Fin+Management+5+Ed+Solutions+Chapter+6

Fin+Management+5+Ed+Solutions+Chapter+6 - F i na ncia l Ma...

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Financial Management: Principles and Applications 5E - Solutions Manual Chapter 6 Working capital management 6.1 Operating cycle The following points could be included in the explanation: the operating cycle refers to the time that elapses between the purchase of new materials and the payment to the suppliers of those new materials this definition applies to manufacturers and retailers but differs slightly for other types of businesses such as service providers. The operating cycle is affected by a number of controllable factors including; efficiency of ordering and purchasing procedures speed of the production process whether goods are manufactured to customers’ order or for stock selling techniques employed by the sales force credit terms offered to customers discounts offered to customers for prompt payment and more effective collection procedures for slow payers. All of these factors can be controlled by management with consequent reductions in the operating cycle, but it should be borne in mind that all such changes will usually involve extra costs. For instance, if the company wishes sales staff to sell more aggressively, it may have to offer them higher commissions on their sales; or if the number of credit days offered to customers is reduced in order to speed up collections, then some customers in future may buy from other suppliers. 6.2 Operating cycles The following points could be included in the explanation: the operating cycle is different for different types of businesses or enterprises service companies differ from retailers and manufacturers in that they do not carry inventories wholesalers and retailers are different to manufacturers in that they do not convert raw materials to finished goods in a service organisation, the operating cycle commences when employees carry out services for clients and ends when clients pay for the services rendered. 6.3 Operating cycle The following points could be included in the answer: a business should reduce its operating cycle up to the point when marginal savings obtained are equal to the marginal cost of implementation in other words, a business should only reduce the duration of the operating cycle to an optimum length or point based on financial considerations. 57
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Financial Management: Principles and Applications 5E - Solutions Manual 6.4 Matching principle The following points could be included in the explanation of the matching principle: the principle of matching the repayment term of borrowings with the life of assets acquired with those borrowings the reason for this is that the cash flow generated by the use of the asset in the business will provide the funds required to repay the loan conversely, where the life of the asset is longer than the term of the loan, there will not be the cash flow to provide the funds to repay the loan.
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This note was uploaded on 11/28/2011 for the course CA 10101 taught by Professor Aaaa during the Three '11 term at James Cook.

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Fin+Management+5+Ed+Solutions+Chapter+6 - F i na ncia l Ma...

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