Exam 17: The Management of Working Capital

Typically, working capital assets are expected to be converted into cash within twelve months while liabilities are expected to be paid within twelve months.

Lock boxes are designed to reduce mail float.

The term working capital refers to the assets and liabilities required to operate a business on a day to day basis.

A firm's financial managers should always attempt to set a credit policy that will result in no bad debts.

Cash held for precautionary demand is to take advantage of unexpected opportunities.

A revolving credit agreement is a guaranteed line of credit.

The financial managers have little control over the level of current assets associated with a given volume of sales.

By foregoing the prompt payment discount offered in terms of 1/10, net 30, the customer is effectively borrowing at rate of 36.5%.

Explain marketable securities. How are they useful to companies?

Under what conditions might larger balances in inventory and accounts receivable not help the firm to run more smoothly and efficiently?

Company presidents and CEOs often come from marketing or engineering backgrounds and don't understand much about finance. When faced with cash flow problems it isn't unusual for them to demand across the board cuts in working capital assets while stretching payables, all to conserve cash. If working capital management was reasonably efficient beforehand such an order can be a disaster. Explain why.

A firm can avoid excess funds at regional banking facilities by using zero balance accounts, or ZBAs.

The cash conversion cycle is shorter than the operating cycle by the time it takes for the firm to pay its own bills.

Processing float in the check clearing system is the time required for checks to clear through the banking system.

Accruals represent spontaneous financing from things such as purchasing inventory on credit.

Accruals tend to be directly related to a firm's level of operations.

Commercial paper is an example of marketable securities.

Policy decisions regarding inventories, accounts receivable, cash balances, and marketable securities can control the amount invested in these assets.

As a firm increases the amount spent on the collection of overdue accounts, both the average collection period and the percentage of bad debts decline.

The cash conversion cycle is the time it takes to convert a receivable into cash.