Essentials of Working Capital Management

Preface xi
Acknowledgments xv

Chapter 1 Concepts in Working Capital Management 1
Working Capital Concepts 1
Ratio Analysis 7
Working Capital Ratios 7
Significance of Working Capital 12
Applying These Ideas to a Real Business 15
Summary 18

PART I CASH TRANSACTIONS, BANKING AND CREDIT, AND FINANCIAL INSTRUMENTS 19
Comprehensive Case: Widget Manufacturing Case I 19

Chapter 2 Cash: Management and Fraud Prevention 25
Forms of Cash 26
Lockboxing 30
Controlled Disbursement 34
Bank Products Used for Electronic Transactions 37
Summary 42

Chapter 3 Cash, Credit, and Short–Term Financial Instruments 43
Developing a Short–Term Forecast 44
Preparing a Cash Budget 45
Credit Financing 48
Short–Term Investments 54
Summary 59

Chapter 4 Concentration Banking and Financial Institution Relationships 61
Changing Financial Landscape 62
Bank Relationship Management 63
Concentration Banking 64
Request–for–Proposals 69
RFP Evaluation 75
Bank Relationship Reviews 78
Summary 80

PART II OTHER WORKING CAPITAL ACCOUNTS RECEIVABLES, INVENTORY, AND PAYABLES 81
Comprehensive Case: Widget Manufacturing Case II 81

Chapter 5 Accounts Receivable and Working Capital Issues 89
Elements of Receivables Management 90
Receivables Cycle Monitoring: Ratios 94
Receivables Cycle Monitoring: The Aging Schedule 96
Sales Financing 98
Credit Reporting 99
Terms of Sale 103
Invoice Generation 104
Asset–Based Financing: Receivables 107
Debt Collection Agencies 109
Summary 109

Chapter 6 Inventory and Working Capital Issues 111
Elements of Inventory Management 112
Inventory Cycle Monitoring: Ratios 113
Inventory Cycle Monitoring: Metrics 115
Purchasing 117
EOQ and JIT 122
Work–in–Process 124
Asset–Based Financing: Inventory 129
Summary 131

Chapter 7 Payables and Working Capital Issues 132
Elements of Payables Management 133
Payables Cycle Monitoring: Ratios 134
Accounts Payable Function 136
Payables Using Internal Processes 139
Payables Outsourcing 140
Payroll Alternatives 145
Summary 149

PART III ISSUES IN WORKING CAPITAL MANAGEMENT 151
Comprehensive Case: Widget Manufacturing Case III 151

Chapter 8 International Working Capital 155
Capitalism Goes Global 156
Elements of International Working Capital 157
Financing of International Transactions 158
Foreign Exchange Markets 160
Analysis of Country Risk 167
Other Significant Issues in International Working Capital 169
Cultural and Corporate Practices Affecting Working Capital 171
Summary 174

Chapter 9 Information and Working Capital 175
Information Technology 176
Bank Information Technology 178
Internet Bank Technology 182
Enterprise Resource Planning: An Alternative Approach 188
Choosing Working Capital Information Systems 191
Summary 197

Chapter 10 Managing the Working Capital Cycle 199
Risk and Working Capital 200
Enterprise Risk Management 202
Efficiency and Working Capital 204
Liquidity and Working Capital 207
Suggested Actions 210
Developments in Working Capital Management 215
The Cost of a Transaction 217
Summary 221
Appendix A: Suggested Solutions to Widget Manufacturing Company Case Parts I, II, and III 223
Appendix B: Basic Financial Concepts 233
Appendix C: Web Sites of Working Capital Market Participants 238
Appendix D: Glossary 241
About the Author 262
Index 263