working captial management Flashcards
working capital=
difference between a companys current assets and its current liabilities
objectives of working capital management
- minimise risk of running out of cash
- maximise the return on assets
working capital policy
its a function of 2 decisions within an organisation:
-the investment decision
- the finance decision
what is working capital a common measure of?
liquidity, efficiency, overall financial health
businesses have different working capitals because
-holding inventory
-time allowed for customer to pay
- time taken to pay suppliers
inventory control policy should reflect the following 4 criteria:
- keep total costs down
-provide satisafactory service levels to customers - ensure smooth running production systems
- be able to with stand fluctuations in business conditions
2 ways to manage inventory:
1- FIFO-first in first out
2-LIFO-later in first out
eoq=
economic order quantity
point on graph where annual holding cost and annual ordering cost cross over
ANNUAL HOLDING COST=
(quantity to be ordered x holding cost per inventory per annum) / 2
ANNUAL REORDERING COST=
(demand x cost of one order)/ quantity to be ordered
number of orders=
demand/quantity to be ordered
purchasing cost=
demand x price per inventory
total costs=
holding cost+ reordering cost + purchase cost
credit cycle
1- receipt of customer order
2-credit screening and agreement of terms
3-goods dispatched or service provided with delivery notes
4-invoice raised stating credit terms
5-debt collection procedures
6-receipt of cash
cash management involves:
efficiency, profitability, insolvency and liquidity
