1. Chapter 13 Working Capital Management  Short-term Cash Flow Planning  Managing Accounts Receivable  Credit Terms, Float, and Cash Management  Inventory Management  Effect of Working Capital on Capital Budgeting

2. Short-term Cash Flow Planning  Cash is an inventory item  Need to know how much you will need to complete daily transactions  Anticipate daily cash inflow  Plan for any short fall between outflow and inflow  For a business it’s the cash conversion cycle (CCC)  CCC looks at the timing of cash flow or how long it takes the business to generate cash flow from a sale

3. Short-term Cash Flow Planning  CCC components  Production cycle – from when product is started until customer “buys” the product  Collection cycle – from time customer “buys” the product until customer makes payment  Payment cycle – from the time company receives materials for production until the company makes payment to supplier  CCC = Production + Collection - Payment

4. Short-term Cash Flow Planning  Estimating production cycle  Find average inventory  Determine inventory turnover using COGS  Calculate production cycle  Example page 351…7.6 Days  Estimate collection cycle  Find average accounts receivable  Determine A/R turnover using credit sales  Calculate collection cycle  Example page 352…13.8 days

5. Short-term Cash Flow Planning  Estimate payment cycle  Find average accounts payable  Determine accounts payable turnover  Calculate payment cycle  Example page 353…7.0 days  CCC = 7.6 + 13.8 – 7.0 = 14.4 days  Must carry operations 15 days

6. Managing Accounts Receivable  Objective in accounts receivable management: speed up receivables  Want payment from customers as soon as practical  Must be aware of standard business practices  First step is to estimate cash flow from sales  Cash sales at time of sale  Credit sales over extended period of time

7. Managing Accounts Receivable  Aging receivables  Identifies chronic late payers  Assigns late fees to proper accounts  Follow-up with late paying customers  Example 13.2  Follow-up invoice with late fees  Late fees billed by individual invoices

8. Credit Terms, Float & Cash Management  Granting of credit to customers  Policy on qualifying customers for credit  Policy on payment plan  Policy on follow-up for late payments  Qualifying for credit  Credit screening  Increasing cost as more information required  Increasing cost usually match the increase in the size of the credit  Example 13.3 – Inflatable boats

9. Credit Terms, Float & Cash Management  Payment Policy  Methods to speed up receivables  Discount for speedy payment  Lock boxes for faster processing of payments  Wire transfers  Your Payment Policy (Accounts Payable)  Methods to slow down payables  Check payment  Playing the float with remote disbursements

10. Inventory Management  Keeping track of inventory  ABC Method  A goods are critical goods, or high priced goods  B goods are moderately priced or essential goods  C goods are low priced or non-essential goods  Most effort is spent on A goods  Little effort is spent on C goods  Economic Order Quantity – how much inventory to keep on hand

11. Inventory Management  Cost components of inventory  Carrying Costs  The storage and handling costs while inventory is in “store” or “manufacturing facililty”  Costs include space and utilities  Ordering Costs  The cost paid to ship inventory items from supplier to company  Does not include the cost of the item  EOQ finds optimal trade-off between carrying costs and ordering costs

12. Inventory Management  Carrying Costs (cc), per unit carrying costs times average inventory  Ordering Costs (oc) number of orders times cost per order  Total Inventory Costs = CC + OC  EOQ is optimal order quantity that minimizes total inventory costs with S being annual sales

13. Inventory Management  Additional Issues with EOQ  Reorder Point  Placement of order quantity before inventory hits zero due to shipping time  Does not alter the actual order quantity or average inventory on hand  Safety Stock  Placement of order quantity before inventory hits zero and with additional days in case order is delayed  Does not alter quantity but does increase average inventory on hand  JIT – Just in Time, system that sets safety stock to zero

14. Effect of Working Capital on Capital Budgeting  Working Capital usually a necessary component of a project  Build up current assets and current liabilities at start of a project  Necessary components for making products  Expensed as products are sold  Maintained inventory levels during the project but could build as production increases  Recover working capital at end of project  Draw down of inventory items supporting production  Because items are expensed in COGS must show recovery of current assets and current liabilities

15. Problems – First Set  Problem 1 – Business Operating Cycle  Problem 3 – Production Cycle  Problem 5 – Collection Cycle  Problem 7 – Payable Cycle  Problem 9 – Accounts Receivable  Problem 11– Aging Accounts Receivable

16. Problems – Second Set  Problem 13 – Credit Screening  Problem 15 – Credit Terms  Problem 17 – Economic Order Quantity