Working Capital Management

Flashcards about working capital management

Define working capital?

The availability of funds within the business to run its daily operations such as payment for wages and raw materials

What is the formula for the working capital cycle?

Inventory days + Receivables days - Payable days

What is the formula for current ratio?

Current Assets / Current Liabilities

What is the formula for quick ratio?

Current Assets - Inventory / Current Liabilities

State the 5 factors that affect the working capital?

Type of business, Current Assets, Management efficiency, Company's credit policy, Terms of trade

State the 3 types of inventories?

Raw materials, Work in progress, Finished goods

Define payable days?

The time taken to pay suppliers

Define terms of trade?

The payment terms agreed with suppliers and customers

Why does the cycle matter?

Measure how fast assets turn into cash

What are the 5 aspects of working capital management?

Inventories (stock), suppliers uncertainty, business activity, credit policy, operating cycle

How to manage working capital management?

To minimize the risks of business failure and maximizing the business returns through efficient use of cash

Define working capital cycle?

The length of time a business takes to turn cash into more cash

Is a shorter or longer Inventory turnover period better?

A shorter inventory period

State the types of key liquidity ratios used to assess short-term liquidity?

Current Ratio and Quick Ratio

State how to manage receivables days?

Shorten credit periods, offer early settlements discounts to minimize aging receivables and bad debts, require frequent deposits from customers.

State how to manage payables days?

Negotiate longer interest-free credit periods from suppliers, balance inventory purchases to maintain manageable payables.

Define working capital investment?

Refers to determining the amount of net current assets required to cover short-term liabilities.

State the optimal inventory management?

Ensure sufficient stock to meet demand and prevent stock out and avoid excess inventory to reduce holding costs.

Explain over-trading?

Insufficient capital for business operations

Explain over capitalization?

Excessive working capital beyond business needs

State how to prevent over-trading?

Implement tight stock control and improve debt collection to improve cash flow, reduce sales volume & increase prices to manage liquidity.

State the 5 symptoms of over-trading?

Rapid increase in turnover especially credit sales, delayed supplier payments, inventory shortages, declining current and quick ratios, and bank overdraft within a short time.

State the 3 symptoms of over-capitalization?

Over-investment in working capital, current ratio > 2:1 and quick ratio > 1:1, long inventory and receivables collection periods.