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Working Capital

Working Capital. Current assets Cash A/R Inventory Current liabilities. 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.

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Working Capital

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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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