Working Capital ManagementApplications and Case Studies
Wiley Corporate F&A 1. Aufl.
Stay liquid, think global, and better manage resources with this authoritative guide Working Capital Management is a comprehensive primer on keeping your business financially competitive in the face of limited access to short-term funds. With detailed insight applicable to each phase in the business cycle, this authoritative guide helps managers revamp current practices for more efficient use of assets and liabilities, including more stringent monitoring and planning of collections, disbursements, and balances. Readers will learn how to minimize investments in idle resources, and how to maximize the use of forecast data to better identify risk and the optimal use of available funds. Case studies illustrate the practical applications of the ideas presented, with particular attention given to cash budgeting, forecasting, banking relationships and other common scenarios with specific requirements. Managing a company’s short-term resources is both an art and a science. Effectively maintaining funds for ongoing activities – and keeping those funds liquid, mobile, and available – is a masterful skillset lacking in business. Working Capital Management offers practical advice for managers in this challenging position, providing guidance that helps them: Learn the specific metrics at work in capital management, and the problems that they can cause Improve cash management with robust fraud protection and better use of short-term instruments Manage the issues that arise from accounts receivable, inventory, payables, information management, and international sources Develop an effective management system for key points in the working capital cycle The recent liquidity crisis in the U.S. has thrown the spotlight onto those companies that have adjusted well to credit contraction and the weakened economy, and these success stories – some of which are noted in the book – demonstrate that a positive business outcome can be accomplished. Working Capital Management provides a clear look at a complex issue, with practical, actionable, sustainable advice.
Preface xiii Acknowledgments xv Chapter 1: Concepts in Working Capital Management 1 Working Capital Concepts 2 Improving Working Capital Management 5 The Significance of Working Capital 8 Cost as the Working Capital Issue 9 Applying These Ideas to a Real Business: Best Buy 12 Summary 15 Notes 16 Chapter 2: Working Capital Ratios and Other Metrics 17 Ratio Analysis 18 Other Ratios and Their Application 22 Other Metrics 23 Benchmarking 27 General Problems in the Use of Ratios and Metrics 29 Summary 32 Notes 32 Chapter 3: Cash—Management and Fraud Prevention 35 Forms of Cash 36 Paper Transactions: Lockboxing 38 Paper Transactions: Depository Accounts 40 Paper Transactions: Controlled Disbursement 41 Electronic Transactions 43 Float and Cost Issues 46 Summary 49 Notes 49 Chapter 4: Cash—Credit and Short?]Term Financial Instruments 51 Developing a Short-Term Forecast 52 Cash Budgeting 53 Credit Financing 55 Short-Term Investments 58 Summary 63 Notes 63 Chapter 5: Managing Bank Relationships 65 The Changing Financial Landscape 66 Bank Relationship Management 66 Cash Mobilization in a Multibank Network 68 General Terms of Credit Facilities 71 Specific Terms in Credit Facilities 72 Ongoing Bank Relationship Concerns 75 Summary 77 Notes 78 Appendix to Chapter 5: Selecting Noncredit Banking Services 81 The Request for Proposal 82 RFP Evaluation 85 Chapter 6: Accounts Receivable and Working Capital Issues 89 Elements of Receivables Management 90 Float Opportunities in Managing Receivables 91 Receivables Cycle Monitoring: Ratios 93 Receivables Cycle Monitoring: The Aging Schedule 94 Sales Financing 96 Credit Reporting 97 Terms of Sale 99 Invoice Generation 100 Asset-Based Financing 102 Debt Collection Agencies 103 Summary 104 Notes 104 Chapter 7: Inventory and Working Capital Issues 107 Elements of Inventory Management 108 Inventory Cycle Monitoring: Ratios 109 Inventory Cycle Monitoring: Metrics 110 The Purchasing Function 112 Analyzing Purchasing Activities 114 EOQ and JIT 116 Work-in-Process 118 ABF: Inventory Financing 120 Summary 123 Notes 123 Chapter 8: Payables and Working Capital Issues 125 Elements of Payables Management 126 Payables Cycle Monitoring: Ratios 127 The Accounts Payable Function 128 Payables Using Internal Processes 131 Payables Outsourcing 133 Check Payments in a Comprehensive Payables Environment 135 Payroll Disbursements 136 Summary 138 Notes 139 Chapter 9: International Working Capital 141 Capitalism Goes Global 142 The Financing of International Transactions 144 The Foreign Exchange Markets 145 Country Risk Analysis 151 Other Significant Issues in International Working Capital 152 Cultural and Corporate Practices Affecting Working Capital 154 Summary 156 Notes 156 Chapter 10: Information and Working Capital 159 Information Technology 160 Bank Information Technology 161 Internet Bank Technology 165 ERP: An Alternative Approach 169 Choosing Working Capital Information Systems 171 Summary 175 Notes 176 Chapter 11: Managing the Working Capital Cycle 177 Risk and Working Capital 178 Traditional Risk Management 179 Enterprise Risk Management 179 The ERM Process 180 Efficiency and Working Capital 181 Working Capital and Liquidity 183 Suggested Actions 