Working capital management involves maintaining adequate current assets to fund daily operations while balancing carrying costs of holding excess inventory or receivables with shortage costs from stock-outs. The operating cycle of a firm from raw material purchase to cash collection affects how efficiently working capital is used. Factoring involves selling accounts receivable to a financial institution to access cash faster at the cost of a fee paid to the factor. Inventory policy must consider costs of holding inventory as well as ensuring adequate supply to meet production needs. Sources of working capital financing include equity, debt, trade credit, bank loans, and factoring.

1. Working Capital In God we trust. All others must pay cash. Anonymous

2. Concept of Working Capital Management Convert to cash within twelve months. Current Assets less Current Liabilities. Operating cycle of the firm. Balancing of Costs. - Carrying Costs - Stock out Costs (Shortage)

3. Carrying Costs and Shortage Costs $ Investment in Current Assets ($) Carrying costs Total costs of holding current assets. Shortage costs CA * Minimum point

4. Cash Conversion Cycle Inventory Conversion Period Receivables Conversion Period Operating Cycle Payables Deferral Period Cash Conversion Period.

5. The Operating Cycle and the Cash Cycle Time Accounts payable period Operating cycle Cash received Finished goods sold Firm receives invoice Cash paid for materials Cash cycle Accounts receivable period Inventory period Order Placed Stock Arrives Raw material purchased

6. Components Inventory Raw material Work-in-process Finished goods Accounts Receivables Cash and Marketable securities / Bank deposits.

7. Current Assets Convert to cash within one year. Operating cycle of the firm Seasonal pattern Nature of business Market position Supply conditions

8. Elements of Credit Policy Payment Terms Credit Standards Analysis of Credit Worthiness. Collection Management.

9. Analysis of Credit Worthiness Character Capacity to pay Collateral Capital Conditions.

10. Factoring The sale of a firm’s accounts receivable to a financial institution (known as a factor ). The firm and the factor agree on the basic credit terms for each customer. Firm Factor Customer Customers send payment to the factor The factor pays an agreed-upon percentage of the accounts receivable to the firm. The factor bears the risk of nonpaying customers Goods

11. Inventory Policy Ready Availability for production Costs of Inventory Lower price for large purchases More economical production runs Less Ordering Costs Reliability of supplies. Delivery time. Volume and mix of production. No. of items.

12. Cost of Inventory Carrying Cost Ordering Costs Stock out Costs Management Tools Economic order quantity Model Just in time Inventory ABC Analysis

13. Sources of Working Capital Financing Equity and Long term debt Trade credit Bank loans Factoring Commercial paper

14. Bank Financing Cash Credit / Overdrafts Bills Discounting Non Funded Limits

15. Non Funded Limits Letter of credit Guarantees No funds provided Assume credit risk

16. The decision to maintain higher inventories was taken to allow Fisher-Price to aggressively support first quarter sales in calendar 1992 and to further improve our quality of customer service. Fisher-Price , Inc., 1991 Annual Report, p.14