Beruflich Dokumente
Kultur Dokumente
Working Capital
and Current
Assets
Management
Learning Goals
1. Understand short-term financial management, net
working capital, and the related trade-off between
profitability and risk.
2. Describe the cash conversion cycle, its funding
requirements, and the key strategies for managing it.
3. Discuss inventory management: differing views,
common techniques, and international concerns.
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Current Liabilities:
Accounts Payable
Accruals
Short-Term Debt
Taxes Payable
Fixed Assets:
Investments
Plant & Machinery
Land and Buildings
Long-Term Financing:
Debt
Equity
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low
return
Current
Assets
Net Working
Capital > 0
Current
Liabilities
Long-Term
Debt
high
return
Fixed
Assets
Copyright 2009 Pearson Prentice Hall. All rights reserved.
Equity
low
cost
high
cost
highest
cost
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low
return
Current
Assets
high
return
Fixed
Assets
Copyright 2009 Pearson Prentice Hall. All rights reserved.
Current
Liabilities
Net Working
Capital < 0
low
cost
Long-Term
Debt
high
cost
Equity
highest
cost
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Funding Requirements
of the CCC (cont.)
Permanent vs. Seasonal Funding Needs
Nicholson Company holds, on average, $50,000 in cash and
marketable securities, $1,250,000 in inventory, and $750,000
in accounts receivable. Nicholsons business is very stable
over time, so its operating assets can be viewed as
permanent. In addition, Nicholsons accounts payable of
$425,000 are stable over time. Nicholson has a permanent
investment in operating assets of $1,625,000 ($50,000 +
$1,250,000 + $750,000 - $425,000). This amount would also
equal the companys permanent funding requirement.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Funding Requirements
of the CCC (cont.)
Permanent vs. Seasonal Funding Needs
In contrast, Semper Pump Company, which produces bicycle pumps,
has seasonal funding needs. Semper has seasonal sales, with its peak
sales driven by purchases of bicycle pumps. Semper holds, at minimum,
$25,000 in cash and marketable securities, $100,000 in inventory, and
$60,000 in accounts receivable. At peak times, Sempers inventory
increases to $750,000 and its accounts receivable increase to $400,000.
To capture production efficiencies, Semper produces pumps at a
constant rate throughout the year. Thus, accounts payable remain at
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Funding Requirements
of the CCC (cont.)
Permanent vs. Seasonal Funding Needs
$50,000 throughout the year. Accordingly, Semper has a permanent
funding requirement for its minimum level of operating assets of
$135,000 ($25,000 + $100,000 + $60,000 - $50,000) and peak
seasonal funding requirements of $900,000 [($125,000 + $750,000 +
$400,000 - $50,000) - $135,000]. Sempers total funding
requirements for operating assets vary from a minimum of $135,000
(permanent) to a a seasonal peak of $1,125,000 ($135,000 +
$900,000) as shown in Figure 14.2.
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Funding Requirements
of the CCC (cont.)
Permanent vs. Seasonal Funding Needs
Figure 14.2
Semper
Pump
Companys
Total Funding
Requirements
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Funding Requirements
of the CCC (cont.)
Aggressive vs. Conservative Funding Strategies
Semper Pump has a permanent funding requirement of $135,000 and
seasonal requirements that vary between $0 and $990,000 and
average $101,250. If Semper can borrow short-term funds at 6.25%
and long term funds at 8%, and can earn 5% on any invested surplus,
then the annual cost of the aggressive strategy would be:
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Funding Requirements
of the CCC (cont.)
Aggressive vs. Conservative Funding Strategies
Alternatively, Semper can choose a conservative strategy under which
surplus cash balances are fully invested. In Figure 13.2, this surplus would
be the difference between the peak need of $1,125,000 and the total need,
which varies between $135,000 and $1,125,000 during the year.
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Funding Requirements
of the CCC (cont.)
Aggressive vs. Conservative Funding Strategies
Clearly, the aggressive strategys heavy reliance on short-term
financing makes it riskier than the conservative strategy because of
interest rate swings and possible difficulties in obtaining needed
funds quickly when the seasonal peaks occur.
