ch 16 - Chapter16 CashManagement InventoryandA/RManagement...

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Working Capital Management Chapter 16 Alternative Working Capital Policies Cash Management Inventory and A/R Management Trade Credit Bank Loans 16-1
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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
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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
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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
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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
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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
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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
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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
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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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