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.