ch 16 - Working Capital Management Chapter 16 Alternative...

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Unformatted text preview: Working Capital Management Chapter 16 Alternative Working Capital Policies Cash Management Inventory and A/R Management Trade Credit Bank Loans 16-1 Working Capital Terminology Working capital – current assets. Net working capital – current assets minus non-interest bearing current liabilities. Working capital policy – deciding the level of each type of current asset to hold, and how to finance current assets. Working capital management – controlling cash, inventories, and A/R, plus short-term liability management. 16-2 Selected Ratios for SKI Inc. SKI Ind Avg Current ratio 1.75x 2.25x Debt/Assets 58.76% 50.00% Turnover of cash & securities 16.67x 22.22x Days sales outstanding 45.63 32.00 Inventory turnover 4.82x 7.00x Fixed assets turnover 11.35x 12.00x Total assets turnover 2.08x 3.00x Profit margin 2.07% 3.50% Return on equity 10.45% 21.00% 16-3 How does SKI’s working capital policy compare with its industry? Working capital policy is reflected in the current ratio, turnover of cash and securities, inventory turnover, and days sales outstanding. These ratios indicate SKI has large amounts of working capital relative to its level of sales. SKI is either very conservative or inefficient. 16-4 Is SKI inefficient or conservative? A conservative (relaxed) policy may be appropriate if it leads to greater profitability. However, SKI is not as profitable as the average firm in the industry. This suggests the company has excessive working capital. 16-5 Working Capital Financing Policies Moderate – Match the maturity of the assets with the maturity of the financing. Aggressive – Use short-term financing to finance permanent assets. Conservative – Use permanent capital for permanent assets and temporary assets. 16-6 Moderate Financing Policy Years Lower dashed line would be more aggressive. $ Perm C.A. Fixed Assets Temp. C.A. S-T Loans L-T Fin: Stock, Bonds, Spon. C.L. 16-7 Conservative Financing Policy $ Years Perm C.A. Fixed Assets Marketable securities Zero S-T Debt L-T Fin: Stock, Bonds, Spon. C.L. 16-8 Cash Conversion Cycle The cash conversion cycle focuses on the length of time between when a company makes payments to its creditors and when a company receives payments from its customers....
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This note was uploaded on 03/25/2012 for the course FINA 2201 taught by Professor J during the Spring '10 term at Northeastern.

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ch 16 - Working Capital Management Chapter 16 Alternative...

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