Exam 17: The Management of Working Capital

The maturity matching principle says that the maturity of financing should generally match the length of the project it supports.

JIT systems work well, even when suppliers are located far away and sell to many similar manufacturers.

Firms are required to commit capital to funding cash balances just as they commit capital to fund inventory, receivables, and fixed assets.

Explain the difference between a promissory note, a line of credit, and a revolving credit agreement.

A lockbox system that accelerates cash collections also decreases a firm's receivables.

Spontaneous financing exists because vendors and employees are not generally paid for their products and services immediately.

The fundamental benefit of offering trade credit is more sales.

Working capital assets typically include cash, accounts receivable, and inventories. The liabilities include payables, accruals, and all borrowing regardless of term to maturity, that is used to fund day-to-day operations.

We say a working capital financing policy is conservative if short-term funding is used to support working capital.

The main advantage of commercial paper is that its maturity is longer than that of a bank loan.

A revolving credit agreement and a line of credit are nearly identical, with the exception that the bank becomes legally obligated when it agrees to a line of credit.

The more efficient the management of cash, the larger the amount of cash the firm needs to hold.

Incremental working capital needed to support seasonal peaks in sales is known as seasonal working capital.

Banks like to make self-liquidating loans because they usually command higher interest rates than other loans.

Warehousing places the pledged inventory under the lender's legal and physical control.

Carrying costs represent those expenses that increase as the level of inventory rises.

Most spontaneous financing comes from trade payables created when vendors sell on credit allowing deferred payment.

Bank credit is a minor source of short-term financing for firms.

When a factor does not assume the bad debt risk on accounts it purchases, the factoring relationship is said to be "without recourse."

Spontaneous financing can take the form of current liabilities or long-term debt.