ch 16 - Chapter 16 Working Capital Management Alternative...

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Working Capital Management Chapter 16 § Alternative Working Capital Policies § Cash Management § Inventory and A/R Management § Trade Credit § Bank Loans 116-1
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Working Capital Terminology § Working capital – current assets. § Net working capital – current assets minus  non-interest bearing current liabilities. § Working capital policy – deciding the level of  each type of current asset to hold, and how to  finance current assets. § Working capital management – controlling  cash, inventories, and A/R, plus short-term  216-2
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Selected Ratios for SKI Inc. SKI Ind Avg Current ratio 1.75x 2.25x Debt/Assets 58.76% 50.00% Turnover of cash & securities 16.67x 22.22x Days sales outstanding 45.63 32.00 Inventory turnover 4.82x 7.00x Fixed assets turnover 11.35x 12.00x Total assets turnover 2.08x 3.00x Profit margin 2.07% 3.50% 316-3
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How does SKI’s working capital  § Working capital policy is reflected in the  current ratio, turnover of cash and  securities, inventory turnover, and days  sales outstanding. § These ratios indicate SKI has large  amounts of working capital relative to its  level of sales.   § SKI is either very conservative or inefficient. 416-4
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Is SKI inefficient or  § A conservative (relaxed) policy may be  appropriate if it leads to greater profitability. § However, SKI is not as profitable as the  average firm in the industry.   § This suggests the company has excessive  working capital. 516-5
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Working Capital Financing  § Moderate – Match the maturity of the assets  with the maturity of the financing. § Aggressive – Use short-term financing to  finance permanent assets. § Conservative – Use permanent capital for  permanent assets and temporary assets. 616-6
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Moderate Financing Policy Year s Lower dashed line would be more aggressive. $ Perm  C.A. Fixed  Assets Temp.  C.A. S-T Loan s L-T Fin: Stock, Bonds, Spon.  C.L. 716-7
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Conservative Financing Policy $ Year s Perm  C.A. Fixed  Assets Marketable  Zero S- T Debt L-T Fin: Stock, Bonds, Spon.  C.L.
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This note was uploaded on 02/09/2010 for the course BUS 101 taught by Professor Noname during the Spring '10 term at KCTCS.

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ch 16 - Chapter 16 Working Capital Management Alternative...

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