Working Capital Management E-Book

James Sagner

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Corporate F&A
• Sprache: Englisch

Seitenzahl: 436

Veröffentlichungsjahr: 2014

Beschreibung

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.

Leseprobe

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Asia, and Australia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.

The Wiley Corporate F&A series provides information, tools, and insights to corporate professionals responsible for issues affecting the profitability of their company, from accounting and finance to internal controls and performance management.

Working Capital Management

Applications and Cases

JAMES S. SAGNER

Cover design: Wiley

Copyright © 2014 John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Parts of this publication are taken from Essentials of Working Capital Management, published in 2011 by John Wiley & Sons, Inc. All rights reserved.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Sagner, James S. Working capital management : applications and cases / James S. Sagner. p. cm. — (Wiley corporate f&a series) Includes bibliographical references and index. ISBN 978-1-118-93383-1 (cloth); ISBN 978-1-118-93384-8 (epub); 978-1-118-93385-5 (epdf) 1. Working capital. 2. Corporations—Finance. 3. Cash management. 4. Working capital—Case studies. 5. Corporations—Finance—Case studies. 6. Cash management—Case studies. I. Title. HG4028.W65S243 2014 658.15′224—dc23

2014012277

This book is for my colleagues and friends in banking, in the corporate world, and in the universities with which I have been associated. As any author can attest, I have learned far more from them than they have from me.

