Lecture Fundamentals of financial management - Chapter 15: Managing current assets. This chapter presents the following content: Alternative working capital policies, cash management, inventory management, accounts receivable management. | CHAPTER 15 Managing Current Assets Alternative working capital policies Cash management Inventory management Accounts receivable management Working capital terminology Gross working capital – total current assets. Net working capital – current assets minus non-interest bearing current liabilities. Working capital policy – deciding the level of each type of current asset to hold, and how to finance current assets. Working capital management – controlling cash, inventories, and A/R, plus short-term liability management. Selected ratios for SKI Inc. SKI Ind. Avg. Current Debt/Assets Turnover of cash & securities DSO (days) Inv. turnover F. A. turnover T. A. turnover Profit margin ROE How does SKI’s working capital policy compare with its industry? SKI appears to have large amounts of working capital given its level of sales. Working capital policy is reflected in current ratio, turnover of cash and securities, inventory turnover, and DSO. These ratios indicate SKI has large amounts of working capital relative to its level of sales. SKI is either very conservative or inefficient. Is SKI inefficient or just conservative? A conservative (relaxed) policy may be appropriate if it leads to greater profitability. However, SKI is not as profitable as the average firm in the industry. This suggests the company has excessive working capital. Cash conversion cycle The cash conversion model focuses on the length of time between when a company makes payments to its creditors and when a company receives payments from its customers. CCC = + – . Inventory conversion period Receivables collection period Payables deferral period Cash conversion cycle CCC = + – CCC = + – CCC = + 46 – 30 CCC = 76 + 46 – 30 CCC = 92 days. Inventory conversion period Receivables collection period Payables deferral period Days per year Inv. turnover Payables deferral period Days sales . | CHAPTER 15 Managing Current Assets Alternative working capital policies Cash management Inventory management Accounts receivable management Working capital terminology Gross working capital – total current assets. Net working capital – current assets minus non-interest bearing current liabilities. Working capital policy – deciding the level of each type of current asset to hold, and how to finance current assets. Working capital management – controlling cash, inventories, and A/R, plus short-term liability management. Selected ratios for SKI Inc. SKI Ind. Avg. Current Debt/Assets Turnover of cash & securities DSO (days) Inv. turnover F. A. turnover T. A. turnover Profit margin ROE How does SKI’s working capital policy compare with its industry? SKI appears to have large amounts of working capital given its level of sales. Working capital policy is reflected in current .
