Flashcards in Financial Management Deck (24):
What are the five functions of financial management?
1. Financing function
2. Capital budgeting function
3. Financial management function
4. Corporate governance function
5. Risk management function
What is working capital?
WC = CA - CL. Measures how solvent the company is.
What is current ratio?
What is quick ratio?
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?
1. Receive inputs from suppliers
2. Pay suppliers
3. Sell finished goods on credit
4. 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?
1. Credit period
3. Credit criteria
4. 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?
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?
What is inventory turnover ratio?