Class Notes (811,167)
Canada (494,537)
Business (3,226)
BU121 (464)

Financing Cont - march 4.docx

4 Pages
Unlock Document

Wilfrid Laurier University
Roopa Reddy

LIQUIDITY: - How easily you can turn assets to cash - Looking to address long term trends - Evaluates “working capital management” issues o - how is your money moving through the business Current Ratio Add the 2 and divide by 2 to make it an average - Bench mark: Should be greater than 2 but less than 4 - You will lose out on return potential – you could use the extra cash to create more return (you don’t want to hold too much cash) - = average current assets / average current liabilities Acid Test / Quick Ratio - Removing inventory (something that isn’t very liquid) - Bench mark: Greater than 1 - = Average Current Assets – Average Inventories Average Current Liabilities NWC (Networking Capital) to total Assets - The higher the better - Average current assets – average current liabilities Average total assets Interpreting Trends - Looking at how fast your company burns cash compared to how much cash they build - Looking at current ratio and quick ration – when there is a large difference than there is a lot of liquidity held in inventory - They could improve their liquidity by: o Cutting back spending o How you are paying o How you are collecting – accounts receivables Conversion Period Ratios - Measure the average time in days required for non-cash current assets and selected current liabilities to create or demand cash Operating cycle Cash Receivables Materials Work-in- (credit sales) progress Finished Goods - Measure time it takes to: o purchase raw material o build the product o book the sale o collect the money from the sale - you don’t want to tie up to much money in inventory Measuring conversion times - inventory to sale conversion period - =average inventory Cost of goods sold / 365 - Sale to cash conversion period - Average receivables Net sales / 365 - Inventory to sale + sale to cash conversion period = average operating cycle - Purchase to Payment Conversion Period - Average payables + average accrued liabilities Cost of goods sold / 365 - Some cash has to go buying products some has to go towards paying payables and accrued liabilities - Inventory to sale + sale to cash – purchase to payment conversion period = Cash Conversion Cycle (C ) - The number of sales of operations that must be externally financed (look
More Less

Related notes for BU121

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.