Working capital cycle - cash cycle, Financial Econometrics

Assignment Help:

Working capital cycle measures the time between paying for goods supplied to you and final receipt of cash to you from their sale. It is desirable to keep this cycle as short as possible as it increases the effectiveness of working capital. The figure below demonstrates how the cycle works.

2317_Working capital cycle - cash cycle.png

The table below explains how the activities of a business have an impact on cash flow.

TRADE PROCESS

EFFECTS ON CASH

Inventories are purchased on creditthat creates trade payables.

Inventories bought on credit temporarily help with cash flowas there is no immediate to pay for these inventories.

Sale of inventories ismade on credit which creates trade receivables.

It means that there is no cash inflow although inventory had been sold. The cash for sold inventory would be received later.

Trade payables need to be paid, and cash is collected from the trade receivables.

Cash has to be collected from the tradereceivables and then paid to trade payables otherwise there is a cash flow problem.

Control  of  working  capital  is  ensuring  that  company  has  enough  cash  in  its  bank. It will save on bank interest and charges on overdrafts. Company also needs to ensure that levels of inventories and trade receivables isn't too great, as this means funds are tied up in assets with no returns (termed as the opportunity cost).

Working capital cycle thus should be kept to a minimum to ensure efficient and cost effective management.


Related Discussions:- Working capital cycle - cash cycle

Chapter , a debit is used to record

a debit is used to record

Bond rate differential, analysis of bond rate parity among india and usa of...

analysis of bond rate parity among india and usa of last 10-15 years

Current ratio or working capital ratio, Current ratio (CA) or working capit...

Current ratio (CA) or working capital ratio CA = Current assets/Current liabilities (times) Current ratio measures the short term solvency or liquidity; it signifies the ext

Chapter , a debit is used to record

a debit is used to record

Determine average excess return, What do you notice about the alphas and be...

What do you notice about the alphas and betas calculated using the various methods? Using the alpha and beta you calculated for stock 4 along with the average excess return on the

Concepts of adverse selection and moral hazard, Consider a recent merger be...

Consider a recent merger between two major corporations. Describe the terms of the merger (cash or stock, premium, changes in management / directors, etc.). Explain the motivation

Mauritian financial system, Question 1: (a) Highlight the main theories...

Question 1: (a) Highlight the main theories of the level and term structure of interest rates. (b) To what extent they can be used to explain the level and structure of inte

Analyse keyness model of liquidity preference, Problem : PART A (a) ...

Problem : PART A (a) Analyse Keynes's model of liquidity preference. (b) Analyse the instruments central banks use to control the supply of money in the economy. PA

Describe the working capital, Q. Describe the Working capital? Working ...

Q. Describe the Working capital? Working capital is the capital available for conducting day-to-day operations of the business and includes current assets and current liabiliti

Investors short sell, Pythagoras Jones has just inherited $1,000,000 and wi...

Pythagoras Jones has just inherited $1,000,000 and wishes to invest this sum in the ?ve funds given below. Fund     Name                                Code               Return

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd