1. Review of Working Capital

2. Ch. 6 This is concerned with the financing and management of the current assets of the firm. Working Capital

3. Short-term financing is generally less costly but more risky than long term financing. Making a decision on financing can be done by computing the value of various financing plans and looking at the risks and costs associated with each

4. Ultimate current asset composition and financing decision should be consistent with firm’s goal of maximizing owner’s wealth Aggressive firm will borrow short term and carry high levels of inventory Conservative firm will maintain high liquidity and use long-term financing Choice of financing will impact a firm’s earnings after taxes

5. PPT 7-1 FIGURE 7-2 Expanded cash flow cycle

6. Ch. 7 Finance managers try to maximize cash balances by speeding up inflows and slowing down outflows Can be done with a lockbox/collection system, or EFT

7. A/R Managing accounts receivable is also important. A technique to help is to make sure the average collection period is acceptable to the company. Aging of accounts also provides more in- depth information.

8. A/R Managing accounts receivable also required setting credit policy. There are 5 C’s to consider: –Character –Capital –Capacity –Conditions –Collateral

9. A/R You can also offer a trade discount to bring in receivables faster

10. Managing Inventory is also important in working capital management Use the EOQ formula to determine optimal order size Safety stock may also be added to the EOQ

11. Chapter 8 There are a number of places to find short term funds for businesses Credit extended by supplies is a very popular source. This is called trade credit. Managing trade credit means calculating the value of discounts offered to see if they should be taken or passed up. This is the cost of not taking the discount.

12. Banks are also a source of funding. Often fees for services are waived or loans are provided if a minimum balance is kept by the company in the bank. This is called a compensating balance. Interests on loans may also be paid at the beginning of the loan. This is called discounting.

13. Both compensating balances and discounting affect the effective rate of interest paid on a loan. The interest rate for the most credit-worthy borrowers is called the prime rate.

14. Vocabulary permanent current assets trade credit lock-box aging of accounts receivable carrying cost credit terms economic ordering quantity safety stock JITLIBOR prime rate APR