M5 Working Capital Management: Part 2

Question 1

what effect would a lockbox provide for receivable management?

Answer 1

MINIMIZED collection float (expedites cash inflows)

Question 2

Methods to converting AR to cash? (4)

Answer 2

1. Collection agencies
2. Factoring AR - selling AR to a factor for cash
3. cash discounts
4. electronic funds transfers

Question 3

What causes the average collection period to decrease due to a change in credit policy?

Answer 3

1. Increase in sales
2. Increase in discounts taken
3. Decrease in the amount of bad debt
4. Decrease in investment in AR

Question 4

How to calculate the float amount?

Answer 4

Difference between the balance of checks outstanding which have not cleared the bank and deposits made but which have not yet cleared the bank

$x per days but not cleared * #days
LESS $x per day checks received but not cleared *#days

Question 5

Lockbox analysis - formula to see if worth it

Answer 5

Lockbox cost

If investment income < cost, LOSS

Investment income =
(# days saved/total 360) * sales * market interest rate

Question 6

Set up factoring problem/solution

See B2-43

Answer 6

AR * Fee *days in yr/days in per
a. AR submitted (given)
b. Amount withheld (100-% advanced)*AR 
Amounts subj to int (a-b) * %/12 each month *360/30
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
                                                                   =Cost to co.
LESS expenses saved
-----------------
Net Cost

*Net cost / avg amount investment (amount sub to interest) = annual cost of financing PERCENT (cost of factoring)

Question 7

How to calculate the cost of carrying the AR?

Answer 7

Sales * variable cost * return rate * (#days in per/#days in year)

Question 8

How to calculate the average gross receivable balance?

Answer 8

avg daily sales * avg collection period

Question 9

Method to speed collections that expedite cash inflows by having a bank receive payments from a company’s customers directly via mailboxes to which the bank has access

Answer 9

lockbox systems

Question 10

characterized by the designation of a single bank as a central depository

Answer 10

concentration banking

Advantages - improved controls over inflows and outflows of cash, reduce idle balances, improved effectiveness for investments

Question 11

used by creditors in lending agreements to protect their interests by limiting or prohibiting the actions of debtors that might negatively affect the positions of the creditors

Answer 11

debt covenants (may be positive or negative)