CHAPTER 1THE ROLE OF WORKING CAPITALSalesA /RCashInv

WORKING CAPITAL MANAGEMENTWC Management is concerned with the problems that arise in attempting to manage current assets, current liabilities and the interrelationship that exists between them. Current Assets-Current Liabilities-Objective/Goal of Working Capital Management

CONCEPTS OF WORKING CAPITALGross working Capital-Net working capital--Most common Definition -Alternative DefinitionWhy we need working capital?Cash Inflow and cash outflow do not synchronize.Electricity Generating Company

OPERATING CYCLESales is necessary for making profit.Sales do not convert to cash instantly.Time lag exists between sale of good and receipt of cash.Operating Cycle/Cash cycle- Continuing flow of resources from cash to supplier, from inventory to a/c receivable and back into cash is called operating cycle.

THE CASH FLOW TIMELINE

Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection < Inventory > < Receivable > < Float >

Time ==> Accounts Disbursement < Payable > < Float > Invoice Received Payment Sent Cash Disbursed

The disbursement float results when a company provides a check. The collection float takes place when the company gets a check.

WORKING CAPITAL CYCLE

MANAGING THE CASH CYCLEManaging Inventory Managing Receivables Managing Payables

MANAGING INVENTORYJIT Trade-offs between: stock-out costs cost of excess inventory ordering costs

MANAGING RECEIVABLESWho should receive credit and how much? Credit terms Monitoring the outstanding balance Speeding up the receipt of payments through lockboxes

MANAGING PAYABLESSearch for terms that match with cash receipts Timing of payment Controlled disbursement

HOW MUCH WC IS ENOUGHOne viewoptimal level is zeroWC is an idle resourceProvides little valueHow much in resources to commit?Why inventory?Why receivables and payables?Why short-term investments

HOW MANAGEMENT OF WORKING CAPITAL IS CHANGING

Chart2

0.120.190.310.07

0.110.230.270.11

0.130.140.130.06

0.010.110.070.04

0.010.050.150

0.02-0.020.11-0.01

-0.02-0.020.150.01

-0.03-0.060.120.05

-0.08-0.0520020.07

Dell

Apple

Compaq

Gateway

Years

Percent of Sales

Exhibit 1-6Working Capital Requirements as a Percent of Sales

Chart1

0.120.190.310.07

0.110.230.270.11

0.130.140.130.06

0.010.110.070.04

0.010.050.150

0.02-0.020.11-0.01

-0.02-0.020.150.01

-0.03-0.060.120.05

-0.08-0.0520020.07

Dell

Apple

Compaq

Gateway

Year

Percent of Sales

Working Capital Requirements as a Percent of Sales

Four company data

APPLE COMPUTER INC

TICKER:AAPL

SIC:3571

Total Current AssetsTotal Current LiabilitiesReceivablesInventoryAccounts PayableTotal AssetsSalesCost of SalesNWCNWC/SWCR/SCCC

Dec-944,476.451,944.311,581.351,088.43881.7175,302.759,188.756,676.962,532.1428%19%71

Dec-955,224.002,325.001,931.001,775.001,165.006,231.0011,062.008,077.002,899.0026%23%84

Dec-964,515.002,003.001,496.006627915,364.009,833.008,709.002,512.0026%14%51

Dec-973,424.001,818.001,035.004376854,233.007,081.005,595.001,606.0023%11%41

Dec-983,698.001,520.00955787194,289.005,941.004,351.002,178.0037%5%19

Dec-994,285.001,549.00681208125,161.006,134.004,353.002,736.0045%-2%-7

Dec-005,427.001,933.00953331,157.006,803.007,983.005,733.003,494.0044%-2%-8

1-Dec5,143.001,518.00466118016,021.005,363.004,026.003,625.0068%-6%-22

2-Dec5,388.001,658.00565459116,298.005,742.004,021.003,730.0065%-5%-19

COMPAQ COMPUTER CORP

TICKER:CPQ

SIC:3571

Total Current AssetsTotal Current LiabilitiesReceivablesInventoryAccounts PayableTotal AssetsSalesCost of Sales

