Chapter 10

1. Chapter 10 Working Capital Management

2. Management of Cash and Marketable Securities • Reasons for holding cash • Transactions motive • Precautionary motive • Speculative motive • Compensating balance requirements • Compensating balance requirement raises effective cost of loan • Meet some of cash needs with marketable securities

3. Management of Cash and Marketable Securities • To improve cash flow: • Synchronize cash inflows with cash outflows • Expedite check clearing • Slow disbursements • Maximize use of float • New development in financial services industry are impacting cash management • Electronic funds transfer system • Money market mutual funds • Commercial bank cash management services

4. Accounts Receivable Management • Balance cost of extending credit with benefit derived from credit sales • Whether or not to offer credit is generally dictated by industry practice • Five C’s of credit analysis • Character, Capacity, Capital, Collateral, Conditions

5. Accounts Receivable Management • Commercial credit service: • Dun and Bradstreet • Credit Interchange • Cost of credit • Cost of financing accounts receivable • Cost of offering discounts • Cost of bad debt losses

6. Accounts Receivable Management • Exhibits 10.1 and 10.2 illustrate impact of two alternative credit policies • Credit manager is also responsible for supervising collection of accounts receivable; balance the need to collect with the need to maintain customer goodwill

7. Inventory Management • Economic order quantity model balances carrying costs and ordering costs • Carrying costs increase with increases in average inventory level • Ordering costs decrease with increases in average inventory level • EOQ model determines optimal average inventory level such that sum of ordering costs and carrying costs is minimized

8. Inventory Management • Exhibit 10.3 graphs cost behavior • Modify basic model for delivery lags and uncertainty in estimates • Appendix 10.1 gives mathematical derivation for EOQ

9. Sources of Short-term Financing • Trade credit is a source of spontaneous financing • Short-term commercial bank loans can be secured or unsecured • Commercial paper is used by only the largest firms with AAA credit ratings

10. Financing Accounts Receivable • Accounts receivable can be pledged as general collateral • Assigned: borrowing firm signs over right to collect receivables to lender • Factored: accounts receivable are sold at a discount to a commercial factor, commercial bank, or other lenders; the factor provides financing, acts as borrower’s credit department, and assumes risk of default; this is an expensive method

11. Inventory Financing • A blanket lien comparable to pledging accounts receivable is most common • Trust receipt creates a specific lien against specific asset; it is used in financing big-ticket inventory items, such as cars • Field warehouse: inventory pledged as collateral under physical control of leader