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Pricing Schools Business

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Working Capital and Cash Management

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Questions and Answers

What is one of the major uses of cash within a company?

Investing in stocks

Working capital (correct)

Paying employee salaries

Research and development

Why is inventory considered a dangerous component of working capital?

It is only important for small businesses

It is not related to revenue levels

It is difficult to manage

It can build rapidly and is hard to convert back into cash (correct)

What can spark a rapid increase in the amount of working capital?

Reducing research and development expenses

Loosening credit policy (correct)

Tightening credit policy

Increasing employee salaries

How should the treasurer monitor components of working capital?

On a trend line, in comparison to revenue levels, and against industry benchmarks (A) Signup and view all the answers

What should the treasurer do if a company's investment in working capital appears to be disproportionately high?

Bring it to the attention of senior management and recommend ways to reduce the investment (B) Signup and view all the answers

Why is it important for the treasurer to be aware of internal policies and controls related to working capital?

To influence changes in the size of working capital (D) Signup and view all the answers

What can a well-managed tightening of credit policy provide in the short term?

The needed funds (C) Signup and view all the answers

Study Notes

Working Capital

One of the largest uses of cash within a company is its working capital
The treasurer does not have direct control over many aspects of working capital, but should be aware of internal policies, controls, and systems that influence it

Importance of Credit Policy

A company's credit policy is crucial, as a loosened credit policy can rapidly increase working capital
Conversely, a well-managed tightening of credit policy can provide needed cash in the short term

Inventory Management

Inventory is the most dangerous component of working capital as it can build rapidly unless controlled
Inventory can be difficult to convert back into cash

Monitoring Working Capital

The treasurer should monitor working capital components on a trend line, comparing them to revenue levels and industry benchmarks
If working capital investment appears disproportionately high, the treasurer should bring it to senior management's attention and recommend ways to reduce the investment

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Description

Learn about the importance of working capital within a company and how it is influenced by internal policies, controls, and systems. Understand the role of a company's credit policy in shaping working capital and how it can impact cash flow.