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Basic Definitions
Gross working capital:
Total current assets.
Net working capital:
Current assets - Current liabilities.
Net operating working capital (NOWC):
Operating CA Operating CL =
(Cash + Inv. + A/R) (Accruals + A/P)
(More)
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Cash Management:
Cash doesnt earn interest,
so why hold it?
Transactions: Must have some cash to pay
current bills.
Precaution: Safety stock. But lessened by
credit line and marketable securities.
Speculation: To take advantage of bargains,
to take discounts, and so on. Reduced by
credit line, marketable securities.
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Inventory Management:
Categories of Inventory Costs
Carrying Costs: Storage and handling
costs, insurance, property taxes,
depreciation, and obsolescence.
Ordering Costs: Cost of placing orders,
shipping, and handling costs.
Costs of Running Short: Loss of sales,
loss of customer goodwill, and the
disruption of production schedules.
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Gross/Net Breakdown
Company buys goods worth
$506,985. Thats the cash price.
They must pay $5,121 more if they
dont take discounts.
Think of the extra $5,121 as a
financing cost similar to the interest
on a loan.
Want to compare that cost with the
cost of a bank loan.
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= $55,560
= 13,890
= $41,670
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k Nom
Discount %
365 days
0.0101 12.1667
99 30
0.1229 12.29%.
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Temp. NOWC
}
Perm NOWC
S-T
Loans
L-T Fin:
Stock &
Bonds,
Fixed Assets
Years
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Marketable Securities
Zero S-T
debt
Perm NOWC
L-T Fin:
Stock &
Bonds
Fixed Assets
Years
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End of Section
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SKI
1.75x
0.83x
58.76%
16.67x
45.63
4.82x
11.35x
2.08x
2.07%
10.45%
30.00
Industry
2.25x
1.20x
50.00%
22.22x
32.00
7.00x
12.00x
3.00x
3.50%
21.00%
33.00
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Use lockboxes.
Insist on wire transfers from
customers.
Synchronize inflows and outflows.
Use a remote disbursement
account.
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January
February
Cash at start if
no borrowing
$ 3,000.00 $16,857.64
Net CF (slide 13) 13,857.64
18,311.85
Cumulative cash $16,857.64 $35,169.49
Less: target cash 1,500.00
1,500.00
Surplus
$15,357.64 $33,669.49
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