working capital and cash management

What is working capital?

The difference between a firm's current assets and current liabilities, used to measure liquidity.

How is working capital calculated?

Working Capital = Current Assets - Current Liabilities.

What does positive working capital indicate?

The company has enough liquid assets to cover its short-term liabilities.

What does negative working capital suggest?

Current liabilities exceed current assets, indicating potential liquidity issues.

What is the working capital ratio?

A measure calculated as current assets divided by current liabilities, indicating the ability to meet short-term obligations.

What is considered a healthy working capital ratio?

A ratio above 1.5 to 2 is generally considered healthy.

What is the goal of working capital management?

To efficiently utilize working capital to achieve profitability, liquidity, and minimize risks.

What are the key components of working capital management?

Optimizing inventories, receivables, payables, and cash.

What is the impact of excessive working capital?

It can negatively affect profitability and liquidity due to idle assets.

What is a matching policy in working capital management?

A policy where current assets are used to match current liabilities, financed by long-term liabilities or equity.

What characterizes an aggressive working capital policy?

It involves high risk and high return, with low current assets financed by short-term liabilities.

What is a conservative working capital policy?

A policy with low risk and low return, matching temporary current assets with long-term liabilities.

How does managing working capital relate to risk-return trade-off?

Effective management maximizes return while minimizing liquidity and business risk.

What role do financial ratios play in working capital management?

They provide information to improve working capital and assess liquidity and efficiency.

What is the cash conversion cycle?

The time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.

What strategies can be used to manage cash flows?

Techniques include speeding up collections, slowing down payments, and cash concentration.

What is the significance of managing accounts receivable?

Balancing credit terms to avoid bad debts while maintaining sales levels.

What are the risks of excessive inventory investment?

It may lead to obsolescence and increased costs in warehousing and insurance.

What is the importance of maintaining a minimum cash level?

To support operations without incurring unnecessary risk.

What should be done with excess cash in working capital management?

Invest it in opportunities like time deposits, mutual funds, or bonds.

What is the impact of being too lenient in credit management?

It can lead to increased accounts receivable and bad debts.

What happens if a company is too strict with credit policies?

It may reduce accounts receivable at the expense of decreased sales.

What is the relationship between working capital and operational efficiency?

Effective working capital management ensures smooth operations and financial health.

What is the effect of high current assets on liquidity risk?

It decreases liquidity risk more than holding fixed assets.

What are the consequences of poor working capital management?

It can lead to operational disruptions and difficulties in meeting financial commitments.

How can a firm improve its working capital?

By analyzing financial ratios to manage inventories and receivables effectively.

What does a high current ratio with a low quick ratio indicate?

It suggests a high investment in inventories.

How can high investment in inventories affect a firm's profitability?

It does not necessarily have a bad impact if the investment has a high turnover.

What is the purpose of financial ratios in inventory management?

They help the firm manage inventories to minimize costs.

Why is internal control important for working capital?

It helps secure working capital and avoid irregularities.

What can proper internal control of cash prevent?

It can prevent theft, mishandling, or misappropriation.

What is the role of changing company policies in working capital management?

Policies guide transactions, and changing ineffective ones can improve firm welfare.

How does preparing a budget help manage working capital?

It identifies when additional or excess working capital is needed.

What is the transaction motive for maintaining cash?

It refers to the need to meet minimum business operation requirements.

What is the speculative motive for holding cash?

It allows firms to take advantage of bargain purchases or cash discounts.

What is the precautionary motive for maintaining cash?

It involves holding cash for unforeseen fluctuations in cash inflow and outflow.

What qualifies as a cash equivalent according to Philippine Accounting Standard No. 7?

Investments with an original maturity of three months or less.

Give an example of a cash equivalent.

A 90-day treasury bill.

What is one advantage of holding cash or cash equivalents?

It allows firms to take advantage of trade discounts.

How does maintaining a good credit rating benefit a firm?

It helps secure favorable credit terms and low interest rates.

What factors affect a firm's cash requirements?

Firm's cash management policy, availability of loans, forecasted cash flow, and unpredictable events.

What is the purpose of synchronizing cash flows?

To ensure cash inflows coincide with cash outflows.

What is mail float?

The time from when a check is issued until it is received by the payee.

What is processing float?

The time from when a check is received by the payee until it is deposited.

What is clearing float?

The time from when a check is deposited until it is cleared and available for use.

What is the benefit of reducing collection float?

It accelerates the collection of funds.

What is a collecting center?

A firm that provides collection services, allowing payments to be made directly to its account.

How can having a collecting center near customers affect float?

It can lead to a zero float, making check collection as good as cash.

What is the purpose of having collecting agents or centers?

To reduce the collection period in specific areas if economically feasible.

What is a lockbox system?

A service where a company rents a P.O. box for customer payments, managed by banks to expedite deposits.

What factors should be considered when selecting a lockbox location?

Average size of receipts, quantity of receipts collected, and average mail received.

What is concentration banking?

A method where a firm collects funds from various accounts across different banks and consolidates them into one account.

What is an example of concentration banking?

Remittances made to the Social Security System (SSS) from various RCBC branches to the main account.

What are some forms of concentration banking?

Direct sends, direct deposits, and auto-debit arrangements.

What does 'playing the float' refer to in cash management?

Taking advantage of the time it takes for checks to clear to utilize funds longer.

What is a draft in the context of cash disbursements?

An unconditional written order requiring payment from one person to another at a specified time.

What is an auto-debit transfer?

A bank service that automatically transfers funds between accounts, requiring a maintained average daily balance.

How does a debit transfer differ from an auto-debit transfer?

A debit transfer is done manually, usually at the end of the banking day, while auto-debit is automated.

What does stretching payables mean?

Extending the time to make payments to suppliers or creditors, though it should be done tolerably.

What is centralization of disbursement?

Controlling cash disbursements from a central point to monitor payments and manage obligations effectively.

How can statistics be used in cash disbursements?

By analyzing historical disbursements to predict the amount needed for future checks, such as payroll.

What is a cash discount?

A short-term financing incentive offered by suppliers to encourage early payment from purchasers.

What does the term '2/10, net 30' mean?

A payment term where a 2% discount is available if paid within 10 days; otherwise, the full amount is due in 30 days.

What is the significance of the compensating balance in bank agreements?

It is the minimum balance required to be maintained in an account to receive certain banking services.

What is the expected outcome of dividing collection services between banks?

To reduce the collection period by one day while managing compensating balances effectively.