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Chapter 13 Working Capital Management. Short-term Cash Flow Planning Managing Accounts Receivable Credit Terms, Float, and Cash Management Inventory Management Effect of Working Capital on Capital Budgeting. Short-term Cash Flow Planning. Cash is an inventory item

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chapter 13 working capital management
Chapter 13Working Capital Management
  • Short-term Cash Flow Planning
  • Managing Accounts Receivable
  • Credit Terms, Float, and Cash Management
  • Inventory Management
  • Effect of Working Capital on Capital Budgeting
short term cash flow planning
Short-term Cash Flow Planning
  • Cash is an inventory item
    • Need to know how much you will need to complete daily transactions
    • Anticipate daily cash inflow
    • Plan for any short fall between outflow and inflow
  • For a business it’s the cash conversion cycle (CCC)
  • CCC looks at the timing of cash flow or how long it takes the business to generate cash flow from a sale
short term cash flow planning1
Short-term Cash Flow Planning
  • CCC components
    • Production cycle – from when product is started until customer “buys” the product
    • Collection cycle – from time customer “buys” the product until customer makes payment
    • Payment cycle – from the time company receives materials for production until the company makes payment to supplier
  • CCC = Production + Collection - Payment
short term cash flow planning2
Short-term Cash Flow Planning
  • Estimating production cycle
    • Find average inventory
    • Determine inventory turnover using COGS
    • Calculate production cycle
    • Example page 351…7.6 Days
  • Estimate collection cycle
    • Find average accounts receivable
    • Determine A/R turnover using credit sales
    • Calculate collection cycle
    • Example page 352…13.8 days
short term cash flow planning3
Short-term Cash Flow Planning
  • Estimate payment cycle
    • Find average accounts payable
    • Determine accounts payable turnover
    • Calculate payment cycle
    • Example page 353…7.0 days
  • CCC = 7.6 + 13.8 – 7.0 = 14.4 days
  • Must carry operations 15 days
managing accounts receivable
Managing Accounts Receivable
  • Objective in accounts receivable management: speed up receivables
    • Want payment from customers as soon as practical
    • Must be aware of standard business practices
  • First step is to estimate cash flow from sales
    • Cash sales at time of sale
    • Credit sales over extended period of time
managing accounts receivable1
Managing Accounts Receivable
  • Aging receivables
    • Identifies chronic late payers
    • Assigns late fees to proper accounts
    • Follow-up with late paying customers
  • Example 13.2
    • Follow-up invoice with late fees
    • Late fees billed by individual invoices
credit terms float cash management
Credit Terms, Float & Cash Management
  • Granting of credit to customers
    • Policy on qualifying customers for credit
    • Policy on payment plan
    • Policy on follow-up for late payments
  • Qualifying for credit
    • Credit screening
      • Increasing cost as more information required
      • Increasing cost usually match the increase in the size of the credit
    • Example 13.3 – Inflatable boats
credit terms float cash management1
Credit Terms, Float & Cash Management
  • Payment Policy
    • Methods to speed up receivables
      • Discount for speedy payment
      • Lock boxes for faster processing of payments
      • Wire transfers
  • Your Payment Policy (Accounts Payable)
    • Methods to slow down payables
      • Check payment
      • Playing the float with remote disbursements
inventory management
Inventory Management
  • Keeping track of inventory
    • ABC Method
      • A goods are critical goods, or high priced goods
      • B goods are moderately priced or essential goods
      • C goods are low priced or non-essential goods
    • Most effort is spent on A goods
    • Little effort is spent on C goods
  • Economic Order Quantity – how much inventory to keep on hand
inventory management1
Inventory Management
  • Cost components of inventory
    • Carrying Costs
      • The storage and handling costs while inventory is in “store” or “manufacturing facililty”
      • Costs include space and utilities
    • Ordering Costs
      • The cost paid to ship inventory items from supplier to company
      • Does not include the cost of the item
  • EOQ finds optimal trade-off between carrying costs and ordering costs
inventory management2
Inventory Management
  • Carrying Costs (cc), per unit carrying costs times average inventory
  • Ordering Costs (oc) number of orders times cost per order
  • Total Inventory Costs = CC + OC
  • EOQ is optimal order quantity that minimizes total inventory costs with S being annual sales
inventory management3
Inventory Management
  • Additional Issues with EOQ
    • Reorder Point
      • Placement of order quantity before inventory hits zero due to shipping time
      • Does not alter the actual order quantity or average inventory on hand
    • Safety Stock
      • Placement of order quantity before inventory hits zero and with additional days in case order is delayed
      • Does not alter quantity but does increase average inventory on hand
  • JIT – Just in Time, system that sets safety stock to zero
effect of working capital on capital budgeting
Effect of Working Capital on Capital Budgeting
  • Working Capital usually a necessary component of a project
    • Build up current assets and current liabilities at start of a project
    • Necessary components for making products
    • Expensed as products are sold
  • Maintained inventory levels during the project but could build as production increases
  • Recover working capital at end of project
    • Draw down of inventory items supporting production
    • Because items are expensed in COGS must show recovery of current assets and current liabilities
problems first set
Problems – First Set
  • Problem 1 – Business Operating Cycle
  • Problem 3 – Production Cycle
  • Problem 5 – Collection Cycle
  • Problem 7 – Payable Cycle
  • Problem 9 – Accounts Receivable
  • Problem 11– Aging Accounts Receivable
problems second set
Problems – Second Set
  • Problem 13 – Credit Screening
  • Problem 15 – Credit Terms
  • Problem 17 – Economic Order Quantity