Chapter 13 Working Capital ManagementShort-term Cash Flow PlanningSlide 3Slide 4Slide 5Managing Accounts ReceivableSlide 7Credit Terms, Float & Cash ManagementSlide 9Inventory ManagementSlide 11Slide 12Slide 13Effect of Working Capital on Capital BudgetingProblems – First SetProblems – Second SetChapter 13Chapter 13Working Capital ManagementWorking Capital ManagementShort-term Cash Flow PlanningShort-term Cash Flow PlanningManaging Accounts Receivable Managing Accounts Receivable Credit Terms, Float, and Cash Credit Terms, Float, and Cash ManagementManagementInventory ManagementInventory ManagementEffect of Working Capital on Capital Effect of Working Capital on Capital BudgetingBudgetingShort-term Cash Flow PlanningShort-term Cash Flow PlanningCash is an inventory itemCash is an inventory itemNeed to know how much you will need to complete Need to know how much you will need to complete daily transactionsdaily transactionsAnticipate daily cash inflow Anticipate daily cash inflow Plan for any short fall between outflow and inflowPlan for any short fall between outflow and inflowFor a business it’s the cash conversion cycle For a business it’s the cash conversion cycle (CCC)(CCC)CCC looks at the timing of cash flow or how long CCC looks at the timing of cash flow or how long it takes the business to generate cash flow from it takes the business to generate cash flow from a salea saleShort-term Cash Flow PlanningShort-term Cash Flow PlanningCCC componentsCCC componentsProduction cycle – from when product is Production cycle – from when product is started until customer “buys” the productstarted until customer “buys” the productCollection cycle – from time customer “buys” Collection cycle – from time customer “buys” the product until customer makes paymentthe product until customer makes paymentPayment cycle – from the time company Payment cycle – from the time company receives materials for production until the receives materials for production until the company makes payment to suppliercompany makes payment to supplierCCC = Production + Collection - PaymentCCC = Production + Collection - PaymentShort-term Cash Flow PlanningShort-term Cash Flow PlanningEstimating production cycleEstimating production cycleFind average inventoryFind average inventoryDetermine inventory turnover using COGSDetermine inventory turnover using COGSCalculate production cycleCalculate production cycleExample page 351…7.6 DaysExample page 351…7.6 DaysEstimate collection cycleEstimate collection cycleFind average accounts receivableFind average accounts receivableDetermine A/R turnover using credit salesDetermine A/R turnover using credit salesCalculate collection cycleCalculate collection cycleExample page 352…13.8 daysExample page 352…13.8 daysShort-term Cash Flow PlanningShort-term Cash Flow PlanningEstimate payment cycleEstimate payment cycleFind average accounts payableFind average accounts payableDetermine accounts payable turnoverDetermine accounts payable turnoverCalculate payment cycleCalculate payment cycleExample page 353…7.0 daysExample page 353…7.0 daysCCC = 7.6 + 13.8 – 7.0 = 14.4 daysCCC = 7.6 + 13.8 – 7.0 = 14.4 daysMust carry operations 15 daysMust carry operations 15 daysManaging Accounts ReceivableManaging Accounts ReceivableObjective in accounts receivable Objective in accounts receivable management: speed up receivablesmanagement: speed up receivablesWant payment from customers as soon as Want payment from customers as soon as practicalpracticalMust be aware of standard business practicesMust be aware of standard business practicesFirst step is to estimate cash flow from First step is to estimate cash flow from salessalesCash sales at time of saleCash sales at time of saleCredit sales over extended period of timeCredit sales over extended period of timeManaging Accounts ReceivableManaging Accounts ReceivableAging receivablesAging receivablesIdentifies chronic late payersIdentifies chronic late payersAssigns late fees to proper accountsAssigns late fees to proper accountsFollow-up with late paying customersFollow-up with late paying customersExample 13.2Example 13.2Follow-up invoice with late feesFollow-up invoice with late feesLate fees billed by individual invoicesLate fees billed by individual invoicesCredit Terms, Float Credit Terms, Float & Cash Management& Cash ManagementGranting of credit to customersGranting of credit to customersPolicy on qualifying customers for creditPolicy on qualifying customers for creditPolicy on payment planPolicy on payment planPolicy on follow-up for late paymentsPolicy on follow-up for late paymentsQualifying for creditQualifying for creditCredit screeningCredit screeningIncreasing cost as more information requiredIncreasing cost as more information requiredIncreasing cost usually match the increase in the size of the Increasing cost usually match the increase in the size of the creditcreditExample 13.3 – Inflatable boatsExample 13.3 – Inflatable boatsCredit Terms, Float Credit Terms, Float & Cash Management& Cash ManagementPayment PolicyPayment PolicyMethods to speed up receivablesMethods to speed up receivablesDiscount for speedy paymentDiscount for speedy paymentLock boxes for faster processing of paymentsLock boxes for faster processing of paymentsWire transfersWire transfersYour Payment Policy (Accounts Payable)Your Payment Policy (Accounts Payable)Methods to slow down payablesMethods to slow down payablesCheck payment Check payment Playing the float with remote disbursementsPlaying the float with remote disbursementsInventory ManagementInventory ManagementKeeping track of inventoryKeeping track of inventoryABC MethodABC MethodA goods are critical goods, or high priced goodsA goods are critical goods, or high priced goodsB goods are moderately priced or essential goodsB goods are moderately priced or essential goodsC goods are low priced or non-essential goodsC goods are low priced or non-essential goodsMost effort is spent on A goodsMost effort is spent on A goodsLittle effort is spent on C goodsLittle effort is spent on C goodsEconomic Order Quantity – how much Economic Order Quantity – how much inventory to keep on handinventory to keep on handInventory ManagementInventory