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20 Cards in this Set
- Front
- Back
Net Working Capital |
NWC = current assets - current liabilities |
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Why is it hard to estimate of benefit of investments in NWC |
1. Not easily measurable 2. Separable returns Firm's operational goal is to minimize NWC, subject to sufficient NWC available to meet firm's operational needs |
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Benefit and cost of holding cash |
Benefit - facilitates transactions Cost - foregone opportunity costs |
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Goals of cash management |
1. Reduce the opportunity cost of holding idle cash 2. ensure that all obligations are paid on time 3. Collect money owed as soon as it becomes due. |
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Four Cs of credit |
1. Character 2. Capacity 3. Capital 4. Condition |
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Tradeoffs of trade credit |
1. Opportunity cost of funds tied up in A/R 2. Reduction in revenue 3. Bad Debt Benefit - impact on sales. |
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Three elements of inventory cost |
1. Ordering cost 2. Carrying (holding cost) 3. Stockout costs |
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Inventory Management - 4 approaches |
1. Economic order quantity (EOQ) 2. ABC Method 3. Materials requirement planning (MRP) 4. Just-in-time (JIT) |
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Economic order quantity (EOQ) |
Determines the optimal order size to minimize total inventory costs (ordering cost + holding cost). Total ordering costs = total holding cost |
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ABC Method |
Inventory group with the highest value receives the greatest level of management and control. |
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Material requirement planning (MRP) |
Materials and other inventory are scheduled to arrive based on when they are needed in the production process. |
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Just-in-time (JIT) |
Similar to MRP. More integration between production and supplier. |
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Explain matching (principles of financing) |
Borrowers should try to match the lives of financial instruments with those of the assets that they want to fund. |
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Sources of short-term financing |
Overdraft Factoring - three services 1. Provision of finance 2. Sales ledger administration 3. Credit insurance |
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Permanent current asset versus Seasonal temporary current asset |
Permanent current asset - asset required at seasonal low level Seasonal temporary current assets - difference between assets required at the season highest level and permanent level. Changes occurs at A/R, inventory, and cash |
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Spontaneous permanent liabilities versus spontaneous seasonal liabilities |
Spontaneous permanent liabilities - current liabilities required at the seasonal low level Spontaneous seasonal liabilities - difference between liabilities required at the season highest level and spontaneous perm liabilities. |
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Extremely conservative approach |
Ensures that all long-term assets are financed through long-term liabilities, as well as seasonal and permanent portions of net working capital. Company will not have any current liabilities other than spontaneous accounts payable, accrued taxes, and accrued liabilities. (scroll) high level of working capital trading off higher borrowing costs for a low liquidity risk. |
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Aggressive approach |
Relying on long-term debt to finance only a portion of the long-term assets and the permanent net working capital. Save interest charge but will increase the liquidity risk`` |
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Moderately conservative approach |
Financing some of the seasonal needs for net working capital with long-term liability and the balance with short-term financing. Liquidity buffer |
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Liquidity buffer |
Portion of NWC financed with long-term debt. Size of the buffer will depending on a company's ability to generate cash from operations. |