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Effective Working Capital Management Strategies for Business Success

Learn how to optimize working capital, manage cash flow, minimize risks, and maximize returns through efficient management of current assets and liabilities. Discover key practices in cash collection, disbursements, investing, and credit analysis for improved financial performance.

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Effective Working Capital Management Strategies for Business Success

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  1. Working Capital • Current assets • Cash • A/R • Inventory • Current liabilities Working Capital Management

  2. 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

  3. Working Capital • Cash collection • Why checks? • Lockbox locations? • Automated payments Working Capital Management

  4. Working Capital • Cash disbursements • Zero balance accounts • Transfer to subaccount such as payroll • Overdraft protection Working Capital Management

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. Working capital • Inventory • Not too much… • Storage • Insurance • Obsolescence • Theft • Cost of carrying inventory Working Capital Management

  12. 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

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