Working capital management

Question 1

How does the “march to cash” method work in a company?

Answer 1

The march to cash consists in:

1. Producing a product
   - create the finished goods
2. Selling the product
   - turn inventory into accounts receivable
3. Collecting those sales
   - turn accounts receivable into cash

Question 2

What is working capital management?

Answer 2

Working capital management reffers to managing a firm’s current assets and liabilities as to improve the flow of funds.

Timing of cash flow is more important than amount of cash flow.

Question 3

What is the cash conversion cycle?

Answer 3

The cash conversion cycle measures the amount of time money is tied up in the production and collection processes before it can be converted into cash.

It measures how quickly a company can convert its products/services into cash.

Question 4

What are sub-cycles of the cash conversion cycle (CCC)

Answer 4

1. The production cycle: the time it takes to build and sell a product
2. The collection cycle: the time it takes to collect from customers
3. They payment cycle: the time we take to pay for suppleirs and labor

CCC = Production cycle + Collection cycle - Payment cycle.

Question 5

What is the business operating cycle?

Answer 5

The business operating cycle starts at the time production begins and ends with the collection of cash from the sale of the product.

= production cycle + collection cycle

Question 6

What are the models for inventory management?

Answer 6

1. The ABC inventory management model
2. Redundant inventory
3. The economic order quantity method
4. The just-in-time method

Question 7

How does the ABC inventory management method work?

Answer 7

It divides inventory in 3 categories:

A: Large dollar items, or critical inventory items
B: Moderate dollar items, or essentially inventory items
C: Small-dollar items, or non-essential inventory items

These levels require different levels of monitoring:

A: Daily
B: Periodically
C: ordered when level is 0

Question 8

What are redundant inventory items?

Answer 8

Redundant inventory items are items not used in current opperations but which serve a backup role just in case the current item fails during operations.

Question 9

What is economic order quantity?

EOQ

Answer 9

It evaluates the trade-off between the carrying costs and the ordering costs.

This model assumes that usage or sales rate of an inventory item to be constant. It doesnt work well with sales rates that vary daily, or seasonally.

Question 10

How are the costs of inventory classified?

Answer 10

1. The cost of ordering and delivery of the inventory
2. The cost of storage or carrying the inventory item until it is sold or used in production

Question 11

What does safety stock represent?

Answer 11

Safety stock represents additional inventory kept on hand so that if an inventory order is delayed in arrival, the current inventory is sufficient to cover this delay.

Question 12

What is the just in time method?

JIT

Answer 12

This method looks to minimize invetory carrying costs by:

• Having companies work with both their suppliers and customers to reduce the time items are in inventory as finished goods