185 Developments in Working Capital Management 189 The Gizmo Deal: How Delays Turn Profits into Losses 190 Summary 192 Notes 192 Chapter 12: Introduction to Working Capital Cases 195 Sequence of the Cases 195 The Concept of the Working Capital Case 196 Case: Widget Manufacturing 198 Suggested Solutions 207 Note 214 CASES ON WORKING CAPITAL MANAGEMENT 215 Case 1: Dinner Bell Hotel 217 Cash Flow Issues 217 Alternative Actions 219 The “Raw” Data 220 Questions 220 Case 2: Koala Fun 223 The Partners’ First Success 223 Financial Concerns 224 Borrowing Issues 225 Working Capital 225 Final Thoughts 226 Questions 226 Case 3: Miller Building Supplies 229 Joseph Miller Starts MBS 230 Variations in Working Capital Requirements 230 A Banker’s Assistance 231 Questions 231 Case 4: Office Smart 235 The Business of Office Smart 236 Financial Issues 237 Questions 238 Case 5: Quacker Cracker 241 The Attitude toward Debt 242 Financial Planning 242 Questions 244 Case 6: Young Brands 245 Changes in YB’s Global Marketing Strategy 246 Forecasting Considerations 247 Working Capital Issues 247 Financial Issues 248 Questions 248 Appendix I: Basic Financial Concepts 251 Appendix II: Websites of Working Capital Organizations 257 Glossary 261 About the Author 279 Index 281
JAMES S. SAGNER, PHD, has been a Professor at the University of Bridgeport and has taught executive education in the finance program at the University of North Carolina. He is a Principal of Sagner/Marks, a treasury management consulting firm with offices in White Plains, New York, and of Bank Credit Training Partners. He is the author of Cashflow Reengineering, Financial and Process Metrics for the New Economy, and Essentials of Working Capital Management, and coauthor of Essentials of Managing Corporate Cash.
Working Capital Management shows how business leaders and managers can continue to be successful in difficult financial times as reflected in the limited access to bank credit and other sources of short-term funds. Working capital management is the art—and increasingly the science—of organizing a company’s short-term resources to sustain ongoing activities, mobilize funds, and optimize liquidity. In this important resource, author James Sagner (a banker and consultant who has worked with myriad leading U.S. and global corporations and not-for-profit organizations) reveals how to identify and put in place an efficient and effective use of current assets and liabilities of a company throughout each phase of a business’s operating cycle. Step by step, Sagner shows what it takes to plan, monitor, and manage a company’s collections, disbursements, and bank account balances. Part of the Wiley Corporate F&A series, this important text covers the main components of working capital. The book also includes information and suggestions on the effective management of receivables, inventories, payables, and international transactions that will help to minimize investment in idle resources. In addition, Working Capital Management reveals the most useful techniques for gathering and managing information to effectively use available funds and identify risk. To bring the information to life, Working Capital Management contains a wealth of examples and real-world scenarios from a variety of organizations. The illustrative examples provide context for applying the core principles and calculations used in working capital management. In addition, the book includes a case analysis (Widget Manufacturing) that clearly explains the book’s approach and offers solutions. Working Capital Management is designed as a useful resource for working capital managers, students, and anyone seeking a succinct, well-written reference to the effective management of working capital. Includes vital information and proven suggestions for the effective management of receivables, inventories, payables, and international transactions to help avoid the critical mistake of investing in idle resources. Explains how to effectively allocate an organization’s current assets and liabilities throughout each phase of the operating cycle. State-of-the-art strategies and approaches for planning, monitoring, and managing a company’s collections, disbursements, and bank account balances.
PRAISE FOR WORKING CAPITAL MANAGEMENT “Any new book by James Sagner is a welcome addition to one’s library: always informative, illuminating, and entertainingly written with lots of practical examples and case studies. Working Capital Management provides a comprehensive review of all of the elements that contribute to managing a company’s liquidity most effectively. Many will wish this book had been available in 2008! An excellent, worthwhile read.” —MICHÈLE ALLMAN-WARD, Managing Partner, AWA Consulting, Inc. “I have known Jim Sagner for four years, and he is a superb author. This is a must-read for bankers.” —HERBERT JACOBS, Coauthor of Handbook of Corporate Lending “The discussion in this book applies real-world concepts to the full array of working capital issues. Dr. Sagner has extensive banking, consulting to Fortune 500 companies, and university teaching experience, which he demonstrates in the text and the accompanying cases.” —EDWARD BANAS, Former Treasurer of PayPal Inc., President of PayPal Asset Management Company, CFO of PayPal Funds
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