Santos, Ronalyn S.
BSA 3205 – BGG
Assignment No. 2
1. Explain the relationship between the predictability of a firm’s cash inflows, and its
required level of working capital.
The firm’s cash inflows are predictable, whereby the level of net working capital required
for operation will be lower. Since the cash inflow of the firm is predictable, the unexpected
requirement of the funds will be less and thus lower level of net working capital is required for
managing.
2. How do changes in the ratio of current liabilities to total assets affect profitability and
risk? You can site an example or examples.
A decrease in the ratio of current assets to total assets will result in an increase in
profitability as well as risk. The increase in profitability will primarily be due to the corresponding
increase in fixed assets which are likely to generate higher returns. Since the current assets
decrease without a corresponding reduction in current liabilities, the amount of net working
capital will decrease, thereby increasing risk.
3. Why is it important for a firm to minimize the length of its cash conversion cycle?
It is important for a company to minimize the length of the cash conversion cycle in order
to increase the liquidity and flexibility of the company and have optimum amount of current
asset and cash in hand which will allow the business to pay its expenses in small amounts.
4. Why is it helpful to divide the funding needs of a seasonal business into its permanent
and seasonal funding requirements when developing a funding strategy?
The advantages of dividing the funding needs of a seasonal business into its permanent
and also seasonal assets at the time that it is developing a funding strategy is that if a firm does
not face a seasonal cycle then they will have to encounter only permanent funding requirement
and also helps seasonal business borrowers by providing working capital needed to meet
increased inventory.