武汉大学公司金融课件(十三).docVIP

WORKING CAPITAL MANAGEMENT Working capital management or short-term financial management is concerned with the management of the firm’s short-term or current assets and liabilities. The most important current assets are cash, marketable securities, accounts receivable, and inventories. The most important current liabilities are accounts payable and bank loans. The difference between current assets and liabilities is called Net Working Capital. One of the more commonly used financial ratios in respect to liquidity is the current ratio: Current Ratio = Current Assets Current Liabilities Arguably, a ratio of less than one suggests that the firm may have difficulty meeting its short-term obligations. In fact, of course, the situation is very different among firms and industries, but in each case, given the nature of the market, there could be different rules of thumb for appropriate current ratios. Other measures, such as the Quick Ratio, that excludes inventories from current assets, are also used where the quality and liquidity of inventories are questionable. We want to move beyond financial ratios to the more interesting question of how firms should manage their net working capital if they wish to maximize the value of the shareholders. Why we need Net Working Capital: The Operating Cycle and the Cash Cycle unsynchronized uncertain Day Activity Cash effect 0 Acquire inventory None on credit 30 Pay for inventory Cash –$1,000 Sell inventory On credit None 105 Collect on sale Cash +$1,400 The Operating Cycle The Inventory Period The Accounts Receivable Period The Accounts Payable Period The Cash Cycle Even without any uncertainty, or the need to have inventory available for customers or the need to pay the work force, the existence of a cash cycle in nearly every form of business activity dictates the need for current assets. Managing Working Capital Accounts Receivable Cycle Raw material inventory Financial managers must fore