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?

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

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

<p>Bring it to the attention of senior management and recommend ways to reduce the investment (B)</p> 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?

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

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

<p>The needed funds (C)</p> 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.

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