Working Capital Management Summary

Working Capital Management Summary - Working Capital and...

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Working Capital and Management - Summary
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Exam Content Pick 4 of 7 questions to answer (40% of final mark) Focus of questions: 1. Cash flow analysis and the operating cycle 2. Ratio analysis to assess financial strength and trends 3. Forecasting financial statements and elements 4. Sources of financing compared to asset requirements 5. Process of extending working capital loans and related debt costs 6. Impact of taxes on cash flows 7. Valuation of bonds or equity (sources of cash if sell divisions or redundant assets)
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Cases covered in course Adept Chemical = impact of working capital on business alternatives Chef’s Tool Kit = detail cash budget use for financing Palmer Limited = impact on working capital by changing business model The Health Nut = impact of emotion in working capital management Talich Fabricating = Sources of financing for working capital needs Dawson Lumber = impact of growth on working capital needs Druthers Forming = analysis using the 7 C’s of credit management Hongxing = how valuation techniques may affect cash available from redundant assets
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Basic Definitions Gross working capital: Total current assets. Net working capital: Current assets - Current liabilities. Net operating working capital (NOWC): Operating CA – Operating CL = (Cash + Inv. + A/R) – (Accruals + A/P)
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5 Working capital policies Working capital management: Includes both establishing working capital policy and then the day-to-day control of cash, inventories, receivables, accruals, and accounts payable. Working capital policy: The level of each current asset. How current assets are financed.
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Cost-Benefit Analysis Good value-adding decisions will ensue when the benefits exceed the costs. In general, the return (on investment, ROI) is In addition to safety and liquidity, the financial manager must also make sure that the return on current assets ( r ) must exceed the cost of borrowing and/or the opportunity cost . monies received net capital tied up r =
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Balance Sheet Current Assets _______________ Fixed Assets Current Liabilities _______________ Long-Term Funds BALANCE SHEET MANAGEMENT Making Investment Decisions Making Financing Decisions Certain assets and current liabilities are spontaneous to increases in sales volumes. Higher net working capital and fixed assets required to support more sales. Retained earnings are also used to support these needs. However, there may be a gap for which external debt or equity is needed to balance the funding needed to grow
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8 CORPORATE SOURCES OF FUNDS Four General Sources of Funds: 1. Internally-generated cash (RE) 2. Short-term external funds (D or E) 3. Long-term external funds (D) 4. Working capital improvements (what actions)
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Cash Flow Time Line
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A financial manager should balance short- term versus long-term financing by considering: 1. the composition of the firm’s assets 2. the firm’s willingness to accept risk 3. the risks and
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Working Capital Management Summary - Working Capital and...

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