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CHAPTER 16

Working Capital

Management Alternative working capital policies Cash management Inventory and A/R management Trade credit Bank loans

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Working capital

terminology Gross working capital total crrent

assets!

"et working capital crrent assets minsnon#interest $earing crrent lia$ilities!

Working capital policy deciding the levelo% each type o% crrent asset to hold& and

how to 'nance crrent assets! Working capital management controlling

cash& inventories& and A/R& pls short#termlia$ility management!

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(elected ratios %or ()I Inc!()I Ind

Avg

Crrent ratio *!+,- .!.,-

e$t/Assets ,0!+12

,3!332

Trnover o% cash 4secrities

*1!1+- ..!..-

ays sales otstanding 5,!16 6.!33

Inventory trnover 5!0.- +!33-

7i-ed assets trnover **!6,- *.!33-

Total assets trnover .!30- 6!33-

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:ow does ()I;s workingcapital policy compare with

its indstry< Working capital policy is re=ected in

the crrent ratio& trnover o% cash and

secrities& inventory trnover& anddays sales otstanding! These ratios indicate ()I has large

amonts o% working capital relative to

its level o% sales! ()I is either very conservative or

ine>cient!

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Is ()I ine>cient or

conservative< A conservative ?rela-ed@ policy

may $e appropriate i% it leads to

greater pro'ta$ility! :owever& ()I is not as pro'ta$le as

the average 'rm in the indstry!

This sggests the company hase-cessive working capital!

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Working capital 'nancing

policies Moderate Match the matrity o%

the assets with the matrity o% the

'nancing! Aggressive se short#term

'nancing to 'nance permanentassets!

Conservative se permanentcapital %or permanent assets andtemporary assets!

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Moderate 'nancing policy

ears

ower dashed line wold $e moreaggressive!

D

8erm C!A!

7i-ed Assets

Temp! C!A!

(#T

oans

#T 7inE(tock&

Bonds&(pon! C!!

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Conservative 'nancing

policyD

ears

8erm C!A!

7i-ed Assets

Marketa$lesecrities

Fero (#Te$t

#T 7inE(tock&Bonds&

(pon! C!!

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Cash conversion cycle The cash conversion cycle %ocses on

the length o% time $etween when a

company makes payments to itscreditors and when a company receivespayments %rom its cstomers!

CCC = + .Inventoryconversionperiod

Receivablescollection

period

Payablesdeferralperiod

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Cash conversion cycle

days!.63#51+1CCC

63#515!0.61,CCC

periodde%erral8aya$le

gotstandinsalesays

trnoverInventory

per yearaysCCC

period

de%erral8aya$les

period

collectionsReceiva$le

period

conversionInventory

CCC

=+=

+=

+=

+=

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Cash doesn;t earn a pro't&so why shold the 'rmhold it