Working Capital Management

Stay liquid, think global, and better manage resources with this authoritative guide

Working Capital Management is a comprehensive primer on keeping your business financially competitive in the face of limited access to short-term funds. With detailed insight applicable to each phase in the business cycle, this authoritative guide helps managers revamp current practices for more efficient use of assets and liabilities, including more stringent monitoring and planning of collections, disbursements, and balances. Readers will learn how to minimize investments in idle resources, and how to maximize the use of forecast data to better identify risk and the optimal use of available funds. Case studies illustrate the practical applications of the ideas presented, with particular attention given to cash budgeting, forecasting, banking relationships and other common scenarios with specific requirements.

Managing a company’s short-term resources is both an art and a science. Effectively maintaining funds for ongoing activities – and keeping those funds liquid, mobile, and available – is a masterful skillset lacking in business. Working Capital Management offers practical advice for managers in this challenging position, providing guidance that helps them:

• Learn the specific metrics at work in capital management, and the problems that they can cause
• Improve cash management with robust fraud protection and better use of short-term instruments
• Manage the issues that arise from accounts receivable, inventory, payables, information management, and international sources

• Develop an effective management system for key points in the working capital cycle

The recent liquidity crisis in the U.S. has thrown the spotlight onto those companies that have adjusted well to credit contraction and the weakened economy, and these success stories – some of which are noted in the book – demonstrate that a positive business outcome can be accomplished. Working Capital Management provides a clear look at a complex issue, with practical, actionable, sustainable advice.

