Chapter 16 - CHAPTER16 WorkingCapitalManagement

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    16-1 CHAPTER 16 Working Capital Management Alternative working capital policies Cash management Inventory and A/R management Trade credit Bank loans
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    16-2 Working capital terminology Gross 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.
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    16-3 Selected ratios for SKI Inc. SKI Ind Avg Current ratio 1.75x 2.25x Debt/Assets 58.76% 50.00% 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% Return on equity 10.45% 21.00%
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    16-4 Cash conversion cycle The cash conversion cycle focuses on the  length of time between when a company  makes payments to its creditors and when a  company receives payments from its  customers. CCC = + . Inventory conversion period Receivables collection period Payables deferral period
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    16-5 Cash conversion cycle  example Cash outflow on day 40, cash inflow on  day 120. Payables Deferral Period (40 Days) Cash Conversion Period (80 Days) Inventory Conversion Period (60 Days) Finish Goods And Sell Them Average Collection Period (60 Days) Receive Materials Pay Cash for Purchased Materials Collect Cash For Accounts Receivable Days
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    16-6 Cash conversion cycle days. 92 30 - 46 76 CCC 30 - 46 4.82 365 CCC COGS/365 Payables Sales/365 s Receivable COGS/365 Inventory CCC period deferral Payables period collection s Receivable period conversion Inventory CCC = + = + = - + = - + =
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    16-7 How does SKI’s 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.
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    16-8 Is 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.
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    16-9 Working capital financing policies Moderate – Match the maturity of the  assets with the maturity of the financing.
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Chapter 16 - CHAPTER16 WorkingCapitalManagement

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