Treasury Management

Final Exam

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Treasury Management Reviewer

Chapter 5: Working Capital Management

Definition & Purpose

Front: What is Working Capital Management?

Back: A strategic process to manage current assets and current liabilities.

Front: What is the purpose of Working Capital Management?

Back: Ensures sufficient liquidity to meet short-term obligations, fund day-to-day operations, and maintain smooth business continuity.

Core Components: Current Assets

Front: What are the most liquid current assets?

Back: Cash & Cash Equivalents.

Front: What do Cash & Cash Equivalents include?

Back: Money market accounts, Treasury bills (T-bills), Certificates of deposit (CDs), and Commercial paper.

Front: What is Accounts Receivable (AR)?

Back: Money owed by customers.

Front: What are the sub-components of Accounts Receivable?

Back: Open invoices, outstanding credit, and accrued interest.

Front: How is Inventory classified?

Back: Raw materials, Work-in-progress, Finished goods.

Front: What are common inventory storage methods?

Back: FIFO (First-In, First-Out) and LIFO (Last-In, First-Out).

Core Components: Current Liabilities

Front: What are Accounts Payable (AP)?

Back: Short-term obligations such as supplier invoices, unpaid dividends, tax payments, and short-term debt.

Key Management Processes: Cash Management

Front: What is the objective of Cash Management?

Back: Optimize liquidity while minimizing idle cash.

Front: Name some techniques used in Cash Management.

Back: Cash flow forecasting, short-term investing (T-bills, money markets), and bank relationship management.

Key Management Processes: Credit Management

Front: Describe a "Loose" Credit Policy.

Back: High risk level, low interest rates, high flexibility.

Front: Describe a "Tight" Credit Policy.

Back: Low risk level, high interest rates, low flexibility.

Front: Name some Credit Controls.

Back: Creditworthiness screening, dynamic payment terms, third-party financing, collateral requirements, secured transactions, credit insurance, and periodic credit re-evaluation.

Key Management Processes: Inventory Management

Front: Describe the Just-In-Time (JIT) inventory method.

Back: Minimal inventory; order as needed. Pros: Reduces holding costs. Cons: Vulnerable to supply shocks.

Front: Describe Material Requirements Planning (MRP).

Back: Forecast-driven inventory planning. Pros: Prevents stockouts. Cons: Forecasting errors costly.

Front: Describe Economic Order Quantity (EOQ).

Back: Optimal order quantity calculator. Pros: Minimizes total inventory cost. Cons: Assumes constant demand.

Front: Describe Days Sales of Inventory (DSI).

Back: Days needed to sell inventory. Pros: Measures inventory liquidity. Cons: Industry-specific benchmarks.

Front: What is the EOQ formula?