Chapter 7: Working Capital Management

Front 1

Also referred to as current assets and consists of cash, marketable securities, accounts receivalbe, and inventory.

Back 1

Gross Working Capital

Front 2

The difference between a business's total current assets and its total current liabilities.

Back 2

Net Working Capital

Front 3

Is normally used to pay for small daily items such as postage or minor supplies.

Back 3

Petty Cash

Front 4

Cash consists of these four things...

Back 4

Petty cash, cash on hand, cash in checking, and cash in savings

Front 5

The goal of cash management is...

Back 5

To obtain the highest return possible on cash.

Front 6

Consists of daily sales and a change fund.

Back 6

Cash on Hand

Front 7

May draw interest, but normally are charged for each check that is written against them.

Back 7

Cash in bank, checking (checking accounts)

Front 8

Your business will want to maintain one of these for several reasons: 1) The earn higher interest rates than checking accounts, 2) the small business must set aside employee taxes, sales taxes, and other payments due to governmental agencies, and 3) some funds should be reserved for emergency repairs and services.

Back 8

Cash in bank, savings (savings account

Front 9

The time period between the writing of a check and its subsequent deposit in a bank account.

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Float

Front 10

The time that elapses between payment by check and the check's actually clearing at the bank, removing funds from our checking account.

Back 10

Disbursement Float

Front 11

The amount of time that elapses between when you deposit a debtor's check in your account and the check clears, placing funds in our account.

Back 11

Collections Float

Front 12

A post office box that is opened by an agent of the bank, and checks received there are immediately deposited in our account.

Back 12

Lockbox

Front 13

Accomplished when funds are immediately transferred from one bank account to another via computer.

Back 13

Electronic Funds Transfer (EFT)

Front 14

Those investment vehicles that include money market mutual funds, U.S. Treasury bills, certificates of deposit, government and corporate bonds, and stocks.

Back 14

Marketable Securities

Front 15

The process of selling our accounts receivable to another firm at a discount off of the original sales price; allows us to have credit sales and still obtain immediate cash for all sales.

Back 15

Factoring

Front 16

The three Cs of credit...

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Character, capacity, and collateral

Front 17

Deemed favorable if that customer has paid bills on time in the past and has good credit references from other creditors.

Back 17

Character

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Refers to whether the customer has enough cash flow or disposable income to pay back a loan or pay off a bill.

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Capacity

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The ability to satisfy a debt or pay a creditor by selling assets for cash.

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Collateral

Front 20

The requirements that our business establishes for payment of a loan.

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Credit Terms

Front 21

Accomplished by determining the amounts of accounts receivable, the various lengths of time for which these accounts have been due, and the percentage of accounts that falls within each time frame.

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Aging of accounts receivable

Front 22

The most widely used formula for determining the reorder quantity .

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Economic Order Quantity (EOQ)

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root of (2DS) / IP

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EOQ Formula

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The point at which items are restocked; has three factors: lead time, daily demand, and safety stock.

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Reorder point (ROP)

Front 25

The time that lapses from order placement to order receipt.

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Lead Time

Front 26

The quantity of a product that is used per day.

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Daily demand

Front 27

The quantity of stock held for variations in demand.

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Saftey Stock

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The model used if daily demand can be accurately predicted, vendor delivery reliability is outstanding, and vendors will deliver on an hourly or daily basis.

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Just in Time (JIT)

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The four basic categories of inventory...

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Raw materials, work-in-process, finished goods, and maintenance, repair, and operating (MRO)

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Items that a company uses in producing its final product.

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Raw Materials

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Consist of those items that are in the midst of being transformed into finished products.

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Work-in-process

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Those itmes that are actually sold by the business.

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Finished goods

Front 33

Itmes that are used by the firm in normal operations, but not sold by the firm.

Back 33

Maintanence, repair, and operating (MRO)

Front 34

Type of inventory analysis in which products are given importance based on their sales, relative to their percentage of inventory.

Back 34

ABC Analysis

Front 35

Business obligations that will be paid within the current accounting period.

Back 35

Short-term debt

Front 36

Obligations of a firm that are accumulated during the normal course of business and are primarily payroll taxes and benfits, property taxes, and sales taxes.

Back 36

Accrued Liabilities

Front 37

Consist of income, Social Security, Medicare, and unemployment taxes.

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Federal employment taxes

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Income, unemployment, and workmen's compensation taxes.

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State employment taxes

Front 39

Amounts deducted from list prices of items when specific services are performed by the trade customer.

Back 39

Trade Discounts

Front 40

Offered to credit customers to entice them to pay promptly.

Back 40

Cash discounts

Front 41

Offered by vendors to increase their own cash flow when the offer discounts to customers who purchase items in large quantities.

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Quantity discounts

Front 42

Offered on total purchases of an item during the vedor's fiscal year.

Back 42

Cumulative discounts