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1、,4,Chapter,The Management of Working Capital,Slides Developed by:Terry FegartySeneca College, 2006 by Nelson, a division of Thomson Canada Limited,2,Chapter 4 Outline (1),Working Capital BasicsWorking Capital and the Current AccountsWorking Capital and Funding RequirementsObjective of Working Capita
2、l ManagementWorking Capital Trade-offsOperationsThe Cash Conversion CycleThe Operating Cycle and the Cash Conversion Cycle, 2006 by Nelson, a division of Thomson Canada Limited,3,Chapter 4 Outline (2),Permanent and Temporary Working CapitalMaturity Matching PrincipleFinancing Net working CapitalShor
3、t-Term vs. Long-Term FinancingWorking Capital Policy, 2006 by Nelson, a division of Thomson Canada Limited,4,Chapter 4 Outline (3),Cash ManagementObjectives of Cash ManagementMarketable SecuritiesYield on a Discounted Money Market SecurityComponents of Float Cheque Disbursement and the Cheque Cleari
4、ng processAccelerating Cash ReceiptsElectronic Funds TransferManaging Cash OutflowEvaluating Cash Management Services, 2006 by Nelson, a division of Thomson Canada Limited,5,Chapter 4 Outline (4),Managing Accounts ReceivableTradeoffs in Managing Accounts Receivable Credit PolicyTerms of SaleCollecti
5、ons policy, 2006 by Nelson, a division of Thomson Canada Limited,6,Chapter 4 Outline (5),Inventory ManagementBenefits and Costs of Carrying Adequate InventoryInventory Ordering CostsInventory Control and ManagementEconomic Order Quantity ModelSafety Stocks, Reorder Points and Lead TimesInventory on
6、Hand Including Safety StockTracking InventoriesThe ABC SystemJust In Time (JIT) Inventory System, 2006 by Nelson, a division of Thomson Canada Limited,7,Working Capital Basics,Working Capital Assets/liabilities required to operate business on day-to-day basisCashAccounts ReceivableInventoryAccounts
7、PayableAccrualsShort-term in natureturn over regularly, 2006 by Nelson, a division of Thomson Canada Limited,8,Working Capital and the Current Accounts,Gross working capital = Current assetsGross Working Capital (GWC) represents investment in current assets(Net) working capital = Current assets Curr
8、ent liabilities, 2006 by Nelson, a division of Thomson Canada Limited,9,Working Capital and Funding Requirements,Working Capital Requires FundsMaintaining working capital balance requires permanent commitment of fundsExample: Firm will always have minimum level of Inventory, Accounts Receivable, and
9、 Cashthis requires funding, 2006 by Nelson, a division of Thomson Canada Limited,10,Working Capital and Funding Requirements,Spontaneous Financing Firm will also always have minimum level of Accounts Payablein effect, money you have borrowedAccounts Payable (and Accruals) are generated spontaneously
10、Arise automatically with inventory and expenses Offset the funding required to support current assets, 2006 by Nelson, a division of Thomson Canada Limited,11,Working Capital and Funding Requirements,Net working capital is Gross Working Capital Current Liabilities (including spontaneous financing)Re
11、flects net amount of funds needed to support routine operations, 2006 by Nelson, a division of Thomson Canada Limited,12,Objective of Working Capital Management,To run firm efficiently with as little money as possible tied up in Working CapitalInvolves trade-offs between easier operation and cost of
12、 carrying short-term assetsBenefit of low working capitalMoney otherwise tied up in current assets can be invested in activities that generate higher payoffReduces need for costly financingCost of low working capitalRisk of shortages in cash, inventory, 2006 by Nelson, a division of Thomson Canada L
13、imited,13,Working Capital Trade-offs, 2006 by Nelson, a division of Thomson Canada Limited,14,Working Capital Trade-offs, 2006 by Nelson, a division of Thomson Canada Limited,15,Current Assets High Level Low LevelProfitability Lower HigherRisk Lower Higher,Working Capital Trade-offs, 2006 by Nelson,
14、 a division of Thomson Canada Limited,16,OperationsThe Cash Conversion Cycle,Firm begins with cash which then “becomes” inventory and labourWhich then becomes product for saleEventually this will turn into cash againFirms operating cycle is time from acquisition of inventory until cash is collected
15、from product sales, 2006 by Nelson, a division of Thomson Canada Limited,17,Figure 4.1: The Cash Conversion Cycle,Product is converted into cash, which is transformed into more product, creating the cash conversion cycle., 2006 by Nelson, a division of Thomson Canada Limited,18,Figure 4.2: Time Line
16、 Representation of the Cash Conversion Cycle, 2006 by Nelson, a division of Thomson Canada Limited,19,The Operating Cycle and the Cash Conversion Cycle,Inventory conversion periodplus:Receivable collection periodequals:Operating cycleminus:Payables deferral periodequals:Cash conversion cycleShortening cash conversion cycle frees up cash to reinvest in business or to reduce debt and interest,
