Working Capital n Current assets Cash AR Inventory

Working Capital n Current assets ¨ Cash ¨ A/R ¨ Inventory n Current liabilities Working Capital Management 1

Working Capital n Cash ¨ Minimize cash Returns available on cash n Business accounts n ¨ Need for cash Pay bills: Mc. Donalds versus General Motors n Take advantage of opportunities ¨ Lines of credit n Working Capital Management 2

Working Capital n Cash collection ¨ Why n checks? Lockbox locations? ¨ Automated payments Working Capital Management 3

Working Capital n Cash disbursements ¨ Zero n balance accounts Transfer to subaccount such as payroll ¨ Overdraft protection Working Capital Management 4

Working Capital n Investing cash: Apple: $147 billion ¨ Typically in short-term securities Maturity < 90 days n No default risk n Liquid n Taxable vs. tax-exempt n Working Capital Management 5

Working Capital n Types of short-term securities ¨ Money n n market accounts Banks Mutual funds ¨ T-bills ¨ Muni short-term securities ¨ Commercial paper: unsecured ¨ CDs ¨ Adjustable preferred stock: dividend exclusion (70%) Working Capital Management 6

Working Capital n Credit sales ¨ Terms of sale n 5/30, n/90 n Length of credit period ¨ Time to turnover product ¨ Competition ¨ Credit risk ¨ Effective return Working Capital Management 7

Working Capital n Credit policy ¨ Steak N Shake: why formerly no credit cards? ¨ Benefits of selling on credit n Increased sales ¨ Cost of selling on credit n Cost of A/R n Bad debt n Managing credit department ¨ Credit cards? Working Capital Management 8

Working Capital n Credit analysis ¨ Scoring n Experian: 340 -820 n Factors ¨ Pay bills on time: (35%) recent late payments versus prior late payments ¨ Amount you owe (30%) § -0§ Close to credit limit ¨ Length of credit history (15%) ¨ New credit (10%) § Refi versus new car loan § Hard versus soft inquiries ¨ Type of debt § Home mortgage versus student loans/credit card debt Working Capital Management 9

Working Capital n Credit analysis ¨ Character: willingness to pay ¨ Capacity: ability to pay n Aging schedule on page 527 ¨ Capital: assets ¨ Collateral: pledged assets ¨ Conditions: business conditions Working Capital Management 10

Working capital n Inventory ¨ Not too much… Storage n Insurance n Obsolescence n Theft n Cost of carrying inventory n Working Capital Management 11

Working capital n Inventory ¨ Not too little: n Lost sales n Restocking ¨ Just right n EOQ: Square root of (2 Tx. F)/CC ¨ Impact of change in fixed costs; carrying costs ¨ Safety stock ¨ Reorder point n MRP: what do I need to build a car? n JIT: who holds the inventory? Working Capital Management 12