Working Capital
What are two considerations with working capital management?
1) Amount 2) How should it be financed
What are the three periods of the Cash Conversion Cycle (CCC)
1) Inventory Conversion 2) Receivables Collection Minus 3) Payables defferal
True or False: High CCC means the company requires less money to operate
False, High CCC means the company requires more money to operate
Payables Deferral period measures..
How many days it take to pay for purchases
Working capital is also known as
Current Assets
How do you calculate net working capital
Current Assets - Current Liabilities
"Stock Outs" are also known as:
Running out of inventory
Maturity matching Policy is also known as _________ and it matches _______ and ______ maturities.
Self-liquidating Approach, Asset and Debt ex. Inventory that sells in 45 days will be financed with a short term 45 day loan
Interest Rate Risk
Short term borrowers are exposed to increases in interest rates
Permanent & Temporary (Seasonal) Net Working Capital is considered under what type of financing policy?
"Short-Term Financing Policy"
What do you divide inventory by to calculate the inventory conversion period?
(COGS/365)
In the Restricted Working Capital Policy, what three things are minimized?
Amount of cash, inventories and receivables are minimized
Payables Deferral period = Payables/(_______/365)
COGS
Receivables collection period Also known as _______, measures how many days it takes to convert ________ to cash
DSO, Accounts Receivables
True or False: Moderate Working Capital Policy is the option to practice either the Relaxed or Restricted working capital policies.
False, Moderate working capital policy is between the above two extremes. Returns and risk between the levels of relaxed and restricted
True or False: To calculate the Receivables collection period, you divide receivables by sales
False, Receivables/(Sales/365)
Conservative Approach
Financing all of a company's fixed assets, Permanent NWC and Temporary NWC with long term capital. SAFEST
Inventory Conversion period measures how many days, it takes to sell _________
Inventory
Net Operating Working Capital (NOWC) =
Inventory + Receivables + Payables
Relaxed working capital policy
Large amounts of cash and inventories, and generous credit policy to customers which results in large amount of accounts receivables
Aggressive Approach Financing long term assets with ____ term capital and part of its permanent net working capital with _____ term debt
Long, Short
Renewal Risk
The potential that a short term loan might not be renewed
Uncertainty results in
Working capital increase Inventory must be increased to match expected sales or delays in receiving new materials. Greater cash must be held to handle unanticipated cash needs.