• Managing Inventory (any)
• DPO (High)

Question 10

What is a DSO ?

Answer 10

Days Sales Outstanding

Question 11

What is the calculation for DSO and what does it tell you?

Answer 11

Ending Accounts Receivable / (Revenue / day)

- If it goes up either the Ending Accounts receivable increased or the revenue decreased

Question 12

What is credit line with a consumer ?

Answer 12

The amount of credit extended to a borrower (line of credit)

Question 13

What is DIT ?

Answer 13

Days Inventory is tied up

Question 14

How do you calculate DIT ?

Answer 14

Average Inventory / (Cost of Goods / Day)

Question 15

What are some causes of inventory increasing?

Answer 15

• more customers
• salesmen promises
• engineers continually tweaking product improvements

Question 16

What does inventory do to your cash? And tell you?

Answer 16

• The more inventory you have the more cash you have because you can sell at lower price you need to
• How long your cash is tied up in inventory

Question 17

What is the key ratio for inventory ?

Answer 17

DII (Days in Inventory)

Question 18

What is DPO?

Answer 18

Days Payable Outstanding

Question 19

How do you calculate DPO?

Answer 19

Ending Accounts Payable / (cost of goods/ day)

Question 20

What is the cash conversion cycle ?

Answer 20

• Another way to understand WC.
• How effectively your company’s activities turn in to cash
• It’s a combination of several ratios
• Track your company over time
• Compare to competitors

Question 21

What is the formula for Cash Conversion Cycle?

Answer 21

DSO + (DII – DPO) = # of day