Chapter 8 – Managing and Financing Current Assets

Working Capital

The firm's current assets, including cash, inventory, and accounts receivable.

Net Working Capital (NWC)

The difference between current assets and current liabilities.

Cash Conversion Cycle (CCC)

Measures the time required for a company to convert cash invested in operations into cash received from sales.

Operating Cycle (OC)

The time from production to cash collection.

Economic Order Quantity (EOQ)

The optimal order size that minimizes total inventory costs.

Just-in-Time (JIT)

A management strategy that aligns raw-material orders with production schedules.

Materials Requirement Planning (MRP)

Inventory management using EOQ concepts and computerized systems to synchronize production needs and inventory.

Five Cs of Credit

Character, Capacity, Capital, Collateral, Conditions - factors used in evaluating creditworthiness.

Credit Terms

Conditions defined for payment periods and discounts for credit sales.

Average Collection Period

The average number of days that credit sales are outstanding before payment is received.

Aggressive Strategy

Funding seasonal requirements with short-term debt and permanent requirements with long-term debt.

Conservative Strategy

Funding both seasonal and permanent requirements with long-term debt.

Money Market

A market for short-term financial instruments, such as Treasury bills and commercial paper.

Capital Market

A market for long-term financing instruments like stocks and bonds.

Eurocurrency Market

The international equivalent of domestic money markets for short-term financing.

ABC System

Prioritizes inventory by value (A = High, B = Medium, C = Low).

Manufacturing Resource Planning II (MRP II)

Advanced system integrating data from finance, accounting, marketing, etc., to generate production plans and financial reports.

Enterprise Resource Planning (ERP)

System integrating external supplier and customer data with internal data for real-time resource management, delay reduction, and cost control.

Credit Selection

Credit selection involves determining which customers should receive credit by evaluating their creditworthiness against the firm's minimum credit standards.

Credit Monitoring

is an ongoing review of a firm’s accounts receivable to ensure customers pay according to credit terms. It identifies slow payments, which increase the firm’s investment in accounts receivable by lengthening the average collection period. Techniques used in credit monitoring include the average collection period, aging of accounts receivable, and various collection methods.

Cash Discount Period

The number of days after the beginning of the credit period during which the cash discount is available.

Credit Period

The number of days after the begging of the credit period until full payment of the account is due.