Documente Academic
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Documente Cultură
Financing of
Working Capital
Koray Erdoğan
FIN603
Okan University
21.04.2012
What Is Working Capital ?
• Working capital typically means the available current or short-
term assets of a firm such as cash, receivables, inventory and
marketable securities that are used to finance its day-to-day
operations.
ASSETS LIABILITIES
Current Assets Current Liabilities
Cash $ 2,100 Notes Payable $ 5,000
Petty Cash 100 Accounts Payable 35,900
Temporary Investments 10,000 Wages Payable 8,500
Accounts Receivable - net 40,500 Interest Payable 2,900
Inventory 31,000 Taxes Payable 6,100
Supplies 3,800 Warranty Liability 1,100
Prepaid Insurance 1,500 Unearned Revenues 1,500
Total Current Assets 89,000 Total Current Liabilities 61,000
-
Investments 36,000 Long-term Liabilities
Notes Payable 20,000
Property, Plant & Equipment Bonds Payable 400,000
Land 5,500 Total Long-term Liabilities 420,000
Land Improvements 6,500
Buildings 180,000
Equipment 201,000 Total Liabilities 481,000
Less: Accum Depreciation (56,000)
Prop, Plant & Equip - net 337,000
-
Intangible Assets STOCKHOLDERS' EQUITY
Goodwill 105,000 Common Stock 110,000
Trade Names 200,000 Retained Earnings 229,000
Total Intangible Assets 305,000 Less: Treasury Stock (50,000)
Total Stockholders' Equity 289,000
Other Assets 3,000
-
Total Assets $770,000 Total Liab. & Stockholders' Equity $770,000
© 2006 by Nelson,
a division of Thomson Canada
• To run firm efficiently with as little money as possible tied up
in Working Capital
Limited
• Involves trade-offs between easier operation and cost of carrying
short-term assets
9
• Benefit of low working capital
• Money otherwise tied up in current assets can be invested in activities
that generate higher payoff
• Reduces need for costly financing
© 2006 by Nelson,
a division of Thomson Canada
• Firm begins with cash which then becomes inventory and
labour
Limited
• Which then becomes product for sale
14
• Eventually this will turn into cash again
Product is
converted into
cash, which is
transformed into
more product,
creating the cash
conversion cycle.
Time Line Representation of the Cash
Conversion Cycle
Equity Capital vs Debt Capital
DEBT
CAPITAL
EQUITY
CAPITAL
Equity Capital vs Debt Capital
Operating cycle with borrowed money
Raw
Materials
Finished
Banks Cash
Goods
Accounts
Receivable
Time & Money Concepts in
Operating Cycle
• Each component of working capital (namely inventory, receivables
and payables) has two dimensions ........TIME ......... and MONEY, when
it comes to managing working capital.
• You can get money to move faster around the cycle or reduce the
amount of money tied up. Then, business will generate more cash or
it will need to borrow less money to fund working capital.
• Similarly, if you can negotiate improved terms with suppliers e.g. get
longer credit or an increased credit limit, you effectively create free
finance to help fund future sales.
If you Then ......
Conclusion:
Rising Working Capital sucks out cash from the company !
Lowering Working Capital frees up cash for the company !
Management Of Cash
Importance of Cash
Bear in mind that more businesses fail for lack of cash than
for want of profit.
Cash vs Profit
The net result is that cash receipts often lag cash payments
and while profits may be reported, the business may
experience a short-term cash shortfall.
Sales ($000) 75
Costs ($000) 65
Profit ($000) 10
(20) (5) 10 10
Cumulative net cash flow
MANAGING CASH FLOWS
After estimating cash flows, efforts should be made to
adhere to the estimates of receipts and payments of
cash.
contd…
Working Capital Determinants (Continued…)
Therefore;
• Temporary (seasonal) should be financed with short-term
borrowing
• Permanent working capital should be financed with long-term
sources, such as long-term debt and/or equity
Working Capital Financing Policies
Working Capital Financing Policies
Short-Term vs. Long-Term Financing
• Short-term financing
• Cheap but risky
• Cheap—short-term rates generally lower than long-term rates
• Spontaneous Financing
• Negotiated Financing
• Factoring Accounts Receivable
• Composition of Short-Term Financing
Spontaneous Financing
• Accounts Payable (Trade Credit from Suppliers)
• Accrued Expenses
Pros Cons
• Less expensive mode • Does not qualify for listing in
• Easier to market the issue to a an unlisted company
few investors • Restrictive covenants may be
• Entry of wholesale financially imposed by the investors
sophisticated investors in • May call for management
company’s profile participation
• May use this route until IPO • Issue pricing more tight
decision taken
• Less administrative
maintenance
Venture Capital & Private Equity
• Reasonably long to medium term commitment
• Hands on management approach, active participation in
management
• Considered value add investor
• Exit route to be defined at the time of investment
• Restrictive clauses on promoters’ holding sell off and other
financial & operational issues
• Detailed memorandum on company, its financials to be
prepared
• Shareholders agreement to be signed by both parties
• Valuation of Company key issue
• Leads to dilution of control by existing promoters
Thank You
For
Listening!