Financial Management Flashcards
(24 cards)
What are the five functions of financial management?
- Financing function
- Capital budgeting function
- Financial management function
- Corporate governance function
- Risk management function
What is working capital?
WC = CA - CL. Measures how solvent the company is.
What is current ratio?
CA/CL
What is quick ratio?
QA/CL
What is quick assets?
Cash, A/R, Marketable Securities
What are the key elements in managing working capital?
Managing inventories and receivables
What is the cash conversion cycle?
2-4. CCC = ICP+RCP-PDP. Measures the number of days from when a business pays for its inputs to when the business collects cash from sales.
Why would a business want to shorten their cash conversion cycle?
Improves profitability b/c larger CCCs require more financing.
What is 1-4?
- Receive inputs from suppliers
- Pay suppliers
- Sell finished goods on credit
- Collect receivables
What is the inventory conversion period, ICP?
1-3. Average number of days to convert inventory into sales.
Avg. inv/COGS per day or sales per day
What is the accounts receivable conversion period, RCP?
3-4. Average number of days to collect A/R.
Avg. A/R / Avg. credit sales per day
What is the accounts payable deferral period?
1-2. Average number of days between buying inventory and paying for that inventory.
Avg. A/P / Purchases per day or COGS/365
What are reasons for keeping cash balances?
Operations, compensating balances, trade discounts, speculative balances, precautionary balances.
What is commercial paper?
Promissory notes issued by corporations with lives up to 9 months.
What is seasonal dating?
A procedure for inducing customers to buy early by not requiring payment until the selling season begins.
What are the 4 key elements of credit policy?
- Credit period
- Discounts
- Credit criteria
- Collection policies
What is the difference between factoring w/recourse and factoring w/out recourse?
Factoring w/recourse is a contingent liability. Factoring w/out recourse is an outright sale, they bear the risk of loss.
What is A/R turnover?
Net credit sales/avg. A/R
What is number of days of sales in avg. A/R?
360/AR turnover
What is the reorder point?
avg. daily demand X avg. lead time = reorder point
What is safety stock?
The difference between maximum lead time and normal lead time.
What is EOQ?
(2AP)/S
What is inventory turnover ratio?
COGS/avg. inventory
What is number of days of supply in average inventory?
360/inventory turnover
