Achangei

nc r
editpoli
cyhasc ause
dani ncreas
einsal
es,anincr
easeindi
sco
untstaken
,ar e
ducti
on
oft hei
nves
tme ntinacco
u ntsrece
ivable,andar e
ducti
onint henumberofdo u
btfulacco
unts
.
Basedonthi
sinformati
on,wek nowthat:Theave
ragecoll
ecti
onperi
odhasdec
reased

Astri
ctcredi
tandc ol
lecti
onpoli
cyisinplac
einSt arCo.AsFinanceDi
rect
oryo uar
easkedto
advi
seontheprop
r i
etyofrelax
ingthecr
editst
andardsi
nvi
e wofsti
ffcompeti
ti
onint
hemarke
t.
Youradvi
sewil
lbefavorabl
eif:Theproj
ectedmarginfr
omincr
easedsal
eswi
llexc
eedthec
ostof
car
ryingthei
ncrementalrec
eiv
able
s

Aco
mpanyobtaini
ngsho
rt -t
ermfinanci
ngwit
htradec
redi
twi
llpayahigherp
erce
n t
agefi
nanc
ing
c
ost,
ever
ythingels
ebeingequal
,when:Thesup
pli
ero
ffer
salongerdi
scou
ntper
iod.

I
tisheldthatthel
evelo
fac co
untsr
eceiv
abl
et hatthefi
rmhasorhol
dsr e
flect
sboththevolumeo
f
afirm’ssale
so nacco
u ntandafirm’scredi
tp o
lic
ies
.Whichoneoft hefo l
lo
wingite
msi snot
cons
ider
e dasparto
ft hefir
m’scr
editpol
ic
ies?Thesiz
eofthedi
scountthatwil
lbeoffere
d.

Whi
cho fthefo l
lo
wingistrueaboute l
ect
roni
cfu ndstransferfrom ac as
hfl ows t
andpoi
nt?Itis
benefi
cialfr
o m acashrecei
ptsstandpo
intbutno tfromc ashdisburs
eme nt.Becaus
eEFTt akes
thefloatoutofbo t
ht hecashrecei
ptsanddisbursementsproce
s se
s.Itisbe ne
fici
altotakethe
flo
ato utofthecashrecei
ptspro
cessbutnotthec as
hdisbursementproce
ss .

Afi
rms tr
ive
stomaxi
mizethefl
oatforc
ashdisbu
rse
mentt
ogetuseofthefundsforaslo
ngas
po
ssi
bleandmi
nimi
zetheflo
atforc
ashrec
eip
tstogetu
seofr
ece
iptsass
oonaspos
sibl
e.

Awork
ingcap
italtechni
quethatincreas
esthepayabl
eflo
att
herefor
edelaystheout
flo
wo fc
ashi
s:
adraft.Concentr
atio
nbank i
ngandl o
ckbo
xs yst
emisdes
ignedtospeedu pproc
essi
ngofcas
h
re
ceipt
s.El
ectroni
cDat aI
nterchangeisdes
ignedtosp
eeduppaymento
fp ayabl
es.

Tr
ansacti
onbal
anc
e–i
stheamo
unto
ffu
ndst
hefi
rm ne
edso
nde
pos
itt
oco
ndu
ctday-t
o-day
trans
acti
ons
.

Pr
ecau
tio
nar
ybal
anc
e–r
epr
ese
ntst
hebal
anc
eav
ail
abl
efo
reme
rge
nci
es

Sp
ecu
lat
ivebal
anc
e–r
epr
ese
ntst
hebal
anc
eav
ail
abl
efo
rba
rgai
npu
rchas
es

As
sumethatWi
ll
iamsco.i
sfi
nance
dwithhe
avyrel
ianc
eons ho
rt-t
ermde btandsho
rt-te
rmrat
es
havei
ncre
ase
d:inte
restex
p:incr
eas
e;neti
nco
me :dec
rease;fi
nanc
ialri
sk:i
ncre
ase.Ifs
hor
t-
ter
mrates

Th
efo
ll
owi
ngar
etr
ueabo
utwo
rki
ngc
api
tal:

Cu
rre
ntl
iabi
li
ti
esar
eani
mpo
rtants
our
ceo
ffi
nanc
ingfo
rmanys
mal
lfi
rms

Pr
ofi
tabi
li
tyv
ari
esi
nve
rse
lywi
thl
iqu
idi
ty

Thehedgi
ngap
pro
acht
ofi
nanc
ingi
nvo
lve
smat
chi
ngmat
uri
ti
eso
fde
btwi
ths
pec
ifi
cfi
nanc
ing
ne
eds
Fi
nanci
ngper
manenti
nventor
ybu i
ldu
pwi
thl
ong-t
ermde
bti
sane
xamp
leo
fanaggr
ess
ivec
api
tal
pol
ic
y.Co
nserv
ati
vecap
italpol
ic
y

De
termini
ngtheappro
pri
atelevelofworki
ngcapi
talforafirmrequi
res:offse
ttingthebene
fitof
cur
rentasse
tsandcurr
entliabil
it
iesagai
nstt
hep ro
babil
it
yo ftec
hnicali
nsol
ve nc
y.Bec
ausethe
mainreas
ontoret
ainwork
ingc api
tali
stomeetthefirmsfi
nanci
alobl
igati
ons.

Ado
pti
ngane
winv
ent
orysys
temthati
ncr
eas
est
hei
nve
nto
ryc
onv
ers
ionp
eri
od:r
edu
cest
hel
engt
h
ofafir
msc
ashc
onv
ersi
oncyc
le

I
feverythi
ngels
eremainsconstantandafi rmincr
easesi
tscashco
nv e
rsioncycl
e,i
tspr
ofi
tabi
li
ty
wi
lll
ike
ly:de
creas
e.Be c
ausethel onge
rt hecas
hconvers
ionc
yclethegreatertheamo
untofti
me
fr
o mwhenafirmpaysitss
u p
plierstothetimeitul
ti
matelyc
oll
ect
sr ece
ivabl
es.

Th
emo
sti
mpo
rtantc
ons
ide
rat
ionswi
thr
esp
ectt
osho
rtt
ermi
nve
stme
ntsar
e:r
iskandl
iqu
idi
ty

Th
efo l
l
owingar
ealter
nat
ivemark
etabl
esecur
iti
ess
uit
abl
efo
rinv
est
ment
:USt
reas
urybi
ll
s,Eu
ro
dol
lar
s,Commerc
ialp
aper
,exc