Working Capital Management and Financial Management Concepts

These flashcards cover key concepts related to working capital management, financial management, and operational costs.

Financing and managing the current assets of the firm.

What does working capital management involve?

It may determine how well the firm can survive in the short run.

Why is the management of current assets crucial for a firm?

It requires an increasing investment in current assets to support the increased sales.

What happens to a firm's investment in current assets as sales increase?

Production may be more operationally efficient on a level basis, but sales fluctuations can lead to a buildup of current assets.

How does the fluctuation of sales volumes affect production processes?

Inventory holding period plus collection period less accounts payable period.

What determines the cash flow cycle of a firm?

An attempt to reduce risk by matching the maturities of debt obligations to the maturities of assets.

What is a hedged approach in financial management?

It relates yields on similar risk obligations to the time until maturity.

What does the term structure of interest rates represent?

The tradeoff between the safety margin of long-term financing and its higher cost against profit potential.

What must a firm consider regarding risk-return decisions?

Fixed costs, like interest and repayments, must be covered by revenues.

What implications does using debt financing have for fixed costs?

The extent of operational risk derived from strategic capital budgeting decisions made as part of an investment strategy.

What is operating leverage?

Fixed, variable, or semi-variable costs.

What are the classifications of firms' operational costs?

The implications of heavy capital asset use.

What does break-even analysis evaluate?

They move directly with a change in volume.

How do variable costs behave in relation to changes in volume?

Costs that remain relatively constant regardless of the volume of operations.

What are fixed costs?