Preface xiii

Acknowledgments xv

Chapter 1: Concepts in Working Capital Management 1

Working Capital Concepts 2

Improving Working Capital Management 5

The Significance of Working Capital 8

Cost as the Working Capital Issue 9

Applying These Ideas to a Real Business: Best Buy 12

Summary 15

Notes 16

Chapter 2: Working Capital Ratios and Other Metrics 17

Ratio Analysis 18

Other Ratios and Their Application 22

Other Metrics 23

Benchmarking 27

General Problems in the Use of Ratios and Metrics 29

Summary 32

Notes 32

Chapter 3: Cash—Management and Fraud Prevention 35

Forms of Cash 36

Paper Transactions: Lockboxing 38

Paper Transactions: Depository Accounts 40

Paper Transactions: Controlled Disbursement 41

Electronic Transactions 43

Float and Cost Issues 46

Summary 49

Notes 49

Chapter 4: Cash—Credit and Short‐Term Financial Instruments 51

Developing a Short‐Term Forecast 52

Cash Budgeting 53

Credit Financing 55

Short‐Term Investments 58

Summary 63

Notes 63

Chapter 5: Managing Bank Relationships 65

The Changing Financial Landscape 66

Bank Relationship Management 66

Cash Mobilization in a Multibank Network 68

General Terms of Credit Facilities 71

Specific Terms in Credit Facilities 72

Ongoing Bank Relationship Concerns 75

Summary 77

Notes 78

Appendix to Chapter 5: Selecting Noncredit

Banking Services 81

The Request for Proposal 82

RFP Evaluation 85

Chapter 6: Accounts Receivable and Working Capital Issues 89

Elements of Receivables Management 90

Float Opportunities in Managing Receivables 91

Receivables Cycle Monitoring: Ratios 93

Receivables Cycle Monitoring: The Aging Schedule 94

Sales Financing 96

Credit Reporting 97

Terms of Sale 99

Invoice Generation 100

Asset‐Based Financing 102

Debt Collection Agencies 103

Summary 104

Notes 104

Chapter 7: Inventory and Working Capital Issues 107

Elements of Inventory Management 108

Inventory Cycle Monitoring: Ratios 109

Inventory Cycle Monitoring: Metrics 110

The Purchasing Function 112

Analyzing Purchasing Activities 114

EOQ and JIT 116

Work‐in‐Process 118

ABF: Inventory Financing 120

Summary 123

Notes 123

Chapter 8: Payables and Working Capital Issues 125

Elements of Payables Management 126

Payables Cycle Monitoring: Ratios 127

The Accounts Payable Function 128

Payables Using Internal Processes 131

Payables Outsourcing 133

Check Payments in a Comprehensive Payables Environment 135

Payroll Disbursements 136

Summary 138

Notes 139

Chapter 9: International Working Capital 141

Capitalism Goes Global 142

The Financing of International Transactions 144

The Foreign Exchange Markets 145

Country Risk Analysis 151

Other Significant Issues in International Working Capital 152

Cultural and Corporate Practices Affecting Working Capital 154

Summary 156

Notes 156

Chapter 10: Information and Working Capital 159

Information Technology 160

Bank Information Technology 161

Internet Bank Technology 165

ERP: An Alternative Approach 169

Choosing Working Capital

Information Systems 171

Summary 175

Notes 176

Chapter 11: Managing the Working Capital Cycle 177

Risk and Working Capital 178

Traditional Risk Management 179

Enterprise Risk Management 179

The ERM Process 180

Efficiency and Working Capital 181

Working Capital and Liquidity 183

Suggested Actions 185

Developments in Working Capital Management 189

The Gizmo Deal: How Delays Turn Profits into Losses 190

Summary 192

Notes 192

Chapter 12: Introduction to Working Capital Cases 195

Sequence of the Cases 195

The Concept of the Working Capital Case 196

Case: Widget Manufacturing 198

Suggested Solutions 207

Note 214

CASES ON WORKING CAPITAL MANAGEMENT 215

Case 1: Dinner Bell Hotel 217

Cash Flow Issues 217

Alternative Actions 219

The “Raw” Data 220

Questions 220

Case 2: Koala Fun 223

The Partners’ First Success 223

Financial Concerns 224

Borrowing Issues 225

Working Capital 225

Final Thoughts 226

Questions 226

Case 3: Miller Building Supplies 229

Joseph Miller Starts MBS 230

Variations in Working Capital Requirements 230

A Banker’s Assistance 231

Questions 231

Case 4: Office Smart 235

The Business of Office Smart 236

Financial Issues 237

Questions 238

Case 5: Quacker Cracker 241

The Attitude toward Debt 242

Financial Planning 242

Questions 244

Case 6: Young Brands 245

Changes in YB’s Global Marketing Strategy 246

Forecasting Considerations 247

Working Capital Issues 247

Financial Issues 248

Questions 248

Appendix I: Basic Financial Concepts 251

Appendix II: Websites of Working Capital Organizations 257

Glossary 261

About the Author 279

Index 281

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.

Working Capital Management shows how business leaders and managers can continue to be successful in difficult financial times as reflected in the limited access to bank credit and other sources of short-term funds.

Working capital management is the art—and increasingly the science—of organizing a company’s short-term resources to sustain ongoing activities, mobilize funds, and optimize liquidity. In this important resource, author James Sagner (a banker and consultant who has worked with myriad leading U.S. and global corporations and not-for-profit organizations) reveals how to identify and put in place an efficient and effective use of current assets and liabilities of a company throughout each phase of a business’s operating cycle. Step by step, Sagner shows what it takes to plan, monitor, and manage a company’s collections, disbursements, and bank account balances.

Part of the Wiley Corporate F&A series, this important text covers the main components of working capital. The book also includes information and suggestions on the effective management of receivables, inventories, payables, and international transactions that will help to minimize investment in idle resources. In addition, Working Capital Management reveals the most useful techniques for gathering and managing information to effectively use available funds and identify risk.

To bring the information to life, Working Capital Management contains a wealth of examples and real-world scenarios from a variety of organizations. The illustrative examples provide context for applying the core principles and calculations used in working capital management.

In addition, the book includes a case analysis (Widget Manufacturing) that clearly explains the book’s approach and offers solutions.

Working Capital Management is designed as a useful resource for working capital managers, students, and anyone seeking a succinct, well-written reference to the effective management of working capital.

• Includes vital information and proven suggestions for the effective management of receivables, inventories, payables, and international transactions to help avoid the critical mistake of investing in idle resources.
• Explains how to effectively allocate an organization’s current assets and liabilities throughout each phase of the operating cycle.
• State-of-the-art strategies and approaches for planning, monitoring, and managing a company’s collections, disbursements, and bank account balances.

Working Capital Management shows how business leaders and managers can continue to be successful in difficult financial times as reflected in the limited access to bank credit and other sources of short-term funds.

Working capital management is the art—and increasingly the science—of organizing a company's short-term resources to sustain ongoing activities, mobilize funds, and optimize liquidity. In this important resource, author James Sagner (a banker and consultant who has worked with myriad leading U.S. and global corporations and not-for-profit organizations) reveals how to identify and put in place an efficient and effective use of current assets and liabilities of a company throughout each phase of a business's operating cycle. Step by step, Sagner shows what it takes to plan, monitor, and manage a company's collections, disbursements, and bank account balances.

Part of the Wiley Corporate F&A series, this important text covers the main components of working capital. The book also includes information and suggestions on the effective management of receivables, inventories, payables, and international transactions that will help to minimize investment in idle resources. In addition, Working Capital Management reveals the most useful techniques for gathering and managing information to effectively use available funds and identify risk.

To bring the information to life, Working Capital Management contains a wealth of examples and real-world scenarios from a variety of organizations. The illustrative examples provide context for applying the core principles and calculations used in working capital management.

In addition, the book includes a case analysis (Widget Manufacturing) that clearly explains the book's approach and offers solutions.

Working Capital Management is designed as a useful resource for working capital managers, students, and anyone seeking a succinct, well-written reference to the effective management of working capital.

• Includes vital information and proven suggestions for the effective management of receivables, inventories, payables, and international transactions to help avoid the critical mistake of investing in idle resources.
• Explains how to effectively allocate an organization's current assets and liabilities throughout each phase of the operating cycle.
• State-of-the-art strategies and approaches for planning, monitoring, and managing a company's collections, disbursements, and bank account balances.