Cash and Working Capital

What are four general phases of the working capital cycle?

Working capital refers to both current assets and current liabilities of a company. The four general phases of the working capital cycle include: obtaining cash, turning cash into resources, using the resources to provide services and then billing customers for the services provided (Zelman, McCue & Glick, 2009). A working capital cycle ensures that the company’s cash inflows compensate cash outflows and at the same time enable good timing of these cash flows. Zelman, McCue & Glick (2009) indicated that “when payments come due before cash is available, a company has to obtain cash from sources other than existing revenues” (p. 188).

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What are the three primary sources of short-term funds?

Many organizations find that they need to borrow funds for short periods to meet their obligations. The three primary sources of short term funds include bank loans, trade credit and commercial paper. Boone & Kurtz (2010) indicated that trade credit is extended by suppliers when a company receives goods or services, agreeing to pay for them later. Bank loans from commercial banks are used to finance accounts receivable and inventory (Boone & Kurtz, 2010). They can be secured or unsecured with accounts receivable or inventory pledged as collateral. Boone & Kurtz (2010) state that commercial paper is a short term IOU (“I owe you”) sold by a company. Commercial paper market is limited to large, financially strong companies.

An organization's short-term investment options for idle cash include what four areas?

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After a company has gone through the effort to collect its cash, it wants to ensure that the money is invested properly to generate good returns. Zelman, McCue & Glick (2009) established that “short-term investment include treasury bills, certificate of deposit, commercial paper and money market mutual funds” (p. 211). According to McKinney (2004) treasury bills are initially issued in $10, 000 denominations having 91-to-182-day maturities. On the other hand certificate of deposit is issued with 9- and 12-month maturities.

Treasury bills are most liquid and default free since they are purchased at a discount and redeemed at face value. Certificates of deposit have higher risk and higher yield than treasury bills. McKinney (2004) indicated that a company can invest its short term funds in commercial paper. Commercial paper is a business promissory note specifying a future payment date. McKinney (2004) established that “commercial papers are usually sold at a discount and are supported by the general credit of the company” (p. 217). The maturity dates of commercial paper range from 30 days to 9 months. Commercial papers yield one quarter to one half greater than that of treasury bills.

A company can invest its idle funds in money market funds. These are mutual funds that invest in marketable securities. McKinney (2004) says that money market mutual funds involve pooling of cash from a number of investors to purchase different types of market securities such as treasury bills. Money market mutual funds provide yields that are much higher than those obtainable from saving banks (McKinney, 2004). Money market mutual funds provide flexibility for entering and withdrawing funds.

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Discuss the term float

According to Sharan (2008), float represents the difference between the cash balance appearing in the bank records and records appearing in the company books. A float may be either negative or positive. A negative float occurs when a company receives payment, while a positive float occurs when a company makes payments. Sharan (2008) commented that “a negative float exists when a customer makes payments for goods purchased to the firm but the amount does not stand credited to the firm’s bank account” (p. 159). Float is thus the sum of the mailing, processing and clearing delays of a check or a payment made to the company account (Sharan, 2008). 

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