ch17.ppt

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ch17.ppt

  1. 1. Working Capital <ul><li>Current assets </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>A/R </li></ul></ul><ul><ul><li>Inventory </li></ul></ul><ul><li>Current liabilities </li></ul>
  2. 2. Working Capital <ul><li>Cash </li></ul><ul><ul><li>Minimize cash </li></ul></ul><ul><ul><ul><li>Returns available on cash </li></ul></ul></ul><ul><ul><ul><li>Business accounts </li></ul></ul></ul><ul><ul><li>Need for cash </li></ul></ul><ul><ul><ul><li>Pay bills </li></ul></ul></ul><ul><ul><ul><li>Take advantage of opportunities </li></ul></ul></ul><ul><ul><ul><ul><li>Lines of credit </li></ul></ul></ul></ul>
  3. 3. Working Capital <ul><li>Float </li></ul><ul><ul><li>Balance per books </li></ul></ul><ul><ul><li>Balance per bank (available balance) </li></ul></ul><ul><ul><li>Float = difference between two balances </li></ul></ul><ul><ul><ul><li>Outstanding checks: disbursement float </li></ul></ul></ul><ul><ul><ul><li>DIT: collection float </li></ul></ul></ul><ul><ul><ul><li>Which of the two is generally larger? </li></ul></ul></ul>
  4. 4. Working Capital <ul><li>Creating float </li></ul><ul><ul><li>Time payment is in mail </li></ul></ul><ul><ul><ul><li>IRS </li></ul></ul></ul><ul><ul><li>Processing </li></ul></ul><ul><ul><ul><li>IRS </li></ul></ul></ul><ul><ul><li>Availability </li></ul></ul><ul><ul><ul><li>Clear banking system </li></ul></ul></ul><ul><ul><ul><li>How do checks travel? </li></ul></ul></ul>
  5. 5. Working Capital <ul><li>Managing float </li></ul><ul><ul><li>Is it disappearing? </li></ul></ul><ul><ul><ul><li>EDI/Automated payments </li></ul></ul></ul><ul><ul><ul><li>Debit cards </li></ul></ul></ul>
  6. 6. Working Capital <ul><li>Cash collection </li></ul><ul><ul><li>Automated payments </li></ul></ul><ul><ul><li>Lockboxes </li></ul></ul><ul><ul><ul><li>Locations </li></ul></ul></ul>
  7. 7. Working Capital <ul><li>Cash disbursements </li></ul><ul><ul><li>Zero balance accounts </li></ul></ul><ul><ul><ul><li>Transfer to subaccount such as payroll </li></ul></ul></ul><ul><ul><li>Overdraft protection </li></ul></ul>
  8. 8. Working Capital <ul><li>Investing cash: Exxon $38.4 bil as of 9/08 </li></ul><ul><ul><li>Typically in short-term securities </li></ul></ul><ul><ul><ul><li>Maturity < 90 days </li></ul></ul></ul><ul><ul><ul><li>No default risk </li></ul></ul></ul><ul><ul><ul><li>Liquid </li></ul></ul></ul><ul><ul><ul><li>Taxable vs. tax-exempt </li></ul></ul></ul>
  9. 9. Working Capital <ul><li>Types of short-term securities </li></ul><ul><ul><li>Money market accounts </li></ul></ul><ul><ul><ul><li>Banks </li></ul></ul></ul><ul><ul><ul><li>Mutual funds </li></ul></ul></ul><ul><ul><li>T-bills </li></ul></ul><ul><ul><li>Muni short-term securities </li></ul></ul><ul><ul><li>Commercial paper: unsecured </li></ul></ul><ul><ul><li>CDs </li></ul></ul><ul><ul><li>Adjustable preferred stock: dividend exclusion (70%) </li></ul></ul>
  10. 10. Working Capital <ul><li>Credit sales </li></ul><ul><ul><li>Terms of sale </li></ul></ul><ul><ul><ul><li>5/30, n/90 </li></ul></ul></ul><ul><ul><ul><li>Length of credit period </li></ul></ul></ul><ul><ul><ul><ul><li>Time to turnover product </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Competition </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Credit risk </li></ul></ul></ul></ul>
  11. 11. Working Capital <ul><li>Credit sales </li></ul><ul><ul><li>Terms of sale </li></ul></ul><ul><ul><ul><li>5/30, n/90 </li></ul></ul></ul><ul><ul><ul><li>Pay $95.00 by 9/5; otherwise $100.00 by 11/15 </li></ul></ul></ul><ul><ul><ul><li>Effective return to buyer </li></ul></ul></ul><ul><ul><ul><li>Why offer these terms? </li></ul></ul></ul>
  12. 12. Working Capital <ul><li>Credit policy </li></ul><ul><ul><li>Steak N Shake: why formerly no credit cards? </li></ul></ul><ul><ul><li>Benefits of selling on credit </li></ul></ul><ul><ul><ul><li>Increased sales </li></ul></ul></ul><ul><ul><li>Cost of selling on credit </li></ul></ul><ul><ul><ul><li>Cost of A/R </li></ul></ul></ul><ul><ul><ul><li>Bad debt </li></ul></ul></ul><ul><ul><ul><li>Managing credit department </li></ul></ul></ul><ul><ul><ul><ul><li>Credit cards? </li></ul></ul></ul></ul>
  13. 13. Working Capital <ul><li>Credit analysis </li></ul><ul><ul><li>Scoring </li></ul></ul><ul><ul><ul><li>Experian: 340-820 </li></ul></ul></ul><ul><ul><ul><li>Factors </li></ul></ul></ul><ul><ul><ul><ul><li>Pay bills on time: minimum? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Real estate loans </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Number of credit cards, balances, available balance </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Applications for credit </li></ul></ul></ul></ul>
  14. 14. Working Capital <ul><li>Credit analysis </li></ul><ul><ul><li>Character: willingness to pay </li></ul></ul><ul><ul><li>Capacity: ability to pay </li></ul></ul><ul><ul><ul><li>Aging schedule on page 527 </li></ul></ul></ul><ul><ul><li>Capital: assets </li></ul></ul><ul><ul><li>Collateral: pledged assets </li></ul></ul><ul><ul><li>Conditions: business conditions </li></ul></ul>
  15. 15. Working capital <ul><li>Inventory </li></ul><ul><ul><li>Not too much… </li></ul></ul><ul><ul><ul><li>Storage </li></ul></ul></ul><ul><ul><ul><li>Insurance </li></ul></ul></ul><ul><ul><ul><li>Obsolescence </li></ul></ul></ul><ul><ul><ul><li>Theft </li></ul></ul></ul><ul><ul><ul><li>Cost of carrying inventory </li></ul></ul></ul>
  16. 16. Working capital <ul><li>Inventory </li></ul><ul><ul><li>Not too little: </li></ul></ul><ul><ul><ul><li>Lost sales </li></ul></ul></ul><ul><ul><ul><li>Restocking </li></ul></ul></ul><ul><ul><li>Just right </li></ul></ul><ul><ul><ul><li>EOQ </li></ul></ul></ul><ul><ul><ul><ul><li>Impact of change in fixed costs; carrying costs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Safety stock </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Reorder point </li></ul></ul></ul></ul><ul><ul><ul><li>MRP: what do I need to build a car? </li></ul></ul></ul><ul><ul><ul><li>JIT: who holds the inventory? </li></ul></ul></ul>

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