The Working Capital Cycle Essay

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The Working Capital Cycle and the Cost of Credit

1. In terms of cash flow, what are the stages of the working capital cycle?
Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. limit, you effectively create free finance to help fund future sales. Each component of working capital (namely inventory, receivables and payables) has two dimensions. TIME and MONEY. When it comes to managing working capital - TIME IS …show more content…
Understanding the regulatory changes and how they will impact various products used to invest or hold short-term cash is vital to optimizing its value to your firm.

6. List three ways to measure accounts receivable performance.
Net accounts receivable, aging schedule and net patient revenues. 7. Identify and define two methods to finance accounts receivable.
Factoring is the selling of accounts receivable, usually to a bank, at a discount. Pledging Receivables as Collateral a tangible asset that is pledged as a promise to repay a loan. If the loan is not paid, the leading institution as legal recourse may seize the pledged asset. 8. Compute the annual approximate interest cost of not taking a discount using the following scenarios. What conclusion can be drawn from the calculations? * 2/10 net 20 means if you pay a bill within 10 days you get a 2% discount. If you take the standard allotted 30 days to pay you pay the "net", or full, amount due. 2/10 net 30 This amounts to a sizable interest rate for paying quickly.

* Paying invoices during the discount period benefits the payer with a savings. * Speeds up the cash collection for the company offering the incentive, but at a cost. * Should a company not take advantage of the discount, then the
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