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CFS C6TX: Working Capital Management (working capital management and the…
CFS C6TX: Working Capital Management
working capital management and the risk-return tradeoff
a. measuring firm liquidity
b. managing firm liquidity
c. risk-return tradeoff
working capital policy
a. the principle of self-liquidating debt
i. permanent and temporary asset investments
key terms: temporary investments in assets, temporary assets, permanent investments
ii. spontaneous, temporary and permanent sources of financing
key terms: spontaneous sources of financing, trade credit , temporary source s of financing , permanent sources of financing
b. a graphic illustration of the Principle of self-liquidating debt
operating and cash conversion cycles
the firm's operating cycle and cash conversion cycle are two popular measures used to determine how effectively a firm has managed its working capital. The shorter these two cycles are (usually measured in days), the more efficient is the firm's working capital management
a. measuring working capital efficiency
key terms: operating cycle, inventory conversion period, accounts payable deferral period, cash conversion cycle
b. calculating the operating and cash conversion cycle
managing current liabilities
key terms: unsecured current liabilities, secured current liabilities, factor
a. calculating the cost of short-term financing
b. evaluating the cost of trade credit
i. credit terms and cash discounts
c. evaluating the cost of bank loans
managing the firm's investment in current assets
a. cash and marketable securities
i. costs of managing cash and marketable securities
principle 2: there is a risk-return tradeoff
ii. Problem #1: maintaining a sufficient cash balance
float
iii. Problem #2: Managing the composition of the firm's marketable securities portfolio
money market securities
b. managing accounts receivable
i. determinants of the size of a firm's investment in accounts receivable
ii. terms of sale: identify the possible discount for early payment, the discount period and the total credit period
iii. customer quality
iv. collection efforts
c. managing inventories
inventory management involves the control of the assets that are produced to be sold in the normal course of the firm's operations
summary