Finance

Amortized

principal is repaid on each payment date

Working Capital Policy

refers to the firm's policies regarding (1) target levels for each category of current assets, and (2) how current assets will be financed.

Current Asset

resources that will be used for current operation (Short term) or within the current operating cycle

MODERATE INVESTMENT

AN INVESTMENT POLICY THAT IS BETWEEN THE RELAXED AND RESTRICTED POLICIES ( tight, lean and mean)

Quick Ratio or Acid Test Ratio

also attempts to measure liquidity

Payables deferral period

the average length of time between the Purchase of materials and labor and payment of cash for them

LONG TERM CAPITAL

IS USED TO FINANCE ALL PERMANENT ASSETS

Maturity

terms of loan

Maturity, matching or self liquidating approach

A Financing policy that matches the maturities of assets and liabilities. This a moderate policy

CREDIT POLICY

A SET OF RULES THAT FIRMS CREDIT PERIOD , DISCOUNTS, CREDIT STANDARDS AND COLLECTION PROCEDURES OFFERED

Credit Score

A numerical score that indicates the likelihood that a person or business will pay on time

Replenishment of Inventory

A sufficient stock of inventory is required to support the sales target of the firm. An "unserved" portion of demand may mean lost revenues for the firm.

PRIMARY SOURCES OF FUNDS

BANK LOAN , CREDIT FROM SUPPLIERS ( ACCOUNTS PAYABLE), ACCRUED LIABILITIES, LONG TERM DEBT, COMMON EQUITY.

Compensation to banks for providing loans and services

Bank makes money by lending out funds that have been deposited with it, so the larger its deposits, the better the bank's profit position. Bank requires the customer to leave a minimum balance on deposit to help offset the costs of providing the services. Bank may also require borrowers to hold deposits at the bank. These deposits are defined as compensating balances.

CONSERVATIVE APPROACH

INDICATING THAT LONG TERM CAPITAL IS USED TO FINANCE ALL PERMANENT ASSETS AND MEET SOME OF THE SEASONAL NEEDS.

Net working

Capital is defined as current assets minus current liabilities

Transactions

Cash balances are necessary in business operations. Payments must be made in cash, and receipts are deposited in the cash account. Cash balances associated with routine payments and collections are known as transactions balances.

Precaution

Cash inflows and outflows are unpredictable, with the degree of predictability varying among firms and industries. Therefore, firms need to hold some cash in reserve for random, unforeseen fluctuations in inflows and outflows.

Trade credit

Debt arising from credit sales and recorded as an account receivable by seller and as an account payable by the buyer.

Net Operating Working Capital

Defined as non interest bearing current assets mius non interest charging current liabilities.

Support for Credit Sales

For some instances, situations require that credit sales are extended to the firm's clients. This will need sufficient working capital to enable the firm to maintain its operations until receivables are converted into cash.

cash budget

Forecasting of cashflow

cash budget

Forecasting tool table that shows cash receipts disbursements and balances over some period

Quick Ratio or Acid Test Ratio

Found by suctracting inventories from current assets and then dividing by current Liabilities

Accounts receivable

Fund due to customers

safety stock

Inventory that is held to reduce the probability of experiencing a stock out due to demand and/or lead time variability (i.e., running out of stock)

cycle stock

Inventory that is intended to meet expected demand

Current Ratio

Is calculated by dividing current assets by current liabilities

Credit Policy

It affects bad debt losses

Credit Policy

It has major effect on sales

Credit Policy

It influences the amount of funds tied up in receivables

Cash Management

It is necessary to maintain sufficient cash fund for the firm to meet its cash commitments.

CREDIT PERIOD

LENGTH OF TIME BUYERS ARE GIVEN TO PAY FOR THEIR PURCHASES

Working Capital

Refers to that part of the capital of the company which is continually circulating

RELAXED Investment

Relatively large amounts of cash, marketable securities and inventories are carried and a liberal credit policy result in a high level of receivables ( High Levels)

Working Capital

Simply refers to current assets used in operations

Speculation

Some cash balances may be held to enable the firm to take advantage of bargain purchases that might arise; these funds are called speculative balances.

Inventories

Supplies, raw materials, work in process and finished goods

Amount

The amount borrowed is indicated

Target cash balance

The desired cash balance that a firm plans to maintain in order to conduct business

Cash Management

The firm needs cash to pay for expenditures that arise from time to time.

Provision of a Safety Margin

The firm should have sufficient amount of capital to provide for unexpected expenditures, delays in expected inflow of cash, and possible decline in revenues.

Precautionary Balances

These "safety stocks" are called

Provision for Operating Expenses

This caters the expenses necessary to maintain the operations like salaries and wages, advertising, taxes and licenses, insurance premiums, and interest payments. .

Cash Management

This is needed because of the difficulty in synchronizing cash receipts with cash disbursements.

Promissorry note

a document specifying the terms and condition of a loan

Secured loan

a loan backed by collateral , often inventories or account receivable

Marketable securities

are financial instruments that are very liquid and can be quickly converted into cash at a reasonable price.

Current Liabilities

are obligation of the firm that will mature or need payment during the current accounting period

Discount

are price reduction given for early payment

Accruals

continually recurring short term liabilities especially accrued wages and taxes

Permanent current assets

current assets that a firm must carry even trough of its cycles

Temporary current assets

current assets that fluctuate with seasonal or cyclical variations in sales

Collection policy

degree of toughness in enforcing the credit terms

Aggressive approach

finances some of its permanent assets with short term debt.

Spontaneous fund

funds that are not generated spontaneously as the firm expands

Restricted investment

holding of cash , market securities, inventories and receivables RE CONSTRAINED ( in between two extremes)

Collateral

if a loan is secured by equipment , buildings, accounts receivable or inventories

Frequency of interest payment

if the note is on interest-only basis, it will indicate how frequently interest must be paid.

Add on loans

interest charges over the life of the loan are calculated and then added to the face amount of the loan.

Working Capital Management

involves both setting working capital policy and carrying out that policy in day-to-day operations

Working Capital

is a measure of both a company's efficiency and its short term financial health

only interest

is paid during the life of loan .

positive cash balance

is required so that the firm's obligations are settled as they fall due.

basic EOQ model

is used to identify a fixed order size that will minimize the sum of the annual costs of holding inventory and ordering inventory.

Interest rates

it can be fixed or floating

Credit terms

statement of the credit period and any discount offered

Credit standards

the financial strength customers must exhibit to qualify for credits

Discount interest

where interest is paid in advance