FM8e- ch20 - 20 - 1 CHAPTER 20 Working Capital Management...

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20 - 1 CHAPTER 20 Working Capital Management Alternative working capital policies Cash, inventory, and A/R management Accounts payable management Short-term financing policies Bank debt and commercial paper
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20 - 2 Basic Definitions Gross working capital: Total current assets. Net working capital: Current assets - Current liabilities. Net operating working capital (NOWC): Operating CA – Operating CL = (Cash + Inv. + A/R) – (Accruals + A/P) (More…)
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20 - 3 Working capital management: Includes both establishing working capital policy and then the day-to-day control of cash, inventories, receivables, accruals, and accounts payable. Working capital policy: The level of each current asset. How current assets are financed.
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20 - 4 Selected Ratios for SKI SKI Industry Current 1.75x 2.25x Quick 0.83x 1.20x Debt/Assets 58.76% 50.00% Turnover of cash 16.67x 22.22x DSO (365-day basis) 45.63 32.00 Inv. turnover 4.82x 7.00x F. A. turnover 11.35x 12.00x T. A. turnover 2.08x 3.00x Profit margin 2.07% 3.50% ROE 10.45% 21.00% Payables deferral 30.00 33.00
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20 - 5 How does SKI’s working capital policy compare with the industry? Working capital policy is reflected in a firm’s current ratio, quick ratio, turnover of cash and securities, inventory turnover, and DSO. These ratios indicate SKI has large amounts of working capital relative to its level of sales. Thus, SKI is following a relaxed policy.
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20 - 6 Is SKI inefficient or just conservative? A relaxed policy may be appropriate if it reduces risk more than profitability. However, SKI is much less profitable than the average firm in the industry. This suggests that the company probably has excessive working capital.
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20 - 7 The cash conversion cycle focuses on the time between payments made for materials and labor and payments received from sales: Cash Inventory Receivables Payables conversion = conversion + collection - deferral . cycle period period period Cash Conversion Cycle
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20 - 8 Cash Conversion Cycle (Cont.) CCC = + CCC = + 45.6 – 30 CCC = 75.7 + 45.6 – 30 CCC = 91.3 days. Days per year Inv. turnover Payables deferral period Days sales outstanding 365 4.82
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20 - 9 Cash Management: Cash doesn’t earn interest, so why hold it? Transactions : Must have some cash to pay current bills. Precaution : “Safety stock.” But lessened by credit line and marketable securities. Compensating balances : For loans and/or services provided. Speculation : To take advantage of bargains, to take discounts, and so on. Reduced by credit line, marketable securities.
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20 - 10 What’s the goal of cash management? To have sufficient cash on hand to
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FM8e- ch20 - 20 - 1 CHAPTER 20 Working Capital Management...

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