1. Dr. David P EchevarriaAll Rights Reserved1 Working Capital Management Chapter 15 Working Capital Management Strategies Cash and Marketable Securities, Accounts Receivable, Inventory Financing Current Assets

2. Dr. David P EchevarriaAll Rights Reserved2 WORKING CAPITAL MANAGEMENT A. Working Capital 1. In a perfect world, the firm would hold just enough; a. Cash to pay bills. b. Accounts receivable to support the credit policy. c. Inventory to meet sales requirements. 2. WCM is necessary - dealing with uncertainty. a. Knowledge of the future is uncertain. b. Devise strategies to deal with uncertainty.

3. Dr. David P EchevarriaAll Rights Reserved3 WORKING CAPITAL MANAGEMENT B. Importance of Current Assets 1. Current assets typically comprise half of total assets. 2. Current asset investment can be quite volatile. 3. Fixed assets may be acquired via leasing, current assets cannot be leased. 4. Current asset investment levels dominated by sales.

4. Dr. David P EchevarriaAll Rights Reserved4 CASH MANAGEMENT A. Requirement for Cash Balances 1. Transaction needs; day-to-day cash needs 2. Precautionary needs; "rainy day" needs 3. Speculation needs; take advantage opportunities 4. Compensatory Balances; required min balances

5. Dr. David P EchevarriaAll Rights Reserved5 CASH MANAGEMENT B. Determining Level Of Cash Balances 1. Level of cash balances determined by; a. Desired level of liquidity (loan covenants). b. Pace of sales activity (volatile sales, more cash). c. Compensatory balance requirements (bank services). d. Scheduled receipts and expenditures: cash cycle.

6. Dr. David P EchevarriaAll Rights Reserved6 CASH MANAGEMENT 2. Cash Conversion Cycle (CCC) a. Important factor in determining the level cash. b. CCC = time between disbursement (RM) & collection (SLS). c. Affected by WCM management policies d. Affected by credit policies. e. Cash Flow deficit/excess management

7. Dr. David P EchevarriaAll Rights Reserved7 MARKETABLE SECURITIES When Cash Flows Exceed Current Needs A. Desired Qualities For Marketable Securities; 1. Marketability; salability without price penalty. 2. Minimum default risk; getting your investment back. 3. Minimizing interest rate risk; keeping maturities short. 4. Minimizing purchasing power risk; effects of inflation.

8. Dr. David P. EchevarriaAll Rights Reserved8 ACCOUNTS RECEIVABLE (A/R) A. A/R result of credit sales B. A/R are initially financed by company C. A/R and Credit Policy: Managing DSO 1. Easy policy results in higher levels of sales and A/R. 2. Tight policy results in lower sales and A/R. 3. Policy affects the bad debt experience level. 4. Use of discounts to induce early payment.

9. Dr. David P. EchevarriaAll Rights Reserved9 ACCOUNTS RECEIVABLE (A/R) D. Credit Policy; the Five C's 1. Character; credit history of borrower. 2. Capacity; how much income do the make. 3. Capital; what assets do they have. 4. Collateral; do they need to pledge assets. 5. Conditions; expectations relative to economy.

10. Dr. David P. EchevarriaAll Rights Reserved10 INVENTORY MANAGEMENT A. Rationales for Inventory; 1. Help smooth production effort. 2. Take advantage of economies of scale. 3. Separate production & consumption functions. 4. Hedge against unexpected supply and demand

11. Dr. David P. EchevarriaAll Rights Reserved11 INVENTORY MANAGEMENT B. Types of Inventory Costs 1.Carrying costs – storage and handling costs, insurance, property taxes, depreciation, and obsolescence. 2.Ordering costs – cost of placing orders, shipping, and handling costs. 3.Costs of running short – loss of sales or customer goodwill, and the disruption of production schedules.

12. Dr. David P. EchevarriaAll Rights Reserved12 INVENTORY MANAGEMENT C. Inventory Control Models 1. Sales Independent Model: EOQ (Economic Order Quantity) a. Model used for ordering supplies (MRO items). b. EOQ = [2SO / CP] 1/2 2. Sales Dependent Model; MRP a. Net Requirements system. b. Requirements determined by Master Production Schedule.

13. Dr. David P. EchevarriaAll Rights Reserved13 HOMEWORK CHAPTER 15 A.Self-Test - 1: parts a, c, e, f, i B.Questions: 15-2, 15-3, 15-9, 15-10 C.Problems: 15-4, 15-5, 15-7

14. HOMEWORK CHAPTER 15 E. Special WCM Management Spreadsheet Simulation 1.Students will receive a set of instructions and an Excel file. 2.The problems requires analysis of several management options 3.Students will prepare a short comment on the effects of each option. 4.The comment sheet must be emailed to instructor when due. Date 2/24/2013 Dr. David P EchevarriaAll Rights Reserved14