Transcript Chapter 26

Chapter 26
Working Capital
Management
26.1 Overview of Working Capital
• Most projects require the firm to invest in
net working capital. The main components
of net working capital are cash, inventory,
receivables, and payables.
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The Cash Cycle
• Cash Cycle
– The length of time between when a firm pays
cash to purchase its initial inventory and when it
receives cash from the sale of the output
produced from that inventory
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The Cash Cycle (cont'd)
• Cash Conversion Cycle (CCC)
– A measure of the cash cycle
CCC  Inventory Days  Accounts Receivable Days  Accounts Payable Days
Where
Inventory
Average Daily Cost of Goods Sold
Accounts Receivable
Accounts Receivable Days 
Average Daily Sales
Accounts Payable
Accounts Payable Days 
Average Daily Cost of Goods Sold
Inventory Days 
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The Cash Cycle (cont'd)
• Operating Cycle
– The average length of time between when a firm
originally purchases its inventory and when it
receives the cash back from selling its product
• Most firms buy their inventory on credit, which reduces
the amount of time between the cash investment and
the receipt of cash from that investment.
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Figure 26.1 The Cash and
Operating Cycle for a Firm
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Table 26.1 Working Capital in
Various Industries (2012)
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Firm Value and Working Capital
• Any reduction in working capital
requirements generates a positive free cash
flow that the firm can distribute immediately
to shareholders.
– Thus, efficiently managing working capital will
maximize firm value.
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Company
2006
2007
2008
2009
2010
DCI
33.500
36.425
24.682
38.256
39.280
DSO
42.682
51.360
36.123
86.327
81.828
DPO
43.985
37.519
20.622
44.449
54.025
OC
76.182
87.785
60.805
124.583
121.108
CCC
32.197
50.266
40.183
80.134
67.083
0
0
0
0
0
DCI
42.00
47.00
48.00
51.00
47.00
DSO
22.00
22.00
21.00
23.00
21.00
DPO
26.00
35.00
34.00
34.00
25.00
OC
64.00
69.00
69.00
74.00
68.00
CCC
38.00
34.00
35.00
40.00
43.00
Industry
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