Chap006_PPT.pptVIP

Working Capital and the Financing Decision 6 Chapter Outline Working capital management Current asset management Asset financing Long-term versus short-term financing Risk and profitability vis-à-vis asset financing Expected value analysis may sometimes be employed Working Capital Management The financing and management of the current assets of a firm Crucial to achieving long-term objectives of the firm or its failure Requires immediate action The Nature of Asset Growth Effective current assets management requires matching of the forecasted sales and production schedules Differences in actual sales and forecasted sales can result in: Unexpected buildup. Reduction in inventory, affecting receivables and cash flow Firm’s current assets could be: Self-liquidating ‘Permanent’ current assets. The Nature of Asset Growth (cont’d) Controlling Assets – Matching Sales and Production Fixed assets grow slowly with: Increase in productive capacity Replacement of old equipment Current assets fluctuate in the short run, depending on: Level of production versus the level of sales When production is higher than sales the inventory rises When sales are higher than production, inventory declines and receivables increase Controlling Assets – Matching Sales and Production (cont’d) Cash budgeting process Level production method Smooth production schedules Use of manpower and equipment efficiently to lower cost Match sales and production as closely as possible in the short run Allows current assets to increase or decrease with the level of sales Eliminates the large seasonal bulges or sharp reductions in current assets Matching Sales and Production-McGraw-Hill Companies, Inc. A good example of seasonal sale Has significant share of sales and earnings in the third and fourth quarters Due to seasonal nature of textbook publishing Lenders and financial managers need to plan inventory Lack of correct inventory planning can lead to lost sales Quarterly Sales and Earnings Per Share for Mc