Working Capital Management

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.

• Preface xiiiAcknowledgments xvChapter 1: Concepts in Working Capital Management 1Working Capital Concepts 2Improving Working Capital Management 5The Significance of Working Capital 8Cost as the Working Capital Issue 9Applying These Ideas to a Real Business: Best Buy 12Summary 15Notes 16Chapter 2: Working Capital Ratios and Other Metrics 17Ratio Analysis 18Other Ratios and Their Application 22Other Metrics 23Benchmarking 27General Problems in the Use of Ratios and Metrics 29Summary 32Notes 32Chapter 3: Cash—Management and Fraud Prevention 35Forms of Cash 36Paper Transactions: Lockboxing 38Paper Transactions: Depository Accounts 40Paper Transactions: Controlled Disbursement 41Electronic Transactions 43Float and Cost Issues 46Summary 49Notes 49Chapter 4: Cash—Credit and Short‐Term Financial Instruments 51Developing a Short‐Term Forecast 52Cash Budgeting 53Credit Financing 55Short‐Term Investments 58Summary 63Notes 63Chapter 5: Managing Bank Relationships 65The Changing Financial Landscape 66Bank Relationship Management 66Cash Mobilization in a Multibank Network 68General Terms of Credit Facilities 71Specific Terms in Credit Facilities 72Ongoing Bank Relationship Concerns 75Summary 77Notes 78Appendix to Chapter 5: Selecting NoncreditBanking Services 81The Request for Proposal 82RFP Evaluation 85Chapter 6: Accounts Receivable and Working Capital Issues 89Elements of Receivables Management 90Float Opportunities in Managing Receivables 91Receivables Cycle Monitoring: Ratios 93Receivables Cycle Monitoring: The Aging Schedule 94Sales Financing 96Credit Reporting 97Terms of Sale 99Invoice Generation 100Asset‐Based Financing 102Debt Collection Agencies 103Summary 104Notes 104Chapter 7: Inventory and Working Capital Issues 107Elements of Inventory Management 108Inventory Cycle Monitoring: Ratios 109Inventory Cycle Monitoring: Metrics 110The Purchasing Function 112Analyzing Purchasing Activities 114EOQ and JIT 116Work‐in‐Process 118ABF: Inventory Financing 120Summary 123Notes 123Chapter 8: Payables and Working Capital Issues 125Elements of Payables Management 126Payables Cycle Monitoring: Ratios 127The Accounts Payable Function 128Payables Using Internal Processes 131Payables Outsourcing 133Check Payments in a Comprehensive Payables Environment 135Payroll Disbursements 136Summary 138Notes 139Chapter 9: International Working Capital 141Capitalism Goes Global 142The Financing of International Transactions 144The Foreign Exchange Markets 145Country Risk Analysis 151Other Significant Issues in International Working Capital 152Cultural and Corporate Practices Affecting Working Capital 154Summary 156Notes 156Chapter 10: Information and Working Capital 159Information Technology 160Bank Information Technology 161Internet Bank Technology 165ERP: An Alternative Approach 169Choosing Working CapitalInformation Systems 171Summary 175Notes 176Chapter 11: Managing the Working Capital Cycle 177Risk and Working Capital 178Traditional Risk Management 179Enterprise Risk Management 179The ERM Process 180Efficiency and Working Capital 181Working Capital and Liquidity 183Suggested Actions 185Developments in Working Capital Management 189The Gizmo Deal: How Delays Turn Profits into Losses 190Summary 192Notes 192Chapter 12: Introduction to Working Capital Cases 195Sequence of the Cases 195The Concept of the Working Capital Case 196Case: Widget Manufacturing 198Suggested Solutions 207Note 214CASES ON WORKING CAPITAL MANAGEMENT 215Case 1: Dinner Bell Hotel 217Cash Flow Issues 217Alternative Actions 219The “Raw” Data 220Questions 220Case 2: Koala Fun 223The Partners’ First Success 223Financial Concerns 224Borrowing Issues 225Working Capital 225Final Thoughts 226Questions 226Case 3: Miller Building Supplies 229Joseph Miller Starts MBS 230Variations in Working Capital Requirements 230A Banker’s Assistance 231Questions 231Case 4: Office Smart 235The Business of Office Smart 236Financial Issues 237Questions 238Case 5: Quacker Cracker 241The Attitude toward Debt 242Financial Planning 242Questions 244Case 6: Young Brands 245Changes in YB’s Global Marketing Strategy 246Forecasting Considerations 247Working Capital Issues 247Financial Issues 248Questions 248Appendix I: Basic Financial Concepts 251Appendix II: Websites of Working Capital Organizations 257Glossary 261About the Author 279Index 281