Professional Documents
Culture Documents
Working Capital Management
Working Capital Management
Working Capital Management
Working Capital
Management
17-1
Working Capital Terminology
17-2
DuPont Equation
17-3
Current Asset Investment Policies
17-4
Current Asset Investment Policies
17-5
Current Asset Investment Policies
17-6
Current Asset Investment Policies
17-7
Illustration:
17-8
Illustration:
17-9
Current Asset Financing Policies
17-10
Current Asset Financing Policies
17-12
Current Asset Financing Policies
Aggressive Approach
- a financing policy where permanent current assets are
financed by short-term debt.
Reason:
1. Short-term debts have lower interest rates
Consideration:
1. Highly risky
Conservative Approach
- a policy where current assets, both permanent and
temporary, are financed by long-term capital/debt.
17-13
Moderate Financing Policy
$ Temp. C.A.
S-T
Loans
$ Temp. C.A.
S-T
Loans
Marketable
$ securities
Zero S-T
Debt
L-T Fin:
Stock,
Perm C.A. Bonds,
Spon. C.L.
Fixed Assets
Years
17-16
Choosing Financing Approach
17-17
Illustration:
V Press and H Press had the following Balance Sheets as of Dec. 31, 2015
BALANCE SHEET
V H EBIT:
CA 100,000.00 80,000.00
30,000
FA 100,000.00 120,000.00
Tax rate:
TA 200,000.00 200,000.00
40%
CL 20,000.00 80,000.00
CS 50,000.00 50,000.00
RE 50,000.00 50,000.00
17-18
Illustration:
17-21
Exercise:
17-22
Suggested Answer:
1.75 + 38 – 30 = 83 days
2. 3,421,875/365 = 9,375 x 38 days = 356,250
3.365 days / 75 days = 4.87 times
17-23
Minimizing Cash Holdings
Use a lockbox
Insist on wire transfers and debit/credit
cards from customers
Synchronize inflows and outflows
Reduce need for “safety stock” of cash
Increase forecast accuracy
Hold marketable securities
Negotiate a line of credit
17-24
Cash Budget
17-26
SKI’s Cash Budget
17-27
Cash Budget Template
17-28
Illustration:
Data:
Collections during the month of sale 20%
Collections during the 1st month of sale 70%
Collections during the 2nd month of sale 10%
Percent of bad debts 0%
Discount on first month collections 2%
Purchases as a % of next month’s sales (paid next month) 70%
Lease payments monthly 15,000
Construction cost payment on Oct 100,000
Target Cash Balance 10,000
Wages and salaries As given
Other expenses As given
Taxes As given
17-29
Illustration:
May June July August September October November December January February
Budgeted Cash
Receipts
Total collections 39,200.00 189,000.00 253,800.00 313,400.00 408,000.00 458,600.00 344,000.00 249,200.00 165,000.00 20,000.00
17-30
Illustration:
May June July August September October November December
Budgeted Cash
Disbursements
Purchases
(70%) of next -
month's sale 175,000.00 210,000.00 280,000.00 350,000.00 245,000.00 175,000.00 140,000.00
Payments:
Payment of
purchases 175,000.00 210,000.00 280,000.00 350,000.00 245,000.00 175,000.00 140,000.00
Wages and
salaries 30,000.00 40,000.00 50,000.00 40,000.00 30,000.00 30,000.00
Lease
payments 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00
17-32
Illustration:
Surplus cash or (Loan needed) (21,200.00) (57,800.00) (114,800.00) (71,200.00) 42,800.00 77,000.00
Maximum required loan (114,800.00)
Maximum available for investment
(excess cash) 77,000.00
17-33
Exercise:
At the end of the current month, Gipit Company expects to have a cash
balance of P 25,000. For the next three months, it expects to generate
sales as follows:
July P 88,000
August P 95,000
September P 74,000
The company sells its goods on cash basis only. Aside from its income
from the sale of goods, the company also earns rental income of P 20,000
per month from the commercial spaces that it lets to a number of tenants.
17-35
Suggested Answer:
17-37
Cash and Marketable Securities
Cash
Currency (bills and coins)
Cash Equivalents
Demand (checking) deposit
Marketable securities
17-38
Cash and Marketable Securities
17-39
Techniques To Optimize Demand Deposit Holdings
17-40
Cash and Marketable Securities