E-Finance CH5

Question 1

What is working capital management

Answer 1

Simutaneous management of CA and CL

Question 2

What is cash management

Answer 2

Management of cash collection and distribution

Question 3

Basic principles of cash management

Answer 3

1. Accelerating cash inflows
2. Delaying cash outflow
3. Matching the timing and amount of cash inflows and outflows

Question 4

How to accelerate cash inflow

Answer 4

1. Shorten collection float
   - set up payment collection centre in cities where time for delivery can be reduced
   - shorten clearing time for cheques receieved by depositing before the bank’s cut off time
2. Encourage payment in cash
   - issue membership cards which allows customers to get points in exchange with other benefits
   - provide express checkout counters for cash payment

Question 5

Ways to delay cash outflow

Answer 5

1. set up distribution centres in remote areas
2. Pay on friday so cheques can’t be deposited and cleared over the weekend
3. Pay at the end of credit period

Question 6

Ways to match the timing and amount of cash inflow and outflow

Answer 6

Forecast future outlfow by budgeting

Question 7

What is account receivable policy

Answer 7

Concern on how account receivable is formulated

Question 8

What are the different account receivable policies aka the credit policy

Answer 8

1. Credit standards
2. Credit terms
3. Collection policy

Question 9

What is credit standards and the major factors (bank) considers before granting credit

Answer 9

the minimun level of creditworthiness in order to obtain the credit

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

Question 10

What is credit terms

Answer 10

repayment conditions for purchasing goods on credit
e.g credit period, cash discount, cash discount period

Question 11

What is collection policy and it’s actions

Answer 11

Actions for collecting overdue account receivables before bad debt
can:
- send friendly reminders
- send warning letters
- visit customers office
- employ collection agency
- take legal actions

Question 12

What are the factors affecting formation of account receivable policy

Answer 12

Sales, profitability and liquidity

Question 13

What are the effects of granting trade credit

Answer 13

Increase sales
- more attractive for those who can’t afford
Decrease profitability
- may not be able to collect
Decrease in liquidity
- don’t receive cash immediately

Question 14

What are the effects of lowering the credit standards

Answer 14

Increase sales
- moe attractive
Uncertain profitability
- expected bad debts
- sales increase but loss from bad debts and opportunity cost of investment in account receivable increases
Decrease liquidity
- customers with lower credit worthiness can also obtain credit

Question 15

Effect when credit period is longer

Answer 15

Increase sales
Decrease liquidity
- more will pay later
Uncertain profitability
-taking longer time to pay can mean that they are financially unstable so there is a chance of creating bad debt
- Increase sales but loss from bad debt can neutralize

Question 16

Effect of high cash discount

Answer 16

Increase sales
Increase liquidity
Uncertain profitability

Question 17

What is account receivable management

Answer 17

Governs the procedures for making credit purchase and repaying decisions on whether to repay early and take cash discount or give up cash discount to have more cash in hand

Question 18

Factors affecting formulation of accounts payable policy

Answer 18

Borrowing rate and cash discount

if borrowing rate > annual rate of cash discount, dont taake the discount
if vise versa, take.

Question 19

What is inventory management

Answer 19

Management of raw materials, work in progress and finished goods

Question 20

What is the economic order quantity

Answer 20

aim to find optimal order quantity that minimizes inventory cost

Question 21

What are the two types of inventory cost

Answer 21

1. Ordering cost
2. Carrying cost

Question 22

Formula of total ordering cost

Answer 22

fixed cost/ ordering cost x ( annual demand for goods)/ ( quantity)

Question 23

Formula of carrying cost

Answer 23

carrying cost x (order quantity/ 2)

Question 24

Formula of EOQ*

Answer 24

SQUARE ROOT 2x annual demand x fixed cost/ carrying cost

Question 25

Formula for re-order level

Answer 25

(daily usage x no. of days to deliver) + safety stocks