The conservative strategy avoids these risks through the locked-in
interest rate and long-term financing, but is more costly. Thus the
final decision is left to management.
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Inventory Management:
Inventory Fundamentals
Classification of inventories:
Raw materials: items purchased for use in the
manufacture of a finished product
Work-in-process: all items that are currently in
production
Finished goods: items that have been produced but
not yet sold
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Inventory Management:
Differing Views About Inventory
The different departments within a firm (finance, production,
marketing, etc.) often have differing views about what is an
appropriate level of inventory.
Financial managers would like to keep inventory levels low to
ensure that funds are wisely invested.
Marketing managers would like to keep inventory levels high
to ensure orders could be quickly filled.
Manufacturing managers would like to keep raw materials
levels high to avoid production delays and to make larger, more
economical production runs.
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Inventory Management:
International Inventory Management
International inventory management is typically
much more complicated for exporters and MNCs.
The production and manufacturing economies of scale
that might be expected from selling globally may prove
elusive if products must be tailored for local markets.
Transporting products over long distances often results
in delays, confusion, damage, theft, and other
difficulties.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Changing Credit
Standards Example (cont.)
Additional Profit Contribution from Sales
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Changing Credit
Standards Example (cont.)
Cost of marginal investment in A/R:
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Changing Credit
Standards Example (cont.)
Cost of marginal investment in A/R:
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Changing Credit
Standards Example (cont.)
Cost of marginal bad debts:
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Changing Credit
Standards Example (cont.)
Cost of marginal investment in A/R:
Table 14.2
Effects on Dodd
Tool of a
Relaxation of
Credit Standards
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For example, with credit terms of 2/10 net 30, the discount
is 2%, the discount period is 10 days, and the credit period
is 30 days.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Changing Credit
Terms Example (cont.)
Table 14.3
Analysis of
Initiating a Cash
Discount for MAX
Company
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Credit Monitoring
Credit monitoring is the ongoing review of a firms
accounts receivable to determine whether customers are
paying according to the stated credit terms.
Slow payments are costly to a firm because they
lengthen the average collection period and increase the
firms investment in accounts receivable.
Two frequently used techniques for credit monitoring
are the average collection period and aging of accounts
receivable.
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Credit Monitoring:
Average Collection Period
The average collection period is the average number of
days that credit sales are outstanding and has two parts:
The time from sale until the customer places the payment in
the mail, and
The time to receive, process, and collect payment.
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Credit Monitoring:
Aging of Accounts Receivable
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Credit Monitoring:
Collection Policy
The firms collection policy is its procedures for
collecting a firms accounts receivable when they are
due.
The effectiveness of this policy can be partly evaluated
by evaluating at the level of bad expenses.
As seen in the previous examples, this level depends
not only on collection policy but also on the firms
credit policy.
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Collection Policy
Table 14.4 Popular Collection Techniques
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Management of Receipts
& Disbursements: Float
Collection float is the delay between the time when a
payer deducts a payment from its checking account ledger
and the time when the payee actually receives the funds in
spendable form.
Disbursement float is the delay between the time when a
payer deducts a payment from its checking account ledger
and the time when the funds are actually withdrawn from
the account.
Both the collection and disbursement float have three
separate components.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Management of Receipts
& Disbursements: Float (cont.)
Mail float is the delay between the time when a payer
places payment in the mail and the time when it is
received by the payee.
Processing float is the delay between the receipt of a
check by the payee and the deposit of it in the firms
account.
Clearing float is the delay between the deposit of a check
by the payee and the actual availability of the funds which
results from the time required for a check to clear the
banking system.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Controlled Disbursing
Controlled Disbursing involves the strategic use of
mailing points and bank accounts to lengthen the
mail float and clearing float respectively.
This approach should be used carefully, however,
because longer payment periods may strain supplier
relations.
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Investing in Marketable
Securities (cont.)
Table 14.5 Features and Recent Yields on Popular
Marketable Securitiesa (cont.)
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Investing in Marketable
Securities (cont.)
Table 14.5 Features and Recent Yields on Popular
Marketable Securitiesa
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