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

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