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1、16-1Copyright 2001 by Harcourt,Inc.All rights reserved.CHAPTER 16Managing Current AssetsnAlternative working capital policiesnCash managementnInventory managementnAccounts receivable management16-2Copyright 2001 by Harcourt,Inc.All rights reserved.DefinitionsnGross W.C.:Total current assets.nNet W.C

2、.:Current assets Current liabilities.nW.C.Policy:Decisions as to(1)the level of each type of current asset,and(2)how current assets will be financed.nW.C.Management:Controlling cash,inventories,and A/R,plus S-T liability management.16-3Copyright 2001 by Harcourt,Inc.All rights reserved.SKI appears t

3、o have large amounts of working capital given its level of sales.Selected Ratios-SKI Inc.SKI IndustryCurrent1.75x2.25xQuick0.83x1.20 xDebt/Assets58.76%50.00%Turnover of cash&securities16.67x22.22xDSO(days)45.0032.00Inv.turnover4.82x7.00 xF.A.turnover11.35x12.00 xT.A.turnover2.08x3.00 xProfit margin2

4、.07%3.50%ROE10.45%21.00%16-4Copyright 2001 by Harcourt,Inc.All rights reserved.How does SKIs working capital policy compare with the industry?nWorking capital policy is reflected in current ratio,quick ratio,turnover of cash and securities,inventory turnover,and DSO.nThese ratios indicate SKI has la

5、rge amounts of working capital relative to its level of sales.SKI is either very conservative or inefficient.16-5Copyright 2001 by Harcourt,Inc.All rights reserved.Is SKI inefficient or just conservative?nA conservative(relaxed)policy may be appropriate if it leads to greater profitability.nHowever,

6、SKI is not as profitable as the average firm in the industry.This suggests the company has excessive working capital.16-6Copyright 2001 by Harcourt,Inc.All rights reserved.Cash Conversion CycleCCC=+CCC=+CCC=+45 30CCC=75+45 30CCC=90 days.InventoryconversionperiodReceivablescollectionperiodPayablesdef

7、erralperiodDays per yearInv.turnoverPayablesdeferralperiodDays salesoutstanding3604.8216-7Copyright 2001 by Harcourt,Inc.All rights reserved.Cash doesnt earn a profit,so whyhold it?1.Transactions:Must have some cash to operate.2.Precaution:“Safety stock.”But lessened by line of credit,marketable sec

8、urities.3.Compensating balances:For loans and/or services provided.4.Speculation:To take advantage of bargains,to take discounts,etc.Reduced by credit lines,securities.16-8Copyright 2001 by Harcourt,Inc.All rights reserved.Whats the goal of cash management?nTo meet above objectives,especially to hav

9、e cash for transactions,yet not have any excess cash.nTo minimize transactions balances in particular,and also needs for cash to meet other objectives.16-9Copyright 2001 by Harcourt,Inc.All rights reserved.Ways to Minimize Cash HoldingsnUse a lockbox.nInsist on wire transfers from customers.nSynchro

10、nize inflows and outflows.nUse a remote disbursement account.(More)16-10Copyright 2001 by Harcourt,Inc.All rights reserved.nIncrease forecast accuracy to reduce need for“safety stock”of cash.nHold marketable securities(also reduces need for“safety stock”).nNegotiate a line of credit(also reduces nee

11、d for“safety stock”).16-11Copyright 2001 by Harcourt,Inc.All rights reserved.What is“Float”and how is it affected by the firms cash manager?nFloat is the difference between cash as shown on the firms books and on its banks books.nIf SKI collects checks in 2 days but those to whom SKI writes checks d

12、ont process them for 6 days,then SKI will have 4 days of net float.(More)16-12Copyright 2001 by Harcourt,Inc.All rights reserved.nIf a firm with 4 days of net float writes and receives$1 million of checks per day,it would be able to operate with$4 million less capital than if it had zero net float.1

13、6-13Copyright 2001 by Harcourt,Inc.All rights reserved.Cash Budget:The Primary Cash Management ToolnPurpose:Forecasts cash inflows,outflows,and ending cash balances.Used to plan loans needed or funds available to invest.nTiming:Daily,weekly,or monthly,depending upon purpose of forecast.Monthly for a

14、nnual planning,daily for actual cash management.16-14Copyright 2001 by Harcourt,Inc.All rights reserved.Data Required for Cash Budget1.Sales forecast.2.Information on collections delay.3.Forecast of purchases and payment terms.4.Forecast of cash expenses,taxes,etc.5.Initial cash on hand.6.Target cas

15、h balance.16-15Copyright 2001 by Harcourt,Inc.All rights reserved.SKIs Cash Budget for January and February Net Cash Inflows January FebruaryCollections$67,651.95$62,755.40Purchases44,603.7536,472.65Wages6,690.565,470.90Rent 2,500.00 2,500.00Total payments$53,794.31$44,443.55Net CF$13,857.64$18,311.

16、8516-16Copyright 2001 by Harcourt,Inc.All rights reserved.Cash Budget(Continued)January FebruaryCash at start if no borrowing$3,000.00$16,857.64Net CF(slide 15)13,857.64 18,311.85Cumulative cash$16,857.64$35,169.49Less:target cash 1,500.00 1,500.00Surplus$15,357.64$33,669.4916-17Copyright 2001 by Ha

17、rcourt,Inc.All rights reserved.Should depreciation be explicitly included in the cash budget?nNo.Depreciation is a noncash charge.Only cash payments and receipts appear on cash budget.nHowever,depreciation does affect taxes,which appear in the cash budget.16-18Copyright 2001 by Harcourt,Inc.All righ

18、ts reserved.What are some other potential cash inflows besides collections?nProceeds from the sale of fixed assets.nProceeds from stock and bond sales.nInterest earned.nCourt settlements.16-19Copyright 2001 by Harcourt,Inc.All rights reserved.How can interest earned or paid on surplus/loan be incorp

19、orated in the cash budget?nInterest earned:Add line in the collections section.nInterest paid:Add line in the payments section.nFound as interest rate x surplus/loan part of cash budget for preceding month.nNote:Interest on any other debt would need to be incorporated as well.16-20Copyright 2001 by

20、Harcourt,Inc.All rights reserved.How could bad debts be worked into the cash budget?nCollections would be reduced by the amount of the bad debt losses.nFor example,if the firm had 3%bad debt losses,collections would total only 97%of sales.nLower collections would lead to higher borrowing requirement

21、s.16-21Copyright 2001 by Harcourt,Inc.All rights reserved.SKIs forecasted cash budget indicates that the companys cash holdings will exceed the targeted cash balance every month,except for October and November.nCash budget indicates the company is holding too much cash.nSKI could improve its EVA by

22、either investing cash in more productive assets,or by returning cash to its shareholders.16-22Copyright 2001 by Harcourt,Inc.All rights reserved.What reasons might SKI have for maintaining a relatively high amountof cash?nIf sales turn out to be considerably less than expected,SKI could face a cash

23、shortfall.nA company may choose to hold large amounts of cash if it does not have much faith in its sales forecast,or if it is very conservative.nThe cash may be used,in part,to fund future investments.16-23Copyright 2001 by Harcourt,Inc.All rights reserved.Categories of Inventory CostsnCarrying Cos

24、ts:Storage and handling costs,insurance,property taxes,depreciation,and obsolescence.nOrdering Costs:Cost of placing orders,shipping and handling costs.(More)16-24Copyright 2001 by Harcourt,Inc.All rights reserved.nCosts of Running Short:Loss of sales,loss of customer goodwill,and the disruption of

25、production schedules.Reducing the average amount of inventory generally reduces carrying costs,increases ordering costs,and may increase the costs of running short.16-25Copyright 2001 by Harcourt,Inc.All rights reserved.Is SKI holding too much inventory?nSKIs inventory turnover(4.82)is considerably

26、lower than the industry average(7.00).The firm is carrying a lot of inventory per dollar of sales.nBy holding excessive inventory,the firm is increasing its costs,which reduces its ROE.Moreover,this additional working capital must be financed,so EVA is also lowered.16-26Copyright 2001 by Harcourt,In

27、c.All rights reserved.If SKI reduces its inventory,without adversely affecting sales,what effect will this have on its cash position?nShort run:Cash will increase as inventory purchases decline.nLong run:Company is likely to take steps to reduce its cash holdings.16-27Copyright 2001 by Harcourt,Inc.

28、All rights reserved.Do SKIs customers pay more or less promptly than those of its competitors?nSKIs DSO(45 days)is well above the industry average(32 days).nSKIs customers are paying less promptly.nSKI should consider tightening its credit policy in order to reduce its DSO.16-28Copyright 2001 by Har

29、court,Inc.All rights reserved.1.Credit Period:How long to pay?Shorter period reduces DSO and average A/R,but it may discourage sales.2.Cash Discounts:Lowers price.Attracts new customers and reduces DSO.3.Credit Standards:Tighter standards tend to reduce sales,but reduce bad debt expense.Fewer bad de

30、bts reduce DSO.4.Collection Policy:How tough?Tougher policy will reduce DSO but may damage customer relationships.Elements of Credit Policy16-29Copyright 2001 by Harcourt,Inc.All rights reserved.Does SKI face any risk if it tightens its credit policy?YES!A tighter credit policy may discourage sales.

31、Some customers may choose to go elsewhere if they are pressured to pay their bills sooner.16-30Copyright 2001 by Harcourt,Inc.All rights reserved.If SKI succeeds in reducing DSO without adversely affecting sales,what effect would this have on itscash position?nShort run:If customers pay sooner,this increases cash holdings.nLong run:Over time,the company would hopefully invest the cash in more productive assets,or pay it out to shareholders.Both of these actions would increase EVA.