The document discusses key concepts related to working capital management. It defines working capital as the assets and liabilities used for day-to-day operations, including cash, receivables, inventory, payables, and accruals. The objective is to manage working capital efficiently with minimal funds tied up in short-term assets while balancing operational needs. Short-term financing options are also reviewed, including spontaneous financing from payables/accruals, bank loans, commercial paper, and asset-based lending secured by receivables or inventory. Cash and receivables management techniques aim to accelerate cash inflows and outflows.
Meaning
Types of working capital
Factors of determining working capital
Operating working capital cycle
Importance of operating cycle concept
Internal factors
External factors
General factors
Types of capital structure
Characteristics of security
Meaning
Types of working capital
Factors of determining working capital
Operating working capital cycle
Importance of operating cycle concept
Internal factors
External factors
General factors
Types of capital structure
Characteristics of security
The matter includes concept and types of Working Capital. Further it explains Optimum Level of Current Assets, Various Approaches to Working Capital Financing. Then Operating Cycle, Cash Cycle and Working Capital Estimation Techniques are discussed.
Cash is the lifeblood of every business.
Cash is the most liquid current asset a firm can hold
Efficient cash management helps the company to remain healthy and strong.
Poor cash management, may end up pushing the company to a crisis.
Youtube Video Link - https://youtu.be/XUVhuqlg6G0
This tends to cover the basics of cash management in terms of its meaning, objectives, functions and tools explained in simple manner. ( cash management, motives for holding cash, objectives of cash management, cash budget, cash flow statement).
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The matter includes concept and types of Working Capital. Further it explains Optimum Level of Current Assets, Various Approaches to Working Capital Financing. Then Operating Cycle, Cash Cycle and Working Capital Estimation Techniques are discussed.
Cash is the lifeblood of every business.
Cash is the most liquid current asset a firm can hold
Efficient cash management helps the company to remain healthy and strong.
Poor cash management, may end up pushing the company to a crisis.
Youtube Video Link - https://youtu.be/XUVhuqlg6G0
This tends to cover the basics of cash management in terms of its meaning, objectives, functions and tools explained in simple manner. ( cash management, motives for holding cash, objectives of cash management, cash budget, cash flow statement).
Follow DevTech Finance on :-
Instagram - https://www.instagram.com/devtechfinance/
LinkedIn - https://www.linkedin.com/company/devtech-finance
Facebook - https://www.facebook.com/devtechfinance/
Slideshare - https://www.slideshare.net/NishaNandani
Thank You For Watching
Please Subscribe To DevTech Finance
FREE PPT OF WORKING CAPITAL MANAGEMENT / HOW TO MAKE PPT ON WORKING CAPITAL / SMU MBA FINANCE PPT ON WORKING CAPITAL MANAGEMENT / SMU 4TH SEMESTER FINANCE MBA PROJECT REPORT ON SSI WORKING CAPITAL MANAGEMENT
Overview, Objectives and Readings Page 1 of 1OverviewT.docxgerardkortney
Overview, Objectives and Readings Page 1 of 1
Overview
This week we will further explore working capital management by focusing on various sources of short-term financing. These
sources can include trade credit, bank loans, commercial paper, the use of accounts receivable and inventory as collateral
and hedging interest rate risk.
Practice Problems: Please see the syllabus for assigned homework/practice problems.
Objectives Readings
_ _ _ __ .._
Learning objectives: Week 5 lecture materials
1. Trade credit from suppliers is normally the most Project instructions
available form of short-term financing.
2. Bank loans are usually short-term in nature and should Chapter 8
be paid off from funds from the normal operations of the
firm.
3. Commercial paper represents ashort-term, unsecured
promissory note issued by the firm.
4. By using accounts receivable and inventory as collateral
for a loan, the firm may be able to borrow larger
amounts.
5. Hedging may be used to offset the risk of interest rates
rising.
O Walsh College, Al! rights reserved
https://ool-content.walshcollege.edu/CourseFiles/FIN/FIN315/jesdale/Week05/OOR/Obj... 10/30/2017
Page 1 of 3
Financing Working Capital
Content Author: Louise August, CPA, PhD
i n the lectures on Working Capital (WC) we talked about the dollar amounts tied up in assets like Accounts Receivable (AR)
and Inventory. Because these accounts often represent substantial balances, we may need to think about how the firm can
finance its investment in WC Assets.
The first concept to consider is "Maturity Matching." That means that short-term needs should be financed with short-term
debt and vice-versa. You wouldn't finance a building with a 90-day note. So if we're thinking about how to finance the
investment in short-term assets like Receivables and Inventory short-term financing is probably the way to go.
