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 Advantages: 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 Unsecured 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.
What is Economic Order Quantity?
The order quantity that minimizes inventory costs. EOQ : Square Root of (2DO/C) D : Unit Demand (Annual) O : Order Cost C : Cost of Inventory
What is Carrying Cost?
The cost of keeping inventory.
What is Order Cost?
Cost of executing an order and starting product production.
What is inventory reorder point?
How low inventory should get before it should be re-ordered. IOP : Average Daily Demand x Average Lead Time
What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it's needed JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
What is Factoring of receivables?
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
What is a Trade Discount?
Buyer saves if paid early Example: 1/10 Net 30 1% Discount if paid within 10 days If not- bill is still due in 30 days
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
What is the Prime Rate?
A benchmark used for lending only to the best customers Most customers will be charged Prime + 3%- for example If the lending institution and the customer are not in the same country- the LIBOR rate is often used
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
How is Current Yield calculated?
CY : Interest Payment / Bond Price
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
What are the characteristics of a Junk Bond?
High interest rate High default risk