Page 55 - FINAL CFA SLIDES DECEMBER 2018 DAY 11

Session Unit 11:

38. Working Capital Management

LOS 38.a: Describe primary and secondary sources of liquidity and factors that influence a
company’s liquidity position., p.81

Primary sources of liquidity -cash it uses in its normal day-to-day operations, cash from:
• selling goods and services, collecting receivables, and short-term investments.
• short-term funding include trade credit from vendors and lines of credit from banks.

Secondary sources of liquidity include:
• liquidating short-term or long-lived assets,
tanties
• negotiating debt agreements (i.e., renegotiating), or filing for bankruptcy and reorganizing
the company.

• Secondary sources can change the company’s financial structure and operations significantly
and may indicate that its financial position is deteriorating.

Factors That Influence a Company’s Liquidity Position

Effective cash flow management of a firm’s collections and payments can be a source of liquidity

for a company
• Drags on liquidity delay or reduce cash inflows, or increase borrowing costs. Examples include
uncollected receivables and bad debts, obsolete inventory (takes longer to sell and can require

sharp price discounts), and tight short-term credit due to economic conditions.
• Pulls on liquidity accelerate cash outflows. Examples include paying vendors sooner than is

optimal and changes in credit terms that require repayment of outstanding balances.