BUS 420 Chapter_21

BUS 420 Chapter_21 - CHAPTER 21 CHAPTER Working Capital...

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CHAPTER 21 CHAPTER 21 Working Capital Management 1
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Focus Areas Focus Areas Alternative working capital policies Cash, inventory, and A/R management Accounts payable management Short-term financing policies Bank debt and commercial paper 2
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Basic Definitions Basic Definitions 1. Gross working capital: Total current assets. 2. Net working capital: Current assets - Current liabilities. 3. Net operating working capital (NOWC): Operating CA – Operating CL = (Cash + Inv. + A/R) – (Accruals + A/P) 3
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How does SKI’s working capital How does SKI’s working capital policy compare with the industry? policy compare with the industry? (a) (a) Ratios that focus on working capital policy What do these ratios indicate? 4
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Is SKI inefficient or just Is SKI inefficient or just conservative? (b) conservative? (b) A relaxed policy may be appropriate if it reduces risk more than profitability. However, SKI is much less profitable than the average firm in the industry. This suggests that the company probably has excessive working capital. 5
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Cash Conversion Cycle (c) 6 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 CCC =                       +                   – CCC =           + 45.6 – 30
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BUS 420 Chapter_21 - CHAPTER 21 CHAPTER Working Capital...

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