1. Working Capital Management CHAPTER 4

2. Chapter Outline Working Capital Concepts Working Capital Issues Financing Current Assets: Short-Term and Long-Term Mix Combining Liability Structure and Current Asset Decisions

3. Working Capital Management Net WorCap = Curr. Assets – Curr. Liabilities Gross Working Capital: -cash & equivalents -accounts receivable -inventory -current liabilities

4. Working Capital Management Working capital management : The administration of the firm’s current assets and the financing needed to support current assets. - Manufacturing firm & distribution firm - Too much vs. too little - Small companies - Time needed

5. Profitability vs. Risk Optimal level of current assets Optimal level of current liabilities Trade-off: RISK vs. PROFITABILITY Low level of current assets High level of current liabilities Increased profitability? Liquidity risks?

6. Optimal Level of Current Assets Tradeoff: profitability vs. liquidity

7. Optimal Level of Current Assets Tradeoff: profitability vs. liquidity ROA High vs. Low Level of Current Assets??? HIGHERMODERATELOWER LIQUIDITYPolicy APolicy BPolicy C PROFITABILITYPolicy CPolicy BPolicy A RISKPolicy CPolicy BPolicy A

8. Optimal Level of Current Assets Profitability varies inversely with liquidity. Increased liquidity generally comes at the expense of reduced profitability. Profitability moves together with risk In search of higher profitability, we must expect to take greater risks.

9. Classification of Working Capital Components Time: Temporary Permanent If permanent, why not considered as fixed assets?

10. Classification of Working Capital

11. Maturity Matching - Hedging Financing with approx. same maturity Seasonal curr. ass. => short term debt Permanent C. A. & Fixed A. => LTD + Equity Unnecessary interest payments Xmas inventory example

12. Maturity Matching - Hedging

13. Short Term vs. Long Term Financing Certainty of cash flow Margin of safety Riskier: shorter vs. longer maturity of debt? STD to fund new facilities Debt renewal? Refinancing costs?

14. Short Term vs. Long Term Financing STD vs. LTD: risks & costs?? The margin of safety: the lag between the firm’s expected net cash flow and the contractual payments on its debt. Risk preference=> Margin of safety=> Curr. Ass. Funded by STD vs. LTD

15. Cash Conversion Cycle Inventory period Inventory sold Cash received Inventory purchased Accounts receivable period Operating cycle (OC) Cash Conversion Cycle (CCC) Cash paid for inventory Accounts payable period Time

16. Cash Conversion Cycle CCC = Inventory period + Acc. Receivables period – Acc. Payables period ÖZSOY Tarım A. Ş. – 2013: Buy inv. => Jan 1st Pay payables=> Jan 15st Sell inv. => Mar 1st Receive receivables => Jun 1st CCC?

17. Cash Conversion Cycle ÇINAR Boyacılık A.Ş. – 2014: inventory turnover ratio= 8 receivables turnover ratio = 6 average credit purchase payment = 30 days CCC?

18. END OF CHAPTER