Objectives

After reading this chapter, students should be able to:

1. Define basic working capital terminology.

2.  Distinguish among relaxed, restricted, and moderate current asset investment policies, and explain the effect of each on risk and expected return.

3.  Calculate the inventory conversion period, the receivables collection period, and the payables deferral period to determine the cash conversion cycle.

4. Briefly explain the basic idea of zero working capital.

5. Briefly explain how a negative cash conversion cycle works.

6. List the reasons for holding cash.

7. Construct a cash budget, and explain its purpose.

8. Briefly explain useful tools and procedures for effectively managing cash inflows and outflows.

9. Explain why firms are likely to hold marketable securities.

10.  State the goal of inventory management and identify the three categories of inventory costs.

11. Identify and briefly explain the use of several inventory control systems.

12. Monitor a firm’s receivables position by calculating its DSO and reviewing aging schedules.

13. List and explain the four elements of a firm’s credit policy, and identify other factors influencing credit policy.

Specific Topics

• Basic working capital terminology

  • Working capital

  • Net Working Capital

  • Working Capital Policy

  • Cash Budget

  • Quick & Current Ratio

• Relaxed, restricted, and moderate current asset investment policies.

•  Cash Conversion Cycle

  • Inventory conversion period

  • The Receivables collection period

  • The Payables deferral period

• Zero working capital.

• Cash Management

  • Reasons for holding cash

  • Pros & Cons of holding Cash

  • Cash budget

  • Cash Management Techniques

    • Synchronized Cash Flows

    • Check Clearing

    • Float

    • Lockbox Plan

• Marketable securities

• Inventory Management

  • Inventory Costs

    • Carrying Costs, Ordering Costs, Receiving Costs

  • Inventory Control Systems

    • Computerized Systems

    • Just-in-Time Systems

    • Out-Sourcing

• Receivables Management

  • Dales Sales Outstanding

  • Aging Schedules

  • Credit Policy

  • Collections Policy

  • Cash Discounts

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