Working Capital & Current Asset Management and Short-Term Financing

Question 1

What are the financial statement ratios that are applicable to this unit?

Answer 1

Inventory Turnover
- Cost of Sales/inventory

inventory days
- inventory/ (cost of sales/ 365)

Accounts receivable days
- Accounts receivable CB or Average/ (Credit Sales/365)

Accounts payable days
- Accounts Payable CB or average/ (Credit purchases/365)

Working capital turnover
- Sales revenue/ net working capital or working capital

working capital cycle
- Inventory days (all categories) + Debtor’s days

Cash to Cash cycle/ cash conversion cycle
- inventory days (all categories) + debtors days - Creditors Days

Current Ratio
- Current assets/ Current liabilities

acid-test ratio
- (Current assets - inventory)/ current liabilities

Question 2

What current asset management policies are there?

Question 3

How do you calculate the working capital cycle length in days?

Answer 3

• add the inventory days and debtors days together
• inventory days = inventory/ ( cost of Sales / 365)
• debtor days = accounts receivable / (credit sales/ 365)

Question 4

What is the formula to calculate the effect of a change in discount policy?

Answer 4

Change in profit = change in gross profit - (change in cost of carrying accounts receivable + change in cost from bad debts + change in cost of discounts)

• change in gross profit is self explanatory
• change in cost of carrying accounts receivable = opportunity cost % x ( (increase in average collection days x existing sales ) / 365) + ((Total collection days x increase in sales x ( 1 - GP%)) / 365)
• change in cost of bad debts , be careful what they tell you to work this out
• change in the cost of discounts, also pretty self explanatory

Question 5

What is the formula for the economic order quantity?

Answer 5

• EOQ = sqroot((2 x F x S)/ C)
• F = fixed costs of placing and receiving an order
• S = annual sales in units
• C = carrying cost of one unit of inventory for one year

Question 6

What is the difference between factoring and invoice discounting?

Answer 6

• factoring - the company sells the receivables for cash and doesn’t need to manage collecting it anymore
• sometimes a recourse clause is attached, which means if someone doesn’t pay, when need to pay up
• invoice discounting - this is when we will still manage the debt after we have sold it