1 / 10

Chapter 14 Working Capital Management

Chapter 14 Working Capital Management. Key Sections (pages 441 - 446) Risk/return trade-offs in Working Capital Management Hedging principle. Introduction. Net WC – current assets less current liabilities

merv
Télécharger la présentation

Chapter 14 Working Capital Management

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 14Working Capital Management • Key Sections (pages 441 - 446) Risk/return trade-offs in Working Capital Management Hedging principle

  2. Introduction • Net WC – current assets less current liabilities • Liquidity management – establish current asset and liability levels so firm can meet its obligations • Short-term – under one year. How much and from what sources? • On average, 15% of sales in working capital

  3. Current Liabilities Advantages • Flexibility • Lower interest cost on short-term debt Disadvantages - Causes increase in risk of illiquidity especially if financial condition deteriorates - Uncertain interest costs year to year

  4. Risk/Return Trade-offLiquidity versus Profitability • Large current assets reduce risk of production stoppages, lost sales and inability to pay bills • But as WC  , no increase in returns • With no increase in profits, ROI drops • Greater reliance on current liabilities, greater risk of illiquidity

  5. Short-term, Long-termTrade-offs • Risk of illiquidity • What happens if can’t obtain or roll over S-T debt? • Xerox, GM, Ford, etc as ratings deteriorated • S-T less costly than L-T and more flexible • Uncertainty of interest costs from year to year • Trade-off – increased risk of illiquidity versus increased profitability

  6. Sources of Financing Assets – temporary (seasonal) or permanent Spontaneous sources – arise in normal course of business Trade credit – accounts payable Other payables and accruals Discretionary sources – from an explicit decision by management, both short and long-term borrowings

  7. Hedging Principle • Maturity should follow cash flows of asset being financed - S-T Financing should be self-liquidating • After spontaneous sources used, finance - Temporary assets with current liabilities. - Permanent assets with permanent financing, including permanent part of working capital

  8. Hedging Principle

  9. Working Capital ManagementNeed for Integrative Approach • People are expensive so automate! • Requires external and internal teamwork to integrate systems for paperless environment • Customers, suppliers, banks, company • MSIS, Finance and Production

More Related