Working Capital

Question 1

What is the ratio wc

Answer 1

Current assets - current liabilities

Question 2

What do we exclude from wc

Answer 2

Exclude debt and cash

Current liabilities minus short term debt

Current asset minus cash

We adjust to show wc independent of capital structure

Question 3

Main components of wc

Answer 3

Ar
Ap
Inventory

Question 4

Impact of increasing inventory

Answer 4

Potential that old inventory cannot be sold more cash needs to be invested

Question 5

Risk to reduce inventory

Answer 5

Reduced risk of obsolescence, potential for missed sales, supply chain risk

Question 6

The goal is to minimize wc how?

Answer 6

Minimize account receivable

Minimize inventory

Maximize account payable

Minimize working capital

Question 7

Why do we minimize wc

Answer 7

Being more efficient with cash

When it is tied in current asset it is not available to pay down debt or distribution

-lower wc = improves roa and roe

-lower wc = minimize debt

Question 8

Negative wc problème?

Answer 8

Can occur if company cash flow cycle naturally generates negative wc

Can be risky operational strategy if inventory too low you have nothing to sell

Question 9

What is the cash conversion cycle

Answer 9

Days in inventory + days in ar + days in ap

Question 10

How do we get the purchase amount

Answer 10

Cogs + capex + cash operating expense