tailieunhanh - Lecture Managerial finance - Chapter 22: Working capital management

Chapter 22 provides knowledge of working capital management. This chapter presents the following content: Alternative working capital policies; cash, inventory, and A/R management; accounts payable management; short-term financing policies; bank debt and commercial paper. | CHAPTER 22 Working Capital Management Topics in Chapter Alternative working capital policies Cash, inventory, and A/R management Accounts payable management Short-term financing policies Bank debt and commercial paper 1 Definitions 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. 2 Cash Conversion Cycle 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 Cash Conversion Cycle (Cont.) CCC = + – CCC = + – 30 CCC = + – 30 CCC = days. Days per year Inv. turnover Payables deferral period Days sales outstanding 365 Cash Management: Cash doesn’t earn . | CHAPTER 22 Working Capital Management Topics in Chapter Alternative working capital policies Cash, inventory, and A/R management Accounts payable management Short-term financing policies Bank debt and commercial paper 1 Definitions 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. 2 Cash Conversion Cycle 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 Cash Conversion Cycle (Cont.) CCC = + – CCC = + – 30 CCC = + – 30 CCC = days. Days per year Inv. turnover Payables deferral period Days sales outstanding 365 Cash Management: Cash doesn’t earn interest, so why hold it? Transactions: Must have some cash to pay current bills. Precaution: “Safety stock.” But lessened by credit line and marketable securities. Compensating balances: For loans and/or services provided. Speculation: To take advantage of bargains, to take discounts, and so on. Reduced by credit line, marketable securities. 6 What’s the goal of cash management? To have sufficient cash on hand to meet the needs listed on the previous slide. However, since cash is a non-earning asset, to have not one dollar more. 7 Ways to Minimize Cash Holdings Use lockboxes. Insist on wire transfers from customers. Synchronize inflows and outflows. Use a remote disbursement account. (More ) 8 Minimizing Cash (Continued) Increase forecast accuracy to reduce the need for a cash “safety stock.” Hold marketable securities instead of a cash “safety stock.” Negotiate a line of credit (also reduces need for a “safety stock”). 9 What are some other potential cash inflows besides