3-Working Capital Management WCM Concepts

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

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Overview of key concepts Working Capital  Management
Background image of page 1

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

View Full DocumentRight Arrow Icon
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
Background image of page 2
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…)
Background image of page 3

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

View Full DocumentRight Arrow Icon
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.
Background image of page 4
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%
Background image of page 5

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

View Full DocumentRight Arrow Icon
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.
Background image of page 6
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.
Background image of page 7

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

View Full DocumentRight Arrow Icon
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
Background image of page 8
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
Background image of page 9

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

View Full DocumentRight Arrow Icon
10 Cash Management: Cash doesn’t earn  interest, so why hold it? n Transactions: Must have some cash to pay  current bills. n
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/09/2012 for the course ECON 440 taught by Professor Fenn during the Spring '11 term at American Internation College.

Page1 / 45

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

This preview shows document pages 1 - 11. Sign up to view the full document.

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