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1-Working Capital Management Foundation Lecture

1-Working Capital Management Foundation Lecture - Working...

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Working Capital and Management
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Financial Analysis Process Industry Life cycle (pioneer – growth – mature – decline) Sector / Segment Positions (Strength) Market share Usually difficult to change Age of products and services vs. competition Volume Industry X Market Share by Segment = Gross Units Sold versus Available Capacity Pricing Brand power (consumer demand) Ability to increase or maintain price Volume X Pricing = Sales (S) Cost Structure Trend of variable costs (VC) Trend of fixed costs (FC) (break-even point) Operating Leverage [S-VC / EBIT] Impact of sales change on EBIT Financing Costs Financial leverage (I) [EBIT / (EBIT-I)] Impact of EBIT change on net income Continuing Net Income (NI) NI X (1 – RR) = dividends Growth (G) = ROE X Retention Ratio (RR) 2
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Controlling measurements Drivers of Value Balanced Scorecard Financial Strength EBIT, EBITDA margin, ROS, ROA, ROE, EPS, Liquidity, Debt service coverage Sustainable Growth EPS, Dividends, Revenue, EBITDA, Cash Flow Product / Value Chain Facts in the Case Delight Customers Facts in the Case Process Performance Facts in the Case Talent Management Facts in the Case 3
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Controlling measures Time dimension Projects Periodic Strategy - products and markets NPV, BE analysis, Discounted EVA, Capital Budgeting FCFF, EBITDA trend, Revenue growth, EVA Strategy - functions NPV, Capital spending, overhead targets % of revenue, competitive targets Operative - products and markets VC per unit, Target costing variances, Investment status EBIT, ROS, ROA, ROE, Revenue, Net profit Operative - functions Functional cost allocations, post mortems Actual versus budget, trend 4
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Net Working Capital Fundamentals Management of Current Assets and Current Liabilities. Working Capital represents the proportion of investments that circulates from one form to another in the normal course of business. Net Working Capital = Current Assets – Current Liabilities
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Working Capital Profitability- Risk Tradeoff Profitability: relationship between revenues and costs generated by the use of the firm’s assets. Risk: probability that a firm will be unable to pay bills when due. Technical Insolvency: when risk is realized and firm is unable to pay due bills.
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Effects of Changing Ratios on Profits and Risk
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Cash Flow Cycle A firm’s ability to quickly convert assets into cash is referred to as liquidity . When a firm’s liquidity is called into question, it often is difficult to continue in business. Liquidity is largely determined by the cash flow cycle . Sales, receivables, and inventory form the basis for cash flow, but the firm’s other activities can also affect cash inflows and outflows.
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Expanded cash flow cycle
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Cash Conversion / Flow Cycle Operating Cycle (OC) consists of that period of time measured by the Average Age of Inventory (AAI) and the Average Collection Period (ACP) of accounts receivable.
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