1. Working Capital Management Current Assets & Current Liabilities Current means that the assets will be “turned” into cash during a normal operating cycle of the business Current means that the assets will be “turned” into cash during a normal operating cycle of the business Current means that the liabilities will be “paid” during the normal operating cycle of the business Current means that the liabilities will be “paid” during the normal operating cycle of the business Net Working Capital is the excess of current assets minus current liabilities Net Working Capital is the excess of current assets minus current liabilities

2. Working Capital Management Why Manage Working Capital Failure to meet current obligations is the number one reason for bankruptcy Failure to meet current obligations is the number one reason for bankruptcy Poor Working Capital Management is a very expensive component of a business Poor Working Capital Management is a very expensive component of a business Determining the Funding Mix Short Term Funding Short Term Funding Long Term Funding Long Term Funding

3. Working Capital Management Two Basic Strategies – Aggressive Strategy Aggressive Strategy Fund a higher percentage of the business with short term funds Advantage – Cost of funds may be lower than long-term funds Disadvantage – Cost of funds may be higher than long-term funds Conservative Strategy Conservative Strategy Fund a higher percentage of the business with long term funds

4. Working Capital Management Sources of Short-Term Cash Accounts Payable Accounts Payable Credit Terms – Problem 1 When would you pay? What is your implied interest rate? Problem 4 Implied EAR for Accounts Receivable or Payable Implied EAR for Accounts Receivable or Payable EAR = (1 + [discount / ( 1 – discount )]) 365/Days –1 Example of 2/10 net 60 EAR = ( 1 + (2/98) ) 365/50 – 1 = 1.0204 365/50 – 1 = 15.89% Homework Problem 2…do not use textbook method Homework Problem 2…do not use textbook method

5. Working Capital Management Sources of Short Term Cash Continued Accruals Accruals Delay Payments Ethical Issue? Bank Loans Bank Loans Straight Loans (Notes) Pre-Arranged Borrowing (Line of Credit) Revolving Credit Problem 10 Commercial Paper Commercial Paper

6. Working Capital Management Sources of Short Term Cash Continued Collateral Collateral Accounts Receivables & Factoring Inventory - Pledged Warehouse Receipts Problem 17 – Selling off receivables versus using a collection agent Problem 17 – Selling off receivables versus using a collection agent