WORKING CAPITAL MANAGEMENT

• Working capital management includes several basic business relationships including the sales impact and liquidity and relations with stakeholders
• Working capital management consists of managing a firm's current assets and current liabilities (where current refers to one year or less).
• In the maturity-matching approach, the firm hedges its risk by matching the maturities of its assets and liabilities.
• The cash conversion cycle is the length of time between the payment of accounts payable and the receipt of cash from accounts receivable.
• A compensation balance is an account balance that the firm agrees to maintain.
• The speculative demand is based on the desire to take advantage of unexpected profitable opportunities that require cash.
• The Baumol cash management model assumes the cash disbursements are spread uniformly over the period.
• The Miller-Orr cash management model allows the daily cash flow to vary according to a probability function.
• Firms use several devices and procedures to manage float including

  • lockboxes
  • controlled disbursing.
  • zero balance accounts.
• Main sources of short-term funds includes trade credit and commercial paper.
• Principle of Time Value of Money


  says to compare the benefits and costs of alternative uses and sourcesof money using after-tax APYs.
• The Principle of Incremental Benefits says to calculate the incremental after-tax cash flows connected with working capital decisions.
• The Principle of two sided transaction says not to act unethically to gain short-term profit at the expense of a supplier or a customer, because such behavior can damage or even destroy a profitable long-term relationship.
• Float - is the difference between the available or collected balance at thebank and the firm's ledger balance.
• Controlled disbursing - this technique may use disbursing accounts at several banks in addition to the master account at the firm's lead bank.
• Firms may "stretch" accounts payable by postponing payment beyond the end of the net period.
• Commercial bank lending is second in importance to trade credit as a source of short-term financing.
• The Capital Market Efficiency Principle says that decisions to grant credit or to use a particular supplier are essentially private, and so the prices and risks should be checked against those in a competitive marketplace.
• Working capital management - management of current assets and current liabilities.
• Transactions demand money refer to refers to the need for cash to accommodate a firm's expected cash transactions
• Speculative Demand for money refers to the need for cash to take advantage of investment opportunities that may arise.
• Disbursement Float - refers to the positive float that is created between the time that a check is written and it is finally cleared out of the checking account.
• Float - refers to the difference between the firm's available or collected balance at its bank and the firm's book (or ledger) balance.
• Three basic motives for holding cash:

  • transactions demand
  • precautionary demand
  • speculative demand.
• Principle of Incremental Benefits


  A key idea in capital budgeting that suggests calculating the difference in after-tax cash flows between two alternative decisions