Working Capital Management: Practice Questions

Under the 5Cs of credit management, which factor is a firm evaluating when it reviews a potential customer's capacity?

A company's operating cycle consists of which two components?

A company wants to shorten its cash conversion cycle. Which of the following actions would most effectively contribute to achieving this objective?

I. Increasing the average collection period for accounts receivable.
II. Decreasing the inventory holding period.
III. Increasing the average payment period for accounts payable.

Which of the following items is typically classified as a current asset when calculating a company's working capital?

A company's credit policy includes several elements to assess the creditworthiness of customers. Which of the following is NOT typically considered one of the '5 Cs' of credit?

What two key variables must a company determine to accurately calculate the Re-order Level (ROL) for inventory management?

Explain why the calculation of the re-order level is crucial for effective inventory management, considering both lead time and usage rate.

A retail business currently maintains a high level of inventory to prevent stockouts and offers extended credit terms to its customers (e.g., 60 days) to boost sales. Simultaneously, it relies heavily on extending its own payments to suppliers (e.g., 90 days) to manage its cash flow. Critically evaluate the overall impact of these combined working capital strategies on the business's liquidity risk and supplier relationships.

ABC Company is a small retail business facing occasional cash flow shortages. The management understands the importance of effective working capital management.

(a) Explain two primary objectives of effective cash management for a business like ABC Company. (2 marks)

(b) Suggest two simple strategies ABC Company could implement to improve its cash collection from customers, other than changing credit terms. (2 marks)

Swift Logistics Ltd. is considering adopting an aggressive working capital policy to boost its profitability and free up cash for expansion. This policy would involve significantly reducing current assets relative to sales and increasing reliance on short-term liabilities.

(a) Explain what is meant by an 'aggressive working capital policy' and describe how it typically impacts a company's liquidity and profitability.

(b) Discuss two potential risks associated with implementing such an aggressive policy, beyond just liquidity concerns, and explain why a company might still choose to adopt it despite these risks.