7 Questions
What is one of the major uses of cash within a company?
Working capital
Why is inventory considered a dangerous component of working capital?
It can build rapidly and is hard to convert back into cash
What can spark a rapid increase in the amount of working capital?
Loosening credit policy
How should the treasurer monitor components of working capital?
On a trend line, in comparison to revenue levels, and against industry benchmarks
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
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
What can a well-managed tightening of credit policy provide in the short term?
The needed funds
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
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.
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