Working Capital Metrics Flashcards
What involves managing cash so that a company an meet its short-term obligations and include all aspects of the administration of current assets and current liabilities?
Working Capital Management
What is the “goal” of working capital management?
Maximizing shareholder wealth
How to calculate the Net Working Capital:
Current assets - current liabilities
When Working Capital increases, what happens to risk, ROA and cash?
Risk decreases, ROA decreases and cash increases
When Working Capital decreases, what happens to risk, ROA, and cash?
Risk increases, ROA increases, and cash decreases
What does the Current Ratio show?
A firms ability to generate cash to meet its short-term obligations
What is the formula to calculate current ratio?
Current assets / Current liabilities
A decline in the current ratio means what?
Implies a reduced ability to generate cash and causes risk to increase
An increase in current ratio means what?
Implies and increased ability to payoff current liabilities and causes risk to go down
Do you want the current ratio to be higher or lower?
Higher
Do you want the quick ratio to be higher or lower?
Higher
Formula for calculating the quick ratio:
(Current assets - inventory - prepaid) / Current liabilities
The quick ratio is usually larger or smaller than the current ratio?
Smalled
The cash conversion cycle should be greater or lesser than the industry standard?
Less than
What is the cycle or the number of days it takes to generate cash from a core business?
The cash conversion cycle
What is the formula to calculate the cash conversion cycle?
days to sell + # days to collect - # days to pay
Inventory turnover ratio measures what?
The effectiveness of an entity’s inventory management
Formula for inventory turnover:
Cost of goods sold / average inventory
Formula for days in inventory:
Ending inventory / (cost of goods sold / 365)
Having a lax credit policy would cause what two things?
To sell fast
To collect slower
Having a strict credit policy would cause what two things?
To sell slower
To collect faster
If inventory turnover is too high, that could mean what?
That management has an issue of not stocking enough inventory to meet demand levels
Accounts receivable turnover formula is:
Net sales / Net average accounts receivable
Should the accounts receivable turnover ratio be greater than or less than the industry standard?
Greater than
Formula for days sales in accounts receivable:
Ending net accounts receivable / (net sales / 365)
Should days sales in accounts receivable be greater than or less than the industry standard?
Less than
Formula for accounts payable turnover:
Cost of goods sold / average accounts payable
Formula for days of payables outstanding:
Ending accounts payable / (cost of goods sold / 365)
Should the accounts payable turnover be greater than or less than the industry average?
Less than
Should the days of payables outstanding be greater than or less than the industry average?
Greater than
Working capital turnover should be greater than or less than the industry standard?
Greater than
Formula for calculating working capital turnover:
Sales / (((beginning period CA - CL) + (ending period CA - CL)) / 2)
Working capital turnover is the measure of:
How effective a company is at generating sales based on funds used in operations
A high working capital turnover means:
Company is doing well at conversions its working capital into sales
