Professional Documents
Culture Documents
Assessing liquidity position via ratios: Inventory turnover, receivable collection period, payable collection
period, current ratio, quick ratio, etc. –(described in earlier Chapter)
Cash operating cycle/working capital cycle
It focuses the length of time between a business paying out cash for inputs and receiving cash for goods sold. It
is measured in days.
(Calculation of cash operating cycle in book)
Solution to the liquidity problems
Reducing the inventory holding period
Reducing the production period
Reducing customer credit
Extending the period of credit taken from suppliers
Managing Inventory:
Profitability Vs liquidity
Higher inventories may give higher sales Higher inventories mean more finance is needed
Reason for holding inventory
Meet demand acting as a buffer
Ensure continuity of production
Take advantage of quantity discount
Buy ahead of a shortage
Reduce ordering cost
Seasonality of demand
Minimum order quantity
Special promotions offered
Cost associated with inventory
Purchase price
Holding cost
Re-ordering cost
Shortage cost
Inventory control systems:
Re-order level system
Periodic review system
ABC system
EOQ
JIT Manufacturing system
Perpetual inventory method
Managing trade payables:
Trade credit is a chief source of finance. However trade credits are not without cost for the following reason:
Credit status may be lost and the supplier will give low priority in future orders
The supplier may rise the price to compensate the finance
The buyer may loose any cash discount for prompt payments
Advantage of trade credit:
It is convenient and informal
It can be used by businesses which do not qualify for credit from a financial institution
It does not prevent advantage being taken of settlement discounts
It can be a sales promotion device
It can be used on a very short term basis to overcome unexpected cash flow crisis
Treasury Management:
Business must trade of the cost of holding cash against the cost of running out of cash
Motives of holding cash
Transaction motives
Finance motives
Precautionary motives
Investment motives
Aim of good cash management:
1. Accurate cash budgeting/forecasting
2. Planning short term finance- receivable factoring, Bank OD, short term bank loan, operating lease
3. Planning investment of surplus when necessary- treasury bill, deposits, bonds, equity, gilts.
4. Cost efficient cash transmission- General clearing by cheques, clearing house automated payment
systems, bank automated clearing system
Banking system: the banking system comprises of primary and secondary banks.
Primary bank are those which operates money transmission service in the economy. They operates cheque
accounts and deal with cheque clearing
Secondary bank are made up of wide range of merchant banks and other banks. They donot tend to take part in
the clearing system.
Money markets: These are a vast array of markets buying and selling different form of money and marketable
securities. The main traders of money markets are bank, the government (through the Bangladesh bank), local
authorities, brokers and other intermediaries.
The money market financial instruments are
Bills
Deposits
Commercial papers
1. What do you mean by liquidity and profitability? Why these are to be trade off for all the elements of
working capital
2. Describe aggressive, average and defensive working capital. If a company moves from a defensive
working capital policy to an aggressive working capital policy, what will be the change in risk and return?
3. What do you mean by cash operation cycle? If a business is suffering from liquidity problems, the aim
must be to reduce the length of the cash operating cycle. How you can reduce the cash operating cycle?
4. Calculation of cash operating cycle.
5. What do you mean by overtrading? How can you avoid this in business?
6. What are the different systems of inventory control systems? Please describe ABC system, or JIT
manufacturing system or perpetual inventory method.
7. Describe trade credit. What will happen of it is not managed properly?
8. Describe how you can control trade receivable.
9. Describe how you can finance trade receivable.
10. What are the good practices in receivable management?
11. What are the motives of holding cash?
12. Describe treasury management. How you can manage treasury?
13. Describe different relationships between Bank and the customers.
14. Questions in interactive questions.