Review of Working Capital
Ch. 6
This is concerned with the financing and
management of the current assets of the
firm.
Working Capital
Short-term financing is generally less
costly but more risky than long term
financing.
Making a decision on financing can be
done by computing the value of various
financing plans and looking at the risks
and costs associated with each
Ultimate current asset composition and financing
decision should be consistent with firm’s goal of
maximizing owner’s wealth
Aggressive firm will borrow short term and carry
high levels of inventory
Conservative firm will maintain high liquidity and
use long-term financing
Choice of financing will impact a firm’s earnings
after taxes
PPT 7-1
FIGURE 7-2
Expanded
cash flow
cycle
Ch. 7
Finance managers try to maximize cash
balances by speeding up inflows and
slowing down outflows
Can be done with a lockbox/collection
system, or EFT
A/R
Managing accounts receivable is also
important.
A technique to help is to make sure the
average collection period is acceptable to
the company.
Aging of accounts also provides more indepth information.
A/R
Managing accounts receivable also
required setting credit policy. There are 5
C’s to consider:
– Character
– Capital
– Capacity
– Conditions
– Collateral
A/R
You can also offer a trade discount to bring
in receivables faster
Managing Inventory is also important in
working capital management
Use the EOQ formula to determine optimal
order size
Safety stock may also be added to the
EOQ
Chapter 8
There are a number of places to find short
term funds for businesses
Credit extended by supplies is a very
popular source. This is called trade credit.
Managing trade credit means calculating
the value of discounts offered to see if
they should be taken or passed up. This is
the cost of not taking the discount.
Banks are also a source of funding. Often
fees for services are waived or loans are
provided if a minimum balance is kept by
the company in the bank. This is called a
compensating balance.
Interests on loans may also be paid at the
beginning of the loan. This is called
discounting.
Both compensating balances and
discounting affect the effective rate of
interest paid on a loan.
The interest rate for the most credit-worthy
borrowers is called the prime rate.
Vocabulary
permanent current
assets
trade credit
lock-box
aging of accounts
receivable
carrying cost
credit terms
economic ordering
quantity
safety stock
JIT
LIBOR
prime rate
APR