~7~t~,tt'I~~/ ~c3~C~'tlt'1 :
Supplying the investment in WC assts with ST sources of Financing
Accounts r~e~eiva~le ~ Accruals
Inver►tory Accounts payable
5T bank loans
There are a number of sources of short-term capital available to the firm and we'll look at each of these in turn:
1. Accruals
2. Accounts Payable
3. Commercial Paper (not available to all firms, so not listed in the graphic above)
4. Short-Term Bank Loans
Accruals
This balance sheet line item usually represents unpaid wages and taxes. These
accounts represent the time periods between when a benefit is received and the
payment for it is made. An example is payroll (Accrued Wages): an employee works
today but the wages earned aren't paid until payday. Accrual accounting requires that
the firm recognize the benefit it received from the employee's efforts and the obligation it
has to pay the wages. Similarly with taxes, the firm earns a portion of its profits
throughout the year but only makes tax payments each quarter.
Not financing in the classic sense, but these accounts do represent a period of time during which payment i.
A current asset is either cash or an asset (e.g. stock) that can be converted into cash within a year and is often used to pay off current liabilities.
Current assets typically include categories such as cash, marketable securities, short-term investments, accounts receivable , prepaid expenses, and inventory.
Approaches to Financing Current Assets.
Instruments in raising finance.
advantages and disadvantages of trade credit.
inter Corporate Deposits , etc.
25. Unsecured Bank Loans Q: A firm borrows $100,000 subject to a 20% compensating balance. The firm will only receive $80,000 in usable funds and the remaining $20,000 must remain in the firm’s account. If the stated rate on the loan is 12%, what is the effective rate? A: The firm must pay the 12% on the entire $100,000 borrowed. Thus, the firm will pay $12,000 in interest for a year on $80,000 of usable funds. This translates to an effective annual rate of 15%, or $12,000 $80,000. Example
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31. Short-Term Credit Secured by Current Assets—Example Q: The Kilraine Quilt Company has an average receivables balance of $100,000 which turns over once every 45 days. It generally pledges all of its receivables to the Kirkpatrick County Cooperative Finance Company, which advances 75% of the total at 4% over prime plus a 1.5% administrative fee. If prime is 11%, what total interest rate is Kilraine effectively paying for its receivables financing? A: Since the finance company advances 75% of the receivables balance, the average loan amount is $75,000. Interest at 4% over prime is 15%. The firm pledges all of its receivables, thus $800,000 in new receivables are pledged each year ($100,000 x 360/45). The administrative fee of 1.5% is charged on this amount and is $12,000, or 1.5% x $800,000. This amounts to 16% of the average loan balance ($12,000 $75,000), thus the annual interest rate is 16% + 15%, or 31%. Example
39. Figure 15.6: A Lock Box System in the Check-Clearing Process
40. Lock-Box Example Q: Kelso Systems Inc. operates primarily on the East Coast, but has a cluster of customers in California that remit about 5,000 checks a year. The average check is for $1,000. West Coast checks currently take an average of eight days from the time they are mailed by customers to clean into Kelso’s East Coast account. A California bank has offered Kelso a lock box system for $2,000 a year plus $0.20 per check. The system can be expected to reduce the clearing time to six days. Is the bank’s proposal a good deal for Kelso if it borrows at 12%? A: On average Kelso has $109,589 tied up in cash, or [(8 365) x $1,000 x 5,000] but the proposed lockbox system will reduce this to $82,192, or [(6 365) x $1,000 x 5,000]; thus, freeing up $27,397 of cash. Kelso will be able to borrow $27,397 less, thus saving $3,288 in interest [$27,397 x 0.12]. The system is expected to cost $3,000, or [$2,000 + ($0.20 x 5,000)]. Hence, the bank’s proposal is only marginally worth doing. Example
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53. Economic Order Quantity (EOQ) Model—Example Q: The Galbraith Corp. buys a part that costs $5. The carrying cost of inventory is approximately 20% of the part’s dollar value per year. It costs $45 to place, process and receive an order. The firm uses 1,000 of the $5 parts per year. What ordering quantity minimizes inventory costs and how many orders will be placed each year if that order quantity is used? What inventory costs are incurred for the part with this ordering quantity? A: Since the unit carrying cost is 20% of the part’s price, the annual carrying cost per unit in dollars is $1, or 20% x $5. Substituting the known information into the EOQ equation, we have: Example The annual number of reorders is 1,000 300, or 3.33. Carrying costs are $150 a year, or (300 2) x $5 x 20%; and ordering costs are $45 x 3.333, or $150. The total inventory cost of the part is $300.