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Flashcards in Working Capital Management Deck (14):

Working Capital

Current Assets - Current Liabilities

Objective is to meet on-going operating and financial needs; not to over invest in working capital which provides low returns or increases cost; EXCESS AR NO INTEREST, STORAGE COST OBSOLETE INVENTORY


Cash Management

Since cash provides little or no return, firms seek to maintain a mining balance; holding too much cash will result in loss of return to firm


Cash budgets

Basis or terming a firm's cash needs is cash budget. If projected cash balance is higher than needed amount, management can plan to make investments or pay existing debt; if shortage projected management can reduce cash requirements, make plans to borrow.

Firms will seek to accelerate cash inflows and defer cash outflows


Accelerating and Controlling Cash Inflows

Time between establishing a claim to cash and hen cash is available to reinvest should be as short as possible.

Time from when customer initiates payment until cash is available for receiving firm is called FLOAT


Lock-box system

Firm leases post office boxes in areas where has high volume of payments through mail. Firms bank collects payments from lock-boxes and processes an deposits to firm accounts. May reduce float from 7+ to 2-3 days


Preauthorized checks

Cash collected through checks that are authorized in advance


Preuauthorized debit/credit

Under a preauthorized debit or credit charge arrangement, cash is collected by a charge to a debit or credit card that has been authorized in advance. While the process is similar to the use of preauthorized checks, a bank is not a party to the authorization agreement


Remote deposits

"Check 21" process checks received without sending physical paper checks to bank. With remote deposit, entity receiving a check uses special scanner to digital image of check (check truncation) and sends image to bank


Concentration banking

Flow achieved by having customers remit payment and company units making deposits to banks close to their locations. Funds collected in multiple local bank accounts transferred regularly to firm''s account in primary bank


Depository transfer checks/official bank checks

Used to transfer funds between firm's accounts. Unsigned, non-negotiatble, and payable to an account of the firm. Using depository transfer checks is an efficient way of transferring funds between a firm's banks


Wire transfers

Electronic means of transferring funds between banks. Wire transfer can be used only for large transfers


Deferring and Controlling Cash Outflows

Deferring and controlling cash outflows it to make cash available to firm for longer period and to control cash disbursements

Managing the purchases/payment process

Remote disbursing - Increase float on checks used to pay obligations. Accomplished by establishing checking accounts in remote locations and paying bills with checks drawn on those accounts

Zero balance accounts - Agreement with bank; overdraft transfers
a. Near elimination of excess cash balances in those accounts
b. Very little administration required, e.g. monitoring and reconciling accounts
c. Possible increase in payment float through use of zero balance accounts in remote banks

Draft - Check-like instruments, distinguished from checks in 2 ways:

1) Payment through draft = legal order-to-pay document. Payment through draft contains words "payable through" follows by name of bank through which payment is to be made. Must present draft to issuer for approval

2) Guaranteed drafts - is drawn on payable from an account of a bank or other entity rather than being drawn on an account of the writer (case with regular check). Guaranteed by bank or other entity on which it is drawn


Common forms of guaranteed drafts

1) Bank draft - Order to pay drawn by a bank in itself or on a correspondent bank with which using bank has an account. Drafts are used by banks dealing with other banks and are sold by banks to customers When purchased, the customer pays the bank the amount of the draft (plus a fee) and the bank issues the customer a draft (check) drawn on itself or its account with another bank. Thus, the customer has a check that is guaranteed to be paid when presented

Cashier's check- order to pay drawn by a bank's cashier on an account. Functions same way as bank draft except only drawn on the bank that ISSUES THE CHECK and only INDIVIDUAL BAIS

Certified check - when a bank certifies a check it immediately withholds the amount of the check for the writer's account and becomes bank's obligation to pay

Money order - AN order to pay a sum of money sold by a non-bank. Limited dollar value (same as cashier's check)


Benefits/Negatives of guaranteed drafts

Benefits of guaranteed drafts include --
i. Provides assurance to the payee that the instrument will be honored for its stated value.
ii. Except for certified checks, drafts do not disclose bank/checking account information to the recipient and, in fact, do not require a checking account.
iii. Automation of bank drafts facilitates the payment of recurring obligations of a fixed amount.
Disadvantage of guaranteed drafts -- The primary disadvantage of guaranteed drafts is that they typically involve a fee that may make their use relatively expensive compared to payment by check.

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