Chapter 14|definitions

committed line of credit

a contractual agreement between bank and a firm under which the bank has a legal obligation to lend funds to the firm up to a preset limit

uncommitted line of credit

a non-binding agreement between a bank and a firm under which the firm can borrow an amount of money up to an agreed-on limit.

factor

an individual or financial institution, such as bank or a business finance company, that buys accounts receivable without recourse

compensating balances

bank balances that firms must maintain to at least partially compensate banks for loans or services rendered

Current assets

cash and other assets that the firm expects to convert into cash in a year or less

shortage cost

cost incurred because of lost production and sales or illiquidity

consumer credit

credit extended by a business to consumers

trade credit

credit extended by one business to another

Flexible current asset investment strategy

current assets investment strategy that involves keeping high balances of current assets on hand

restrictive current asset investment strategy

current assets investment strategy that involves keeping the level of current assets at a minimum

maturity matching strategy

financing strategy that matches the maturities of liabilities and assets

long term funding strategy

financing strategy that relies on long tern debt and equity to finance both fixed assets and working capital

short term funding strategy

financing strategy that relies on short term debt to finance all seasonal working capital and a portion of permanent working capital and fixed assets

working capital efficiency

how efficiently the working capital is used and measured by cash conversion cycle

working capital (gross working capital)

include the funds invested in company's cash and marketable security accounts, account receivable,inventories and other current assets (current asses)

working capital management

management of current assets and their financing

(NWC)net working capital

measure of a firm's liquidity: current assets-current liabilities

current liabilities (short term liabilities)

obligations that the firms expects to repay in a year or less

economic order quantity

order quantity that minimizes the total cost incurred to order and hold inventories

aging schedule

organizes the firm's account receivables by their age

commercial paper

short term debt in the form of promissory notes issued by large, financially secure firms with high credit ratings

liquidity

the ability of a company to convert assets - real or financial - into cash quickly without suffering any loss

operating cycle

the average time between receipt of raw materials and receipt of cash for the sale of finished goods made from those materials.

cash conversion cycle

the length of time from the point at which a company pays for raw materials until the point at which it receives cash from the sale of finished goods made form those materials.

permanent working capital

the minimum level of working capital that a firm will always have on its books.

collection time (float)

the time between when a customer makes a payment and the cash becomes available to the firm