Base rate and Working capital management: Difference between pages

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Generally, a widely recognised and quoted interest rate - such as the Fed funds rate, the prime rate, or LIBOR - by reference to which a rate of interest is calculated. More properly, a "reference rate" or a "benchmark rate" and these avoid confusion with Base Rate (see below).
(WCM).


For example, in the phrase ‘LIBOR plus 50 basis points’, LIBOR is the base (reference) rate.
Working capital operates as a continuous cycle.  


More particularly, a central bank rate may be known as Base Rate. This is normally the rate at which the central bank will lend overnight funds, commonly of a secured basis, to financial institutions. By changing this Base Rate, they may hope to influence market rates generally. It seems that anticipated changes to Base Rate are one of the largest influences on market rate movements between actual Base Rate changes<ref>Paul Mizen and Boris Hofmann [http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2002/wp170.pdf "Working Paper No 170: Base rate pass-through: evidence from banks' and building societies' retail rates"], London, 2002, ISSN 1368-5562.</ref>.
At its simplest, a creditor provides stock, the stock is then sold on credit, creating a debtor.  
 
In due course, the debtor pays, thus providing the firm with cash resources which are then used to pay the creditor and the surplus cash is retained in the firm.
 
 
Firms can increase their financial efficiency by minimising the length of time this cycle takes.
 
A firm that reduces its working capital cycle will reduce its working capital levels.
 
 
However, there are practical, operational and commercial limitations on how low working capital levels can fall without adversely affecting operations and relationships. 
 
As a result, the management of working capital is essentially a compromise between levels high enough for smooth commercial operation and safeguarding reputation, and levels low enough to be financially efficient.
 
 
 
 
 
:<span style="color:#4B0082">'''''Working capital win-wins?'''''</span>
 
:"Effective working capital management (WCM) is a complex balance between supplier and customer relationships, operational needs, financial efficiency, and reputation.
 
:Simply defined, working capital is the surplus of our inventories and customer receivables, over our supplier payables. We bear the cost of giving credit to customers. Collecting money more quickly from customers reduces our financing costs, but may have adverse effects on sales volumes or prices.  
 
:When suppliers give us credit, that helps us and costs them. Paying suppliers more slowly also reduces financing costs. But it risks damaging relationships. It also risks adverse pricing from suppliers, and even damaging our reputation.  
 
:Intermediaries, supply chain finance and other solutions can provide win-win outcomes to some of these problems."
 
 
:''ACT eletter, November 2019.''


Base Rates, if secured, are like the [http://www.federalreserve.gov/monetarypolicy/discountrate.htm discount rate] applied to loans to eligible institutions from the US Federal Reserve Banks under the primary credit program of their "discount window". 




== See also ==
== See also ==
* [[LIBOR]]
* [[CertICM]]
* [[Lock-up]]
* [[Reputational risk]]
* [[Working capital]]
* [[Working capital cycle]]




==References==
===Other links===
[[Media:Oct14TTtreasuryessentials46.pdf |The cash conversion cycle, The Treasurer, Oct 2014]]


<references />
[[Media:Jun14TTsantander48-49.pdf |Unlocking the value, The Treasurer, July 2014]]


[[Category:Manage_risks]]
[https://www.treasurers.org/node/9240 Extending accounts payable is seen as vital, The Treasurer, Web exclusive]

Revision as of 14:19, 20 November 2019

(WCM).

Working capital operates as a continuous cycle.

At its simplest, a creditor provides stock, the stock is then sold on credit, creating a debtor.

In due course, the debtor pays, thus providing the firm with cash resources which are then used to pay the creditor and the surplus cash is retained in the firm.


Firms can increase their financial efficiency by minimising the length of time this cycle takes.

A firm that reduces its working capital cycle will reduce its working capital levels.


However, there are practical, operational and commercial limitations on how low working capital levels can fall without adversely affecting operations and relationships.

As a result, the management of working capital is essentially a compromise between levels high enough for smooth commercial operation and safeguarding reputation, and levels low enough to be financially efficient.



Working capital win-wins?
"Effective working capital management (WCM) is a complex balance between supplier and customer relationships, operational needs, financial efficiency, and reputation.
Simply defined, working capital is the surplus of our inventories and customer receivables, over our supplier payables. We bear the cost of giving credit to customers. Collecting money more quickly from customers reduces our financing costs, but may have adverse effects on sales volumes or prices.
When suppliers give us credit, that helps us and costs them. Paying suppliers more slowly also reduces financing costs. But it risks damaging relationships. It also risks adverse pricing from suppliers, and even damaging our reputation.
Intermediaries, supply chain finance and other solutions can provide win-win outcomes to some of these problems."


ACT eletter, November 2019.


See also


Other links

The cash conversion cycle, The Treasurer, Oct 2014

Unlocking the value, The Treasurer, July 2014

Extending accounts payable is seen as vital, The Treasurer, Web exclusive

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