武汉大学公司金融课件(十三).doc

WORKING CAPITAL MANAGEMENT Working capital management or short-term financial management is concerned with the management of the firms short-term or current assets and liabilities. The most important current assets are cash, marketable securities, accounts receivable, and inventories. The most important current liabilities are accounts payable and bank loans. The difference between current assets and liabilities is called Net Working Capital. One of the more commonly used financial ratios in respect to liquidity is the current ratio:Current Ratio = Current Assets Current Liabilities Arguably, a ratio of less than one suggests that the firm may have difficulty meeting its short-term obligations. In fact, of course, the situation is very different among firms and industries, but in each case, given the nature of the market, there could be different rules of thumb for appropriate current ratios. Other measures, such as the Quick Ratio, that excludes inventories from current assets, are also used where the quality and liquidity of inventories are questionable. We want to move beyond financial ratios to the more interesting question of how firms should manage their net working capital if they wish to maximize the value of the shareholders.Why we need Net Working Capital:The Operating Cycle and the Cash Cycle unsynchronized uncertain DayActivityCash effect 0Acquire inventoryNoneon credit30Pay for inventoryCash $1,00060 Sell inventory On creditNone105Collect on saleCash +$1,400The Operating Cycle The Inventory Period The Accounts Receivable Period The Accounts Payable Period The Cash Cycle Even without any uncertainty, or the need to have inventory available for customers or the need to pay the work force, the existence of a cash cycle in nearly every form of business activity dictates the need for current assets. Managing Working CapitalAccounts Receivable Cycle Raw material inventory Financial managers must forecast the cycle and be prepared to invest or borrow in the short-term markets.To do that, the manager must: Develop a cash flow model for the particular firm; and have short-term financing arrangements in place before cash from short-term financing is actually required.Cash BudgetingThe Cash Budget is used to forecast cash requirements or availability by recording the pattern of cash receipts and disbursements. EXAMPLE: CASH BUDGETINGDONS CDsSales Forecast for 2005Q1Q2Q3Q4Sales505560142CollectionsQ1Q2Q3Q4Receivables(start)15 5 5.5 6Sales505560142Collections Current4549.554 127.8 (90%) Previous15 5 5.5 6 Total6054.559.5 133.8Receivables(end) 5 5.5 6 14.2Uses of CashQ1Q2Q3Q4Payment ofAccounts30307030Labor, rent& other20202025Taxes, Interest &Dividends 15 15 15 15Total6565 105 70Net Cash InflowQ1Q2Q3Q4Collections6054.559.5 133.8Disbursements6565 105 70Net Cash Inflow - 5 -9.5 - 45.5 + 63.8Cash BalanceQ1Q2Q3Q4Beginning25 20 10.5 - 35Net Cash Inflow -5 - 9.5 -45.5 + 63.8Ending Balance20 10.5 -35 + 28.8Minimum CashBalance - 15 - 15 - 15 - 15Cumulative Surplus + 5 - 4.5 - 50 + 13.8Sources of Short-term Financing Bank Loans Commercial Paper Bankers Acceptances Secured Loans Trade Credit Suppose a supplier offers trade credit on terms of 2/10, net 30.Dons CDs: Short-term Credit ArrangementSince only 10% of sales are on credit, it would likely be costly to restrict the number of accounts receivable.The small size of the firm would likely rule out commercial paper as an option. Banks were unwilling to establish a line of credit