Dec-945,158.002,013.002,287.002,005.008886,166.0010,866.007,971.003,145.0029%31%114

Dec-956,527.002,680.003,141.002,156.001,379.007,818.0014,755.0011,153.003,847.0026%27%97

Dec-969,169.003,852.003,168.001,152.001,962.0010,526.0018,109.0013,651.005,317.0029%13%48

Dec-9712,017.005,202.002,891.001,570.002,837.0014,631.0024,584.0017,386.006,815.0028%7%24

Dec-9815,167.0010,733.006,998.002,005.004,237.0023,051.0031,169.0023,087.004,434.0014%15%56

Dec-9913,849.0011,838.006,685.002,008.004,380.0027,277.0038,525.0028,396.002,011.005%11%41

Dec-0015,111.0011,549.008,392.002,161.004,233.0024,856.0042,383.0031,010.003,562.008%15%54

1-Dec13,278.0011,133.006,504.001,402.003,881.0023,689.0033,554.0025,065.002,145.006%12%44

2-Dec@NA@NA@NA@NA@NA@NA@NA@NA0.000%0%0

DELL COMPUTER CORP

TICKER:DELL

SIC:3571

Total Current AssetsTotal Current LiabilitiesReceivablesInventoryAccounts PayableTotal AssetsSalesCost of Sales

Dec-941,048.38537.987410.774220.265282.7081,140.482,873.172,339.40510.3918%12%44

Dec-951,470.36751.41537.974292.925447.0711,594.003,475.342,704.15718.9521%11%40

Dec-961,957.009397264294662,148.005,296.004,191.001,018.0019%13%47

Dec-972,747.001,658.009032511,040.002,993.007,759.006,046.001,089.0014%1%5

Dec-983,912.002,697.001,486.002331,643.004,268.0012,327.009,538.001,215.0010%1%2

Dec-996,339.003,695.002,481.002732,397.006,877.0018,243.0014,034.002,644.0014%2%7

Dec-007,681.005,192.002,678.003913,538.0011,471.0025,265.0019,891.002,489.0010%-2%-7

1-Dec9,491.006,543.002,895.004004,286.0013,435.0031,888.0025,205.002,948.009%-3%-11

2-Dec7,877.007,519.002,269.002785,075.0013,535.0031,168.0025,422.00358.001%-8%-30

GATEWAY 2000 INC

TICKER:GTW

SIC:3571

Total Current AssetsTotal Current LiabilitiesReceivablesInventoryAccounts PayableTotal AssetsSalesCost of Sales

Dec-94654.16348.875252.91120.229183.299770.582,701.202,325.66305.2911%7%26

Dec-95866.189525.291405.283224.916235.0641,124.013,676.333,022.45340.909%11%39

Dec-961,318.34799.769449.723278.043411.7881,673.415,035.234,009.84518.5710%6%23

Dec-971,544.681,003.91510.679249.224488.7172,039.276,293.685,130.47540.779%4%16

Dec-982,228.191,429.67558.851167.924718.0712,890.387,467.935,816.13798.5211%0%0

Dec-992,696.811,809.71646.339191.87898.4363,954.698,645.566,611.64887.1010%-1%-3

Dec-002,267.061,631.03544.755315.069785.3454,152.549,600.607,352.52636.037%1%3

1-Dec2,122.921,146.03501.445120.27341.1222,986.866,079.524,825.03976.8916%5%17

2-Dec1,955.37940.349502.4188.761278.6092,509.414,171.333,430.061,015.0224%7%27

199419951996199719981999200020012002

Dell12%11%13%1%1%2%-2%-3%-8%

Apple19%23%14%11%5%-2%-2%-6%-5%

Compaq31%27%13%7%15%11%15%12%

Gateway7%11%6%4%0%-1%1%5%7%

Four company data

Dell

Apple

Compaq

Gateway

Years

Percent of Sales

Exhibit 1-6Working Capital Requirements as a Percent of Sales