Scribd
Upload
37 views5 pages

WCM Notes

The document discusses working capital management, including the cash conversion cycle, current asset investment policies, current financing policies, short-term financing sources and costs, cash and marketable securities management, credit management, inventory management, and multinational working capital management. It addresses key questions around determining appropriate current asset levels and how current assets should be financed.

Uploaded by

JOHN RYAN JINGCO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
37 views5 pages

WCM Notes

The document discusses working capital management, including the cash conversion cycle, current asset investment policies, current financing policies, short-term financing sources and costs, cash and marketable securities management, credit management, inventory management, and multinational working capital management. It addresses key questions around determining appropriate current asset levels and how current assets should be financed.

Uploaded by

JOHN RYAN JINGCO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 5

Working Capital Management (WCM) Notes

The Cash Conversion Cycle

1. Inventory conversion period


𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 = =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 𝑝𝑒𝑟 𝑑𝑎𝑦 𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
( )
360 𝑑𝑎𝑦𝑠
2. The receivables collection period
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑(𝐷𝑆𝑂) = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
( )
360 𝑑𝑎𝑦𝑠
3. The Payables Deferral Period
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝐷𝑒𝑓𝑒𝑟𝑟𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑(𝐷𝑃𝑂) = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑐𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
( )
360 𝑑𝑎𝑦𝑠
𝐶𝑎𝑠ℎ 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐶𝑦𝑐𝑙𝑒
= 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑(𝐻𝑃) + 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑(𝐶𝑃)
− 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝐷𝑒𝑓𝑒𝑟𝑟𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑(𝑃𝐷𝑃)
Operating Cycle = HP + CP

*TWO BASIC QUESTIONS:

A. WHAT IS THE APPROPRIATE LEVEL FOR CURRENT ASSETS, BOTH IN TOTAL AND BY SPECIFIC
ACCOUNTS?

B. HOW SHOULD CURRENT ASSETS BE FINANCED? *

Alternative Current Asset Investment Policies

a. Relaxed Current asset investment policy

Relatively large amounts of current assets are maintained; liberal credit policy

b. Restricted current asset investment policy


Holdings of cash and marketable securities and inventories are minimized, and a restrictive
accounts receivable policy is followed
c. Moderate current asset investment policy

A policy that is between the relaxed and restricted policies

Current Financing Policies

a. Permanent Current Assets


Current asset balances that do not change due to seasonal or economic conditions;
These balances exist even at the trough of a firm’s business cycle;
b. Temporary Current Assets
Current assets that fluctuate with seasonal or economic variations in a firm’s business;
c. Maturity matching, or “self-liquidating” approach

Financing is based on matching asset and liability maturities; a moderate current asset financing
policy;

d. Conservative approach
All fixed assets and permanent current assets and some of the temporary current assets are
financed with long-term capital
e. Aggressive approach
All fixed assets are financed with long-term capital, but some of the firm’s permanent current
assets are financed with short-term nonspontaneous funds

Advantages of Short-Term Financing

a. Speed
A short-term loan can be obtained much more quickly than long-term credit
b. Flexibility

For cyclical need, avoid long-term debt:

Cost of issuing long-term debt is higher;

There might be penalties for payoff prior to maturity;

Long-term debt generally has restrictive covenants;

c. Cost of long-term vs Short-term debt


Short term interest rates are generally lower than long-term rates – yield curve is generally
upward sloping

Disadvantages of Short-Term Financing

a. Risk of long-term vs short-term debt


Short-term debt subjects the firm to more risk than long-term debt

Short-Term Credit

Any liability originally scheduled for repayment within one year

Sources of Short-Term Financing

a. Accruals
b. Accounts Payable (trade credit)
c. Short-term bank loans
d. Commercial paper
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒/𝑅𝑎𝑡𝑒 360
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒 = 𝑥
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑇𝑒𝑟𝑚 (𝑇)
If there’s compensating balance/discount:
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒/𝑅𝑎𝑡𝑒 360
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒 = 𝑥
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑇𝑒𝑟𝑚 (𝑇)
(ex. Mangungutang 1m, required compensating balance, assumption 1yr)
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒/𝑅𝑎𝑡𝑒
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒 =
1 − 𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 (𝐶𝐵)
Ex: will pay 10% interest rate, CB = 20%
10%
= 12.5%
1 − 0.2

If 60 days only:

10% 360
𝑥 = 75%
80% (𝑏𝑒𝑐𝑎𝑢𝑠𝑒 100% − 20%) 60
e. Secured Loans
f. Using receivables as collateral
g. Using inventories as collateral
Computing the Cost of Short-Term Credit

a. Discount interest loan

Managing Cash and Marketable Securities

a. Cash Management

Firms Hold Cash For:

a. Transaction Balance (panggastos)


b. Compensating Balance (deposit)
c. Precautionary Balance (save a penny for a rainy day*)
d. Speculative Balance (one way of managing the risk)
Cash Management Techniques:

a. Cash Forecasts
b. Cash Flow Synchronization
c. Float
d. Disbursement Float
e. Collection Float
f. Net Float
g. Acceleration of Receipts
a. Lockbox arrangements
b. Preauthorized debit system
c. Concentration banking
h. Disbursement Control
Bohmle (?) Model:

2 𝑥 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑐𝑎𝑠ℎ(𝐷)𝑥 𝑝𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 (𝑂)


𝐵=√
𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 (𝐶𝐶)

a. Centralized disbursement system


b. Zero-balance account (ZBA)
c. Controlled disbursement accounts (CDA)
i. Marketable Securities

Credit Management

a. Credit Policy
b. Credit Policy Factors
i. Credit Standards
ii. Terms of credit
iii. Collection policy
c. Receivable’s monitoring
i. Day’s sales outstanding (DSO)
ii. Aging schedule
5C:
Character
Capacity
Collateral
Capital
Condition

Inventory Management

a. Raw Materials
b. Work in-process
c. Finished Goods
d. Optimal Inventory Level
e. Stockout
f. Inventory Costs:
a. Carrying Costs (storage, insurance, use of funds, depreciation, etc.)
b. Ordering Costs
c. Total inventory costs = Carrying Costs + Ordering Costs

g. Economic Ordering Quantity Model (EOQ)

2𝑥𝑂𝑥𝑇
𝐸𝑂𝑄 = √
𝐶 𝑥 𝑃𝑃

i. Reorder Point
ii. Safety Stocks
iii. Quantity Discount
iv. Seasonal Adjustments
h. Inventory Control Systems
a. Red-line method – red line is drawn around the inside of an inventory-stocked bin
b. Computerized inventory control system
c. Just-in-time System
d. Out-sourcing

Multinational Working Capital Management

a. Cash Management
b. Credit Management
c. Inventory Management

You might also like