Fundamentals of Managing Finance Chap 12 - CHAPTER 12...

CHAPTER 12
INVESTING IN
PERMANENT
WORKING CAPITAL
ASSETS
M
arie Kaye stared through the window that was the front wall of her of-
fice and shook her head slowly. Outside were row after row of desks.
She glanced at her watch; it was 7:30
A
.
M
. Monday morning. Soon the desks
would be occupied by the clerks who processed the company’s accounts re-
ceivable—at last count there were 43 clerks in the department.
Marie had recently been appointed controller of her company. Among her re-
sponsibilities were customer billing and collection of outstanding accounts, ar-
eas that had proved quite problematic. Customers routinely complained that in-
voices were difficult to understand, sometimes even incorrect, and responded
by withholding payment. Marie had recently added 10 clerks to the department
in an effort to correct the problems and reduce the company’s collection period,
which was well above the industry average, yet little progress had been made.
Even with the additional staff, every clerk remained busy all day and many had
to work overtime to clear their desks.
Last week Marie had attended a professional meeting, at which she talked to
the controllers of several competitors and similar companies in other industries.
She was surprised to learn that some companies she considered comparable to
hers operated their billing and receivables function with fewer than 10 employ-
ees and had far fewer outstanding accounts. She made some notes about as-
sembling a team to tackle the problem and vowed to go in first thing Monday
morning to get an early start.

Marie looked at her watch again; it was 7:45. She was eager for the work day
to begin so she could discuss the problem with her colleagues and put together
the team.
Working capital management involves day-to-day dealings with the firm’s
stakeholders: customers, suppliers, employees, bankers, etc. In fact, many stake-
holders’ primary experience with the company is through its working capital
activities. To manage these resources, financial managers must understand how
their work affects stakeholders and, in turn, how stakeholder actions affect
them. Marie is discovering that successful working capital management re-
quires not only good application of finance theory, but also the use of quality-
management information and tools to ensure that stakeholder needs are being
met.
Working capital management provides an excellent opportunity for financial
managers to add value to their organizations. In many companies, fully half of
the investment in assets—and up to 90% of the effort of the finance organiza-
tion—are in the current accounts. In this chapter we examine the nature of
working capital, how to add value by investing in permanent working capital,
and how an awareness of quality-management issues can further improve the
worth of these decisions.