Cash Management and Working Capital Strategies
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Questions and Answers

Which of the following is NOT a type of investment objective?

  • Income Generation
  • Capital Appreciation
  • Capital Preservation
  • Inventory Management (correct)
  • Working capital management is primarily concerned with long-term financial planning.

    False (B)

    What is the primary purpose of working capital management?

    To ensure efficient operations, maintain liquidity, and optimize profitability by managing short-term assets and liabilities.

    A company can improve its working capital by ______ its invoice issuance process.

    <p>optimizing</p> Signup and view all the answers

    Match the following working capital management tactics with their respective benefits.

    <p>Monitor your working capital ratio = Provides a snapshot of a company's financial health Incentivize receivables = Encourages customers to pay invoices promptly Automate business processes = Reduces manual errors and improves efficiency Improve inventory management = Minimizes storage costs and reduces the risk of obsolescence Leverage supply chain financing = Provides access to short-term funding for working capital needs Utilize tax incentives = Reduces the tax burden on the company's operations</p> Signup and view all the answers

    Which of the following is NOT an investment policy or guideline?

    <p>Inventory turnover (A)</p> Signup and view all the answers

    The investment decision process includes assessing risk tolerance and setting investment goals.

    <p>True (A)</p> Signup and view all the answers

    What is the main objective of setting investment goals in the investment decision process?

    <p>To clearly define the desired outcomes and objectives of the investment strategy.</p> Signup and view all the answers

    Which of the following is NOT a cash management objective?

    <p>Increasing Employee Salaries (B)</p> Signup and view all the answers

    Excess liquidity can refer to the surplus amount of cash in a bank account that is more than what is usually required.

    <p>True (A)</p> Signup and view all the answers

    What is the primary goal of cash flow forecasting?

    <p>To predict future cash inflows and outflows</p> Signup and view all the answers

    _______ refers to highly liquid financial instruments that can be quickly converted to cash.

    <p>Marketable securities</p> Signup and view all the answers

    Match the following short-term investment options with their descriptions:

    <p>Marketable Securities = Highly liquid financial instruments Fixed Deposits (Short-term) = Bank deposits with fixed interest rates Repurchase Agreements (Repos) = Agreements to sell securities with a promise to buy back Treasury Bills = Short-term government securities sold at a discount</p> Signup and view all the answers

    What is the primary purpose of short-term borrowing instruments?

    <p>To meet immediate liquidity needs (C)</p> Signup and view all the answers

    Rolling down the yield curve involves buying shorter-dated bonds and holding them until maturity.

    <p>False (B)</p> Signup and view all the answers

    What is the relationship represented by the yield curve?

    <p>The relationship between interest rates and time to maturity for bonds of similar credit quality.</p> Signup and view all the answers

    A __________ allows a company to borrow funds up to a certain limit, providing flexible access to cash as needed.

    <p>Line of Credit</p> Signup and view all the answers

    Match the following short-term borrowing instruments with their characteristics:

    <p>Bank overdraft = Allows withdrawal beyond the available balance Short-Term Loans = Loans that are repaid in less than a year Trade Credit = Credit extended by suppliers for goods or services Promissory Notes = Written promises to pay a specified amount at a future date</p> Signup and view all the answers

    What is the primary reason for short-term borrowing?

    <p>To meet immediate financial needs (A)</p> Signup and view all the answers

    The price of a bond decreases as it gets closer to its maturity date.

    <p>False (B)</p> Signup and view all the answers

    What does liquidity refer to in financial contexts?

    <p>The ability to meet short-term financial obligations.</p> Signup and view all the answers

    Companies with stable cash flow can utilize more _____ debt.

    <p>long-term</p> Signup and view all the answers

    Match the following terms with their correct definitions:

    <p>Short-term borrowing = Loans or credits repaid within a year Liquidity needs = The capability to meet short-term financial obligations Maturity structures = Timelines for liabilities or investments Cost of capital = The cost of funding a company's operations</p> Signup and view all the answers

    Which best describes the objective of matching assets and liabilities?

    <p>To ensure debt maturity aligns with asset lifespan (B)</p> Signup and view all the answers

    An upward-sloping yield curve suggests that investors can expect a negative return.

    <p>False (B)</p> Signup and view all the answers

    Why might companies with volatile cash flows prefer short-term debt?

    <p>To access liquidity easily.</p> Signup and view all the answers

    Study Notes

    Cash Management Objectives

    • Ensure sufficient liquidity
    • Minimize borrowing costs
    • Maximize return on investment
    • Strengthen financial position
    • Reduce cost of capital
    • Enhance operational efficiency
    • Prepare for uncertainty
    • Maximize payment terms

    Cash Flow Forecasting

    • Estimating future cash inflows and outflows (e.g., daily, weekly, monthly, annually)
    • Predicting future cash balances
    • Ensuring enough cash for obligations while optimizing financial resources
    • Key features include short-term and long-term forecasting, inflow/outflow estimations, and decision-making aid

    Working Capital Management

    • Managing short-term assets (cash, receivables, inventory) and liabilities (payables, short-term debts)
    • Ensuring efficient operations, maintaining liquidity, and optimizing profitability
    • Important for daily operations, short-term financial obligations, and maintaining liquidity during challenges

    Optimizing Working Capital

    • Managing cash inflows/outflows through improving accounts receivable collection, reducing inventory levels, better supplier terms, and cash outflow monitoring.
    • Close monitoring of cash flow and liquidity.
    • Seven ways to improve working capital management: monitor working capital ratio, optimize invoice issuance, incentivize receivables, automate business processes, improve inventory management, leverage supply chain financing, use tax incentives.

    Excess Liquidity

    • Amount of liquid assets exceeding needed amounts.
    • Can be in a bank's portfolio or the economy in general.
    • Excess cash in an account more than usual.
    • Short-term investment options include marketable securities (highly liquid) and fixed deposits (predefined interest rates, short maturities). Repurchase agreements (repos) are agreements to sell and buy securities at a higher price later.

    Investment Objectives

    • Goals for investments, such as capital preservation, income generation, or capital appreciation.

    Investment Policies and Guidelines

    • Rules, principles, and frameworks guiding investment decisions (individuals, organizations, fund managers).
    • Dictate strategies and approaches for investment portfolios.
    • Types include risk tolerance, time horizon, and diversification policies.

    Investment Decision Process

    • Series of steps in investment decision making.
    • Includes setting investment goals, assessing risk tolerance, and deciding on maturity structures.

    Identifying Investment Options

    • Types of available investments and matching them with goals and risk.
    • Monitoring investment performance.
    • Determining investment maturity structures, aligning debt maturity with asset lifespan (short-term debt for short-term assets, long-term debt for long-term assets) and managing liquidity needs. Consider interest rate risk and expectations.
    • Rolling down the yield curve, gradually selling bonds moving towards maturity for potential price appreciation.

    Short-Term Borrowing

    • Loans repayable within a short period (usually one year).
    • Meeting immediate financial needs, covering cash shortages, or financing operational expenses.
    • Policy for short-term borrowing includes criteria such as borrowing limits, source selection, repayment guidelines, risk management, and approval process.
    • Objectives include meeting immediate needs, supporting business continuity, and optimizing costs.

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    Related Documents

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    Description

    This quiz covers essential concepts of cash management, including objectives like ensuring liquidity, minimizing costs, and maximizing returns. It also delves into forecasting cash flows and effective working capital management strategies for optimizing financial operations. Test your knowledge on these foundational financial principles!

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