Working Capital management Flashcards
What are current liabilities
Debts to be payed in less than one year
What is net working capital
Cash + current assets - current liabilities
increasing non current liabilities and equity while decreasing non current assets as well as current assets - liabilities will increase the amount of cash in the firm
True
What is the inventory duration period
The time from a good is ordered by the firm to that it is sold
Name some flexible short term financial policies
Keeping large reserves of cash and marketable securities, making large investments in inventory and granting liberal credit terms which results in a lot of accounts recivables. The oposit of this is to have restrictive short term fiancial policies
What are carrying costs
Costs that rise with investment into current assets f.ex opertunity cost of having account recivables instead of cash and the warehousing cost of housing inventory
What are shortage costs
Costs that decrease with investment into current assets
Large firms with limited growth opertunities, low risk investments and great access to credit tend to hold less liquid assets
True
Small firms with large growth opurtunities and high risk invesmtnets and that lack access to credit tend to have more liquid assets
True
Name the two general kinds of shortage costs
Trading or order costs f.ex brokarage costs of getting more cash or inventory and costs related to safety reserves f.ex disrupted schedules, lost customer goodwill and lost sales
What determines the financial policy of a firm
Where shotage costs + carrying costs are the lowest. As shortage costs decrease carrying costs increase so there is an optimum points where the sum is as low as possible
What is the difference between non comited and comited lines of credit
non comitted lines of credit are agreements between a firm and a bank to let the firm borrow up to an amount at standard interest without paperwork. Commited lines are a formal arangement which require a fee and often also compensation balances aka cash in a bank account.
How does compensation balances work
A firm keeps money in a bank account with zero interest but recives the money they would have recived as intest as a line of credit instead.
What are secured loans
When the bank requires security for a loan f.ex lien on accounts recivables or inventory in the case that a firm fails to pay inters.
Treasury bills, certificates of deposits and repurchase agreements are cash equivalents
True
The decision to allow purchase on credit and at what time is verry similar regardless of industries
False, retail often has very short account revivavles an example is 5 days while mining firms can have as long as 65 day recivables.
Why do firms hold cash
As compensating balances for credit, to make up the difference between unsyncronized cash inflows (collections) and cash outflows (disbursments).
What information must be known to determine the optimal cash balance policy according to the baumol model
The fixed cost of selling securities to replenish cash, the total amount of new cash needed over the planing period and the opertunity cost for holding cash which is the interest rate on marketable securities.
How is the short term opertunity cost calculated in the baumol model
Average cash balance times the interest rate
What are the three limitations of the baumol model
it assumes a constant disbursment rate, It assumes no cash reciepts durring the period and it does not count safety stock buffers which are often present in acutal firms.
What 4 things must management do to use the Miller Orr model to determine the optimal cash position
Set a minimum cash limit, Estimate the standard deviation of daily cash inflows, determine the interest rate and estimate the trading costs of buying/selling marketable securities
According to the Miller Orr model firms that have more uncertainty in their cashflows should have greater cash reserves
True
Borrowing tends to be more expensive than selling marketable securities
Yes because the interest rate tends to be higher
Why do firms leave cash in bank accounts instead of moving it to marketable securities
As a compensating balance with banks and becouse the cost of micromanaging is higher than the gain from keeping current assets in more lucurative forms
What is collection float
A bank check that is recognized as cash but does not apear in the account imediately. Dispersion float is the oposite
What is net float
disbursment folat + collection float
What are the three parts of collection float
Mail float (when checks are trapped in the postal system), In house processing float (the time it takes for the reciver to deposit the check in a bank for collection) and availability float (the time it takes for the bank to use the clearing system to transfer the payment)
What are lock boxes
A way to speed up the cash collection process, basically a speedyer mail box operated by banks popular in the US
What is concentration banking
A way to speed up the cash collection process basically have an office near the customers handle the payments to reduce the time checks spend in the mail and the clearing system if it is the same bank as the customers use.
What is wire transfer
The fastest way to speed up the cash collection time, basically electronic payment, the most popular is the SWIFT system
Give an example of how you can delay payments
By writing checks through a geografically distant bank
What is zero balance accounting
To have a payment account wicith is to have zero content, when you use it to pay it becomes negative and you have to transfer money to it from a master account in the same bank. I did not realy understand why but by the context it may be a way to slow down payments with useless bloat.
What is the diference between drafts and cheques
The draft is a commitment to make a payment while a cheque is an order to the bank to make the payment. Drafts involves more burocracy and slows down the payment.
Can uncollected funds be used to make investments
Yes but banks usually charge a fee for that but sometimes they dont have good enough accounting and controle fearures for that.
What makes a security marketable
It can be sold in large quantities without changing the market price and it can be sold quickly.
What does it mean if the terms of trade are 2/10 net 30
That from the invoicing the customer has 30 days to pay but if they pay withing 10 days they get a 2% cash discount
What are credit instruments
Some proof of the grant of credit such as an IOU signed upon delivery, a draft sent before goods are delivered or a bankers acceptance to transfer from the customers account.
What may motivate a firm to grant credit
if it has a cost advantage over other lenders, if it can engage in price discrimination, if it can obtain favorable tax treatments, if they have no established reputation for quality, if they want a long term relatinship and if products are differentiated
How can you assess a firms credit worthyness
Through banks credit score, therough their financial statements, credit reports and your history with them
What is a factor
A financial institution that takes on the risk of credit for a fee.
What is a captive finance company
A subsidiary used as colateral
