Chapters 3-4

Question 1

what is the net working capital

Answer 1

current assets - current liabilities

Question 2

2 main objectives for working capital managent

Answer 2

increase profits of a business

ensure there is sufficient liquidity to pay short term debts

Question 3

what are the general factors affecting working capital levels

Answer 3

nature of the industry

policies of competitors

seasonal factors

Question 4

what is the aggressive strategy

Answer 4

aims to keep receivables and inventories as low as possible

payables are maximised

Question 5

what is the conservative strategy

Answer 5

allows high levels of inventory and recievables whilst keeping payables

Question 6

downside of aggressive strategy

Answer 6

may create trading problems ie stock outs

Question 7

downside of conservative strategy

Answer 7

compromises liquidity

Question 8

formula for inventory days

Answer 8

finished goods/ cost of sales x 365

Question 9

formula for inventory turnover

Answer 9

cost of sales / average inventory

Question 10

formula for receivables days

Answer 10

receivables / credit sales x 365

Question 11

formula for payables days

Answer 11

payables / credit purchases x 365

Question 12

what is the cash operating cycle

Answer 12

the period of time that elapses between cash being used for production and the collection of cash from a customer

Question 13

how do you work out cash operating cycle

Answer 13

inventory days + receivables days - payable days

Question 14

what is the sales / net working capital ratio

Answer 14

sales rev / ( receivables + inventory - payables)

Question 15

what is overtrading

Answer 15

A situation where a business has inadequate cash to support its level of sales

Question 16

what else can overtrading known as

Answer 16

undercapitalisation

Question 17

symptoms of overtrading

Answer 17

rapid increase of sales rev
rapid increase in TR and Inv
increase in TP and bank overdraft

Question 18

how to deal with overtrading

Answer 18

plan introduction of new long term capital
improve working capital management
reduce business activity

Question 19

what is the economic order quantity

Answer 19

the optimal ordering quantity for an item of inventory which will minimise inventory related costs

Question 20

formula for total holding costs

Answer 20

Ch x Q/2

Question 21

what is Q

Answer 21

the initial order

Question 22

what is Ch

Answer 22

annual cost of holding one unit in inventory

Question 23

what is D

Answer 23

annual demand

Question 24

what is Co

Answer 24

cost of placing an order

Question 25

formula for total ordering costs

Answer 25

Co x D/Q

Question 26

formula for economic order quantity

Answer 26

Q = square root of 2CoD/Ch

Question 27

drawbacks of the EOQ model (4)

Answer 27

assumes no bulk discounts ignores the need to increase order sizes ignores fluctuations of demand ignores benefits of holding more stock

Question 28

3 stages of implementing a new credit strategy

Answer 28

planning monitoring collection

Question 29

what is factoring

Answer 29

an arrangement to have debts collected by a factor company, which advances a proportion of the money it is due to collect

Question 30

what is a debt factor

Answer 30

a debt factor can be used to chase late payments or to have a wider role in managing receivables

Question 31

advantages of debt factor

Answer 31

saves in internal admin costs expertise in credit management will reduce bad debts

Question 32

disadvantages of debt factor

Answer 32

fees charged by a debt factor possible loss of customer goodwill if debt factor is too aggressive

Question 33

what are the 3 problems with managing foreign accounts receivables

Answer 33

harder to do a credit analysis harder to chase for payments - diff languages and time zones to pursue debt you need to know the laws of that country

Question 34

how do you work out if you should extend credit terms

Answer 34

calculate the benefit and the cost then benefit - cost

Question 35

formula for supplier discount as percentage ( non annual )

Answer 35

discount received/ amount paid if discount take x 100

Question 36

formula for supplier discount as percentage ( annual )

Answer 36

(1+R)=(1+r) to the power of n

Question 37

what is R

Answer 37

annual rate

Question 38

what is r

Answer 38

period rate

Question 39

what is n

Answer 39

no of periods in a year

Question 40

what are the three motives for holding cash

Answer 40

transactions motive precautionary motive speculation motive

Question 41

what is the transactions motive

Answer 41

holding cash to pay suppliers

Question 42

what is the precautionary motive

Answer 42

holding cash for unexpected occurrences

Question 43

what is the speculation motive

Answer 43

holding cash to take advantage of attractive investment oppurtunities

Question 44

4 methods of easing cash shortages

Answer 44

delaying non essentials capital expenditure selling assets previously acquired accelerating cash inflows negotiating a reduction in outflows

Question 45

what are treasury bills

Answer 45

short term government IOUs

Question 46

what are term deposits

Answer 46

fixed period deposits

Question 47

what are certificates of deposit

Answer 47

issued by banks, entitle the holder to interest plus principal

Question 48

what are commercial papers

Answer 48

short term IOUs issued by companies, unsecured

Question 49

what are drawbacks of the Baumol model

Answer 49

difficult to predict amounts required unlikely that cash will be used at a constant rate

Question 50

formula for the miller - orr model

Answer 50

3(3/4 x (transaction cost x variance of cash flows)/interest rate) to the power of 1/3

Question 51

drawbacks of the Miller-Orr model

Answer 51

estimates are likely to be based on historic information the model doesnt incorporate seasonality

Question 52

what is the definition of working capital finance

Answer 52

the approach taken to financing the level, and fluctuations in the level, of working capital

Question 53

3 types of assets

Answer 53

long term assets permenant current assets fluctuating current assets

Question 54

4 functions of treasury management

Answer 54

liquidity managament risk management funding corporate finance