2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Working Capital ManagementAlternative Working Capital Policies Cash Management Inventory and A/R Management Trade Credit Bank LoansChapter 1616-1 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Working Capital TerminologyWorking capital: current assets. Net working capital: current assets minus current liabilities. Net operating working capital: current assets minus (current liabilities less notes payable). Current assets investment 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.16-2 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Selected Ratios for SKI Inc.SKIInd Avg Current ratio1.75x2.25x Debt/Assets58.76%50.00% Turnover of cash & securities16.67x22.22x Days sales outstanding45.6332.00 Inventory turnover4.82x7.00x Fixed assets turnover11.35x12.00x Total assets turnover2.08x3.00x Profit margin2.07%3.50% Return on equity10.45%21.00%16-3 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.How does SKIs current assets investment policy compare with its industry?Current assets investment policy is reflected in the current ratio, turnover of cash and securities, inventory turnover, and days sales outstanding. These ratios indicate SKI has large amounts of working capital relative to its level of sales. SKI is either very conservative or inefficient.16-4 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Is SKI inefficient or 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 current assets.16-5 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Working Capital Financing PoliciesModerate: Match the maturity of the assets with the maturity of the financing. Aggressive: Use short-term financing to finance permanent assets. Conservative: Use permanent capital for permanent assets and temporary assets.16-6 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Moderate Financing Policy16-7YearsLower dashed line would be more aggressive.$Perm C.A.Fixed AssetsTemp. C.A.S-T LoansL-T Fin: Stock, Bonds, Spon. C.L. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Conservative Financing Policy16-8$YearsPerm C.A.Fixed AssetsMarketable securitiesZero S-T DebtL-T Fin: Stock, Bonds, Spon. C.L. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Cash Conversion CycleThe cash conversion cycle focuses on the length of time between when a company makes payments to its creditors and when a company receives payments from its customers.16-9 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Cash Conversion Cycle16-10 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Minimizing Cash HoldingsUse a lockbox Insist on wire transfers and debit/credit cards from customers Synchronize inflows and outflows Reduce need for “safety stock” of cash Increase forecast accuracy Hold marketable securities Negotiate a line of credit16-11 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Cash BudgetForecasts cash inflows, outflows, and ending cash balances. Used to plan loans needed or funds available to invest. Can be daily, weekly, or monthly, forecasts. Monthly for annual planning and daily for actual cash management.16-12 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.SKIs Cash Budget for January and February16-13JanuaryFebruary Collections$67,651.95$62,755.40 Purchases44,603.7536,472.65 Wages6,690.565,470.90 Rent 2