Contents

Preface

Concept of the Book

Acknowledgments

Chapter 1: Concepts in Working Capital Management

Working Capital Concepts

Improving Working Capital Management

The Significance of Working Capital

Cost as

the

Working Capital Issue

Applying These Ideas to a Real Business: Best Buy

Summary

Notes

Chapter 2: Working Capital Ratios and Other Metrics

Ratio Analysis

Other Ratios and Their Application

Other Metrics

Benchmarking

General Problems in the Use of Ratios and Metrics

Summary

Notes

Chapter 3: Cash—Management and Fraud Prevention

Forms of Cash

Paper Transactions: Lockboxing

Paper Transactions: Depository Accounts

Paper Transactions: Controlled Disbursement

Electronic Transactions

Float and Cost Issues

Summary

Notes

Chapter 4: Cash—Credit and Short-Term Financial Instruments

Developing a Short-term Forecast

Cash Budgeting

Credit Financing

Short-term Investments

Summary

Notes

Chapter 5: Managing Bank Relationships

The Changing Financial Landscape

Bank Relationship Management

Cash Mobilization in a Multibank Network

General Terms of Credit Facilities

Specific Terms in Credit Facilities

Ongoing Bank Relationship Concerns

Summary

Notes

Appendix to Chapter 5: Selecting Noncredit Banking Services

The Request for Proposal

RFP Evaluation

Chapter 6: Accounts Receivable and Working Capital Issues

Elements of Receivables Management

Float Opportunities in Managing Receivables

Receivables Cycle Monitoring: Ratios

Receivables Cycle Monitoring: The Aging Schedule

Sales Financing

Credit Reporting

Terms of Sale

Invoice Generation

Asset-Based Financing

Debt Collection Agencies

Summary

Notes

Chapter 7: Inventory and Working Capital Issues

Elements of Inventory Management

Inventory Cycle Monitoring: Ratios

Inventory Cycle Monitoring: Metrics

The Purchasing Function

Analyzing Purchasing Activities

EOQ and JIT

Work-in-Process

ABF: Inventory Financing

Summary

Notes

Chapter 8: Payables and Working Capital Issues

Elements of Payables Management

Payables Cycle Monitoring: Ratios

The Accounts Payable Function

Payables Using Internal Processes

Payables Outsourcing

Check Payments in a Comprehensive Payables Environment

Payroll Disbursements

Summary

Notes

Chapter 9: International Working Capital

Capitalism Goes Global

The Financing of International Transactions

The Foreign Exchange Markets

Country Risk Analysis

Other Significant Issues in International Working Capital

Cultural and Corporate Practices Affecting Working Capital

Summary

Notes

Chapter 10: Information and Working Capital

Information Technology

Bank Information Technology

Internet Bank Technology

ERP: An Alternative Approach

Choosing Working Capital Information Systems

Summary

Notes

Chapter 11: Managing the Working Capital Cycle

Risk and Working Capital

Traditional Risk Management

Enterprise Risk Management

The ERM Process

Efficiency and Working Capital

Working Capital and Liquidity

Suggested Actions

Developments in Working Capital Management

The Gizmo Deal: How Delays Turn Profits into Losses

Summary

Notes

Chapter 12: Introduction to Working Capital Cases

Sequence of the Cases

The Concept of the Working Capital Case

Case: Widget Manufacturing

Suggested Solutions

Note

Cases on Working Capital Management

Case 1: Dinner Bell Hotel

Cash Flow Issues

Alternative Actions

The “Raw” Data

Questions

Case 2: Koala Fun

The Partners' First Success

Financial Concerns

Borrowing Issues

Working Capital

Final Thoughts

Questions

Case 3: Miller Building Supplies

Joseph Miller Starts MBS

Variations in Working Capital Requirements

A Banker's Assistance

Questions

Case 4: Office Smart

The Business of Office Smart

Financial Issues

Questions

Case 5: Quacker Cracker

The Attitude toward Debt

Financial Planning

Questions

Case 6: Young Brands

Changes in YB's Global Marketing Strategy

Forecasting Considerations

Working Capital Issues

Financial Issues

Questions

Appendix I: Basic Financial Concepts

General Balance Sheet Issues

Assets and Liabilities

Net Worth

Cost of Capital

Appendix II: Websites of Working Capital Organizations*

Glossary

U.S. Legislation Significant to Working Capital Management

About the Author

Index

End User License Agreement

List of Illustrations

Chapter 1

Exhibit 1.1 Rengas Company Balance Sheet as of December 31, 2012, and 2013

Exhibit 1.2 Illustrative Payment Stream Matrix

Exhibit 1.3 Working Capital Timeline

Exhibit 1.4 Show Business Services: Billing Activity of Largest Vendors (all invoices are received on the fi rst or second of each month)

Exhibit 1.5 Best Buy and Industry Working Capital Ratios

Chapter 2

Exhibit 2.1 Rengas Company Income Statement (for the years ended December 31, 2012, and 2013)

Exhibit 2.2 Rengas Company and Plastic Manufacturing Industry Ratios

Exhibit 2.3 The Rengas Company Statement of Cash Flows ($ millions)

Exhibit 2.4 Cash Conversion Cycle

Exhibit 2.5 Savings from Benchmarking (per transaction)

Chapter 4

Exhibit 4.1 Illustrative Distribution Method (by Business Day)

Exhibit 4.2 Illustrative Cash Budget ($000)

Exhibit 4.3 Illustrative ECR Calculation (based on a typical bank account analysis)

Exhibit 4.4 Comparison of Rates on Debt Instruments (pre- and post-credit crisis) (in percent of annual interest)

Exhibit 4.5 Investment Policy Issues

Chapter 5

Exhibit 5.1 Information Required in Establishing a Credit Facility

Exhibit 5.2 Illustrative Loan Covenants

Exhibit 5.3 Illustrative Bank Loan Agreement

Appendix to Chapter 5

Exhibit A5.1 RFP Templates for Banking Service

Exhibit A5.2 Examples of Bank RFP Questions on Noncredit Services

Exhibit A5.3 Bank Account Analysis: Illustrative Noncredit Service Presentation

Exhibit A5.4 Evaluation Score Sheet for Lockbox Services

Chapter 6

Exhibit 6.1 Receivables Aging by Customer

Exhibit 6.2 Receivables Aging by Group with Estimated Doubtful Accounts

Exhibit 6.3 Business Credit Report

Exhibit 6.4 Discounts Other than Cash Discounts

Exhibit 6.5 Representative Factoring Organizations

Exhibit 6.6 Representative Debt Collection Agencies

Chapter 7

Exhibit 7.1 Inventory Metrics

Exhibit 7.2 Selected Materials Purchasing Activity

Exhibit 7.3 Typical SCM Functions

Exhibit 7.4 SCM Software Vendors

Exhibit 7.5 Industries That Use Inventory as Collateral in ABF

Exhibit 7.6 Selected Inventory Lenders

Chapter 8

Exhibit 8.1 The World of Animals: Billing Activity of Largest Vendors (all invoices are received on the first or second of the month)

Exhibit 8.2 Illustrative Savings from Comprehensive Payables

Chapter 9

Exhibit 9.1 Letter of Credit Documentation Flow

Exhibit 9.2 Selected FX Rates (for March 2014)

Chapter 10

Exhibit 10.1 Working Capital Internet Technology Features

Exhibit 10.2 Working Capital Lines of Business Features (for Typical ERP Systems)

Chapter 11

Exhibit 11.1 Financial Ratios

Exhibit 11.2 Supplemental Ratios

Exhibit 11.3 Changes in Liquidity Ratios in U.S. Industry Groups (2006–2009)

a

Chapter 12

Exhibit 12.1 Significant Industry Ratios

Exhibit 12.2 Income Statement (in $ millions)

Exhibit 12.3 Balance Sheet ($ millions) (% to total assets and to total liabilities and equity)

Exhibit 12.4 Bank Account Fees and Balances

Exhibit 12.5 Inventory to Sales ($ millions)

Exhibit 12.6 Accounts Receivable Aging Schedule

Exhibit 12.7 Monthly Forecast of Sales and Expenses ($ millions)

CASE 1

Exhibit C1.1 Forecasts for the Dinner Bell Hotel Cash Budget ($000s) (in the month incurred)

CASE 2

Exhibit C2.1 KF Income Statements: 2012–2013

Exhibit C2.2 KF Balance Sheets: 2012–2013

Exhibit C2.3 Financial Ratios for the Electronic Arts Industry

CASE 3

Exhibit C3.1 Recent MBS Quarterly Financial Statement Results (in $000)

Exhibit C3.2 Selected Industry Ratios

Exhibit C3.3 MBS Income Statements, 2008–2010 (year ending January 31) (in $000)

Exhibit C3.4 MBS Balance Sheets, 2008–2010 (year ending January 31) (in $000)

CASE 4

Exhibit C4.1 Office Smart and Industry Significant Ratios

Exhibit C4.2 Financial Statements, Fiscal Years 2006 and 2007 ($000s)

CASE 5

Exhibit C5.1 Ratios for the Fancy Foods Industry

Exhibit C5.2 Quacker Cracker Balance Sheet for 2012 ($000s) (prepared before any financing decisions have been made)

CASE 6

Exhibit C6.1 Recent Financial Results

Exhibit C6.2 Financial Statements ($ millions)

Exhibit C6.3 Selected Industry Ratios and Other Financial Data

Appendix I

Exhibit A.1 Calculating the Cost of Capital

Guide

Cover

Table of Contents

Preface

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Preface

THIS BOOK IS ONE OF a series of textbooks developed by John Wiley and Sons. As the publisher observed the near-chaotic conditions in the credit markets beginning in 2008, it became apparent that there was a need for an explanation of business processes and specific ideas on changes to company structures and procedures.

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. The most important elements are:

The efficient utilization of current assets and current liabilities of a firm throughout each phase of the busi­ness operating cycle.

The planning, monitoring, and manage­ment of the company's collections, disbursements, and bank account balances.

The management of receivables, inventories, payables, and international transactions to minimize the investment in idle resources.

The gathering and management of information to ef­fectively use available funds and identify risk.

The liquidity crisis that was experienced in the United States has been the subject of numerous articles, congressional hearings, and general debate. Available data indicate that adjustments have been ongoing and may eventually lead to the opportunity for future business expansion now that this period is coming to an end. Despite some bankruptcies, companies have adjusted remarkably well to the contraction of credit and liquidity and to weakened economic conditions. Our discussion focuses on how businesspeople can continue to be successful in difficult financial times, particularly in the context of limited access to bank credit and other sources of short-term funds.

CONCEPT OF THE BOOK

In developing this approach, several components have been included to assist the reader.

Chapters are of convenient length, approximately 5,000 words. Each chapter begins with a series of learning objectives and ends with a brief summary of material covered.

Examples and real-world situations are included to provide context for principles and calculations used in working capital management.

As a banker and consultant, the author has actually worked with more than 250 major U.S. and global corporations and not-for-profits, and has analyzed and helped implement the ideas discussed in the book.

A concluding chapter contains an explanation of our approach to case analysis and then presents a case (Widget Manufacturing) with solutions.

Six cases that emphasize various working capital concerns are included in the second part of the book.

Other useful material is contained in Appendices I and II and the Glossary to supplement the coverage in the main part of the text.

In planning the content, the author and publisher had in mind the needs of several types of readers:

New working capital managers, including students and recent appointees to any of the functions of working capital.

Current managers who need a succinct, well-written reference.

Members of allied professions, including accountants, information technology specialists, marketing and production managers, and others who want to expand their knowledge base.

Readers outside of the United States who either plan to do business here or are observing their economy as evolving into a U.S.-type of capitalism.

Acknowledgments

THE AUTHOR IS INDEBTED TO Michele Allman-Ward, who provided assistance in Chapter 9, and with whom he authored an earlier book in the Wiley Essentials series. Michele is a distinguished consultant, lecturer, and author, and has encyclopedic knowledge of global treasury management practices.

Chapter 10, “Information and Working Capital,” was coauthored with Arthur C. McAdams, associate dean in the School of Business at the University of Bridgeport (Connecticut). He was senior vice president and director of information systems at People's Bank (Connecticut) leading the implementation of several strategic initiatives, and has many years of experience in systems development and project and process management.

Acknowledgment is also extended to Sheck Cho, Helen Cho, and Judy Howarth, my Wiley editors; and to my former colleagues and clients at First National Bank of Chicago (now JPMorgan Chase) and the team at Sagner/Marks.

You may have questions about the ideas presented in this book. If so, e-mail the author at [email protected] with your inquiries. However, a good place to start is to ask your bankers for ideas; they are often on the leading edge of current practice and have access to helpful product information.

CHAPTER 1Concepts in Working Capital Management

This chapter covers these topics:

Explanation of the basic concepts of working capital.