working capital management - part 3 (class copy).pdf
TRANSCRIPT
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
1/36
Working Capital Management
A simplified lecture by Prof. Ken Yumang
De La Salle University Manila
References:
Fundamentals of Financial Management, Brigham and Houston
Financial Management: Principles and Application, Titman, Keown, and Martin
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
2/36
Working Capital Management
Management of
Management of
Management of
Cash
Accounts Receivable
Inventory
Management of Accounts Payable
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
3/36
Cash Management
Currency (paper money and coins) Demand Deposits (checking account)
Marketable Securities (treasury Bonds,
treasury bills, certificates of deposit,money market funds)
Cash and Cash Equivalents
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
4/36
Cash Management
Create a cash budget
Whenever possible and practical, use credit cards,
debit cards, wire transfers, and direct deposits for
payments and/or collections.
Hold marketable securities rather than demand
deposits.
Establish a line of credit.
If you have a bargaining power as a buyer, stretch
the payments of accounts payable.
Use a lockbox (available in some countries only)
Synchronize inflows and outflows
Minimizing Cash Holdings:
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
5/36
Cash Management
The Cash Budget
1. It is a useful tool for predicting theamount and timing of the firmsfuture financing requirements.
2. It is a useful tool to monitor andcontrol the firms operations.
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
6/36
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
7/36
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
8/36
Accounts Receivable Management
1. Credit Period length of time given to buyers
to pay for their purchases2. Discounts price reductions for early
payments
3. Credit Standards required financial strength
of acceptable credit customer4. Collection Policy procedures used to collect
due and past due accounts
Credit Policy Considerations
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
9/36
Credit sales can actually be moreprofitable than cash sales!
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
10/36
Aging of Accounts Receivable
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
11/36
Lamar Lumber Company has sales of $10
million per year, all on 30 days credit terms; itsaccounts receivable are $2 million.
What is Lamars days sales outstanding
(days of receivable)? How much capital would be released or
freed up if Lamar could take action tocollect on time?
Problem Illustration:
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
12/36
From relaxed to restricted to improvereturns.
From restricted to relaxed to attract sales
and to create value to the customers.
Changing Credit Standard
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
13/36
Changing Credit Standard
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
14/36
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
15/36
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
16/36
Changing Credit Standard
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
17/36
Offering Cash Discount
Accounts Receivable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
18/36
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
19/36
Inventory Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
20/36
Inventory Management
1. ABC Inventory System2. Two-Bin System3. Just-In-Time (JIT)
4. Economic Order Quantity (EOQ)
Common Inventory Management Strategies
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
21/36
Inventory Management
1. ABC Inventory System
The ABC inventory system is used in order to focus on the most
important items in inventory. Usually a relatively few items will account
for a very significant value. These relatively few items with greatimportance are categorized as the "A" items. It is also common for
many of the items in inventory to have a relatively small aggregate
value. These items are categorized as "C" items. The remaining items
are categorized as the "B" items. By closely monitoring the "A" items, a
company is able to manage the most important items with a relativelysmall effort.
Common Inventory Management Strategies
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
22/36
Inventory Management
2. Just-In-Time (JIT)
Just-in-time (JIT) inventory refers to an inventory
management system with objectives of havinginventory readily available to meet demand, but not
to a point of excess where you must stockpile extra
products.
Common Inventory Management Strategies
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
23/36
Inventory Management
3. Two-Bin System
An inventory control system used to monitor the quantity
of an item left behind. The two-bin inventory controlmethod is mainly used for small or low value items. For
example, when items in the first bin have finished, an
order is placed to refill or replace these items. The second
bin is supposed to have enough items to last until the
placed order arrives. The first bin has a minimum of stockand the second bin keeps reserve stock or remaining
material. Bin cards and store ledger cards are used to
record the inventory.
Common Inventory Management Strategies
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
24/36
Inventory Management
A technique for determining the optimal order size with minimumcost.
Order Costs costs of placing the order Carrying Costs variable cost per unit of holding the
inventory for a specific period of time.
Relationships: Order costs decreases as size of the orderincreases; Carrying costs increases with the increase in ordersize.
4. Economic Order Quantity (EOQ)
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
25/36
Inventory Management
Assumptions: Demand is known, reasonably constant, independent Lead time is known
Receipt of inventory arrives on time Quantity discounts are not possible
Variables:Quantity (Q) number of units per orderDemand (D) demand in the units for the inventoryOrder Cost (O) set up cost for each orderCarrying Cost (C) cost of holding or stocking per unit of
inventory per year
4. Economic Order Quantity (EOQ)
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
26/36
Inventory Management
Order Cost = number of orders placed per year x order cost per order
annual demandunits per order
= (D / Q) x O
Carrying Cost = average inventory level x carrying cost per unit
units per order2
= (Q / 2) x C
4. Economic Order Quantity (EOQ)
= x order cost per order
= x carrying cost per unit
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
27/36
Inventory Management
Optimal or Economic Order Quantity is found when
ORDER COST = CARRYING COST
D QQ 2
4. Economic Order Quantity (EOQ)
x O = x C
EOQ = 2 x D x O
C
= 2 x Demand x Total Order Cost
Carrying Cost per Unit
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
28/36
Inventory ManagementIllustration:
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
29/36
Inventory Management
MERALCO stocks certain switch connector at its centralwarehouse for supplying field services offices. The yearlydemand for these connectors is 15,000 units. MERALCOestimates its annual holding cost for this item to be $25per unit. The cost to place and process an order from thesupplier is $75. The company operates 300 days per year.The lead time to place and receive an order from thesupplier is 2 working days, therefore, it wants to keep atleast 100 units as safety stocks.
Determine the EOQ. How much is the annual order cost using established EOQ? How much is the carrying cost using the established EOQ? Determine the reorder point. Determine the reorder point with safety stocks.
Sanity Check:
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
30/36
Inventory Management
The number of days of LEAD TIME the firm needs to place andreceive an order, and the firms DAILY USAGE of the inventory item,assuming the inventory is used at a constant rate.
*Daily Usage = Units Demand / Total Days o f Operat ion
Reorder Point
Extra inventory that is held to prevent stockouts ofimportant items.
Safety Stock
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
31/36
Accounts Payable Management
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
32/36
Accounts Payable Management
Trade credit (accounts payable) may be free, orit may be costly. If the seller does not offerdiscounts, the credit is free in the sense that
there is no cost for using it.
Take the trade discount or not?
A t P bl M t
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
33/36
Accounts Payable Management
A t P bl M t
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
34/36
Accounts Payable Management
A t P bl M t
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
35/36
Accounts Payable ManagementSanity Check:
-
8/10/2019 Working Capital Management - Part 3 (class copy).pdf
36/36
END