Chapter 15 - Net Working Capital

Five C's of Credit

1. Character 2. Capacity 3. Capital 4. Collateral 5. Conditions

Working Capital

Current assets, which represent the portion of investment that circulates from one form to another in the ordinary conduct of business

Net Working Capital

The difference between the firm's current assets and its current liabilities

Credit Standards

The firm's minimum requirements for extending credit to a customer.

Reorder Point

The point at which to reorder inventory, expressed as days of lead time * daily usage

Operating Cycle

The time from the beginning of the production process to collection of cash from the sale of the finished product.

Marketable Securities

To be truly marketable, a security must have (1) a ready market so as to minimize the amount of time required to convert it into cash and (2) safety of principal, which means that it experiences little or no loss in value over time. The securities that are most commonly held as part of the firm's marketable-securities portfolio are divided into two groups: (1) government issues, which have relatively low yields as a consequence of their low risk; and (2) nongovernment issues, which have slightly higher risk associated with them.

Credit Scoring

A credit selection method commonly used with high volume/small-dollar credit requests; relies on a credit score determined by applying statistically derived weights to a credit applicant's scores on key financial and credit characteristics

Marketable Securities

short-term, interest-earning, money market instruments that can easily be converted into cash.