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Flashcards in Financial Management 1 Deck (16):

What is the primary focus of working capital management?

Managing inventory & receivables (current assets & liabilities)


How is Net Working Capital calculated?

NWC : Current Assets - Current Liabilities


What are the characteristics of effective Working Capital Management?

Shorten the cash conversion cycle

Don't negatively impact operations


What is the Inventory Conversion Period?

Average time needed to convert materials into finished goods and sell them

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day


What is the Receivables Collection Period?

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day


What is the Payables Deferral Period?

Average time between materials and labor purchase and their A/P payment

Average Payables : (BP + EP) / 2

Payables Deferral Period : Average Payables / (COGS/365)


What is the Cash Conversion Cycle?

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)

Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle

(Inventory Really (-Pays) Cash)


What traits should Cash and Short-Term Investments have?




For what are Letters of Credit used?

Used for importing goods.

Issued by importer's bank.


What is the advantage of using Trade Credit?

No interest cost if paid timely.


What is a Lockbox System? What are the advantages?

Customer Payments are sent to a bank-managed PO box.

Employees don't have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don't- lockbox is not beneficial)


What is float?

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts


What are Zero Balance Accounts?

Regional bank sends enough cash to cover daily checks

Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances


What is the difference between Treasury Bills- Notes and Bonds?

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money


What is commercial paper?

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity


Issued by large firms


What are the advantages and disadvantages of Commercial Paper?

Advantages: Financing at less than Prime. No compensating balances required.

Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren't lending.