Chapter 16

Chapter 16 - 15-1CHAPTER 16Working Capital...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 15-1CHAPTER 16Working Capital ManagementAlternative working capital policiesCash managementInventory and A/R managementTrade creditBank loans15-2Working capital terminologyGross working capital total 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 liability management.15-3Selected ratios for SKI Inc.SKIIndustry AverageComments on SKICurrent ratio1.75x2.25xLess liquidity than the industryDebt/Assets58.76%50.00%Too much debtsTurnover of cash & securities16.67x22.22xCash turn over is too slowDays sales outstanding45.6332.00Takes too much time to collect credit salesInventory turnover4.82x7.00xInventory turnover is too slowFixed assets turnover11.35x12.00xFixed assets turnover is a little too slowTotal assets turnover2.08x3.00xNot efficient in using fixed assetsProfit margin2.07%3.50%Profit margin is lower than other peersReturn on equity10.45%21.00%ROS is only half of that for peers15-4How does SKIs working capital policy compare with its industry?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.15-5Is SKI inefficient or conservative?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.15-6Working Capital ManagementShort-Term Investment (uses of short-term funds)Cash ManagementAccount Receivable ManagementInventory ManagementShort-Term Financing (sources of short-term funds)Trade CreditBank LoansCommercial PaperAccount Receivable and/or Inventory Financing15-7Working capital financing policiesShort-Term AssetsCost 1Cost 2Cash and Marketable SecuritiesOpportunity cost of fundsIlliquidity and solvency costAccounts ReceivableCost of investment in ARs and bad debtsOpportunity cost of lost sales due to an overly restrictive credit policy and/or credit termsInventoryCarrying cost of inventory, including financing, warehousing, and other costsOrder and setup costs associated with replenishment, financing and production of finished goods15-8Working capital financing policiesShort-Term Liabilities Cost 1Cost 2Accounts payable,...
View Full Document

Page1 / 61

Chapter 16 - 15-1CHAPTER 16Working Capital...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online