Working Capital

Current assets
 Cash
 A/R
 Inventory

Current liabilities
Working Capital Management
1
Working Capital

Cash
 Minimize
cash
Returns available on cash
 Business accounts

 Need
for cash
Pay bills: McDonalds versus General Motors
 Take advantage of opportunities
 Lines of credit

Working Capital Management
2
Working Capital

Cash collection
 Why

checks?
Lockbox locations?
 Automated
payments
Working Capital Management
3
Working Capital

Cash disbursements
 Zero

balance accounts
Transfer to subaccount such as payroll
 Overdraft
protection
Working Capital Management
4
Working Capital

Investing cash: Apple: $147 billion
 Typically
in short-term securities
Maturity < 90 days
 No default risk
 Liquid
 Taxable vs. tax-exempt

Working Capital Management
5
Working Capital

Types of short-term securities
 Money


market accounts
Banks
Mutual funds
 T-bills
 Muni
short-term securities
 Commercial paper: unsecured
 CDs
 Adjustable preferred stock: dividend exclusion (70%)
Working Capital Management
6
Working Capital

Credit sales
 Terms of sale
 5/30, n/90
 Length of credit period
 Time to turnover product
 Competition
 Credit risk
 Effective return
Working Capital Management
7
Working Capital

Credit policy
 Steak
N Shake: why formerly no credit cards?
 Benefits of selling on credit

Increased sales
 Cost
of selling on credit
Cost of A/R
 Bad debt
 Managing credit department


Credit cards?
Working Capital Management
8
Working Capital

Credit analysis
 Scoring
 Experian: 340-820
 Factors
 Pay bills on time: (35%) recent late payments versus prior late
payments
 Amount you owe (30%)
 -0 Close to credit limit
 Length of credit history (15%)
 New credit (10%)
 Refi versus new car loan
 Hard versus soft inquiries
 Type of debt
 Home mortgage versus student loans/credit card debt
Working Capital Management
9
Working Capital

Credit analysis
 Character:
willingness to pay
 Capacity: ability to pay

Aging schedule on page 527
 Capital:
assets
 Collateral: pledged assets
 Conditions: business conditions
Working Capital Management
10
Working capital

Inventory
 Not
too much…
Storage
 Insurance
 Obsolescence
 Theft
 Cost of carrying inventory

Working Capital Management
11
Working capital

Inventory
 Not too little:
 Lost sales
 Restocking
 Just right
 EOQ: Square root of (2TxF)/CC
 Impact of change in fixed costs; carrying costs
 Safety stock
 Reorder point
 MRP: what do I need to build a car?
 JIT: who holds the inventory?
Working Capital Management
12