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3-Working Capital Management WCM Concepts

3-Working Capital Management WCM Concepts - WorkingCapital...

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1 Overview of key concepts Working Capital  Management
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2 Topics in Chapter n Alternative working capital policies n Cash, inventory, and A/R management n Accounts payable management n Short-term financing policies n Bank debt and commercial paper
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3 Basic Definitions n Gross working capital:   Total current assets. n Net working capital: Current assets - Current liabilities. n Net operating working capital (NOWC): Operating CA – Operating CL = (Cash + Inv. + A/R) – (Accruals + A/P) (More…)
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4 Definitions  (Continued) n Working capital management:  Includes both establishing working  capital policy and then the day-to-day  control of cash, inventories, receivables,  accruals, and accounts payable. n Working capital policy: n The level of each current asset. n How current assets are financed.
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5 Selected Ratios for SKI SKI Industry Current 1.75 2.25 Quick 0.83 1.20 Debt/Assets 58.76% 50.00% Turnover of Cash 16.67 22.22 DSO(365-day year) 45.63 32.00 Inv. Turnover 4.82 7.00 F.A. Turnover 11.35 12.00 T.A. Turnover 2.08 3.00 Profit Margin 2.07% 3.50% ROE 10.45% 21.00%
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6 How does SKI’s working capital  policy compare with the industry? n Working capital policy is reflected in a  firm’s current ratio, quick ratio, turnover  of cash and securities, inventory  turnover, and DSO. n 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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7 Is SKI inefficient or just  conservative? n A relaxed policy may be appropriate if it  reduces risk more than profitability. n 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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8 Cash Conversion Cycle The cash conversion cycle  focuses on the time  between payments made for materials and  labor and payments received from sales:     Cash  Conversion =    Cycle  Inventory Conversion +     Period  Receivables  Collection   −    Period Payables  Deferral   Period
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9 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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10 Cash Management: Cash doesn’t earn  interest, so why hold it? n Transactions: Must have some cash to pay  current bills. n
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3-Working Capital Management WCM Concepts - WorkingCapital...

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