TAILIEUCHUNG - Lecture Introduction to finance: Markets, investments, and financial management (14th edition): Chapter 15 - Melicher, Norton

Chapter 15 - Managing working capital. This chapter includes contents: Explain what is meant by a firm’s operating cycle and its cash conversion cycle; describe the impact of the operating cycle on the size of investment in accounts receivable and inventories; explain how seasonal and cyclical trends affect the operating cycle, cash conversion cycle, and investments in current assets;. | Chapter 15 Managing Working Capital © 2011 John Wiley and Sons Chapter Outcomes Explain what is meant by a firm’s operating cycle and its cash conversion cycle. Describe the impact of the operating cycle on the size of investment in accounts receivable and inventories. Explain how seasonal and cyclical trends affect the operating cycle, cash conversion cycle, and investments in current assets. Chapter Outcomes Explain how a cash budget is developed and how a treasurer will use it. Describe the motives underlying the management of cash and marketable securities Briefly explain what is involved in accounts receivable management and indicate how it is carried out. Describe inventory management from the standpoint of the financial manager. Importance of Working Capital Issues Current assets typically comprise 30-50% of a firm’s assets Main day-to-day focus of financial managers Mismatch between current assets and financing cash crunch, bankruptcy possibilities Operating Cycle Operating cycle: time between receiving materials from suppliers and collecting cash following their sale as finished products = inventory conversion period + average collection period = 365 / inventory turnover + AR / (sales/365) Operating Cycle Collection Period Materials Orders Manufacturing Process Selling Effort Cash Finished Inventory Accounts Receivable Cash Conversion Cycle Cash conversion cycle: time between paying cash to suppliers for material and collecting cash from customers from their subsequent sale =Operating cycle - Avg payment period where Avg payment period = Accounts Payable/(COGS/365) Cash Conversion Cycle, continued The cash conversion cycle measures the financing gap in terms of time As the cash conversion cycle increases, the firm’s financing needs grow larger Timelines for the Operating and Cash Conversion Cycles Raw Finished Materials Goods Cash Received Sold Received Accounts Inventory Period Receivable Period Time Accounts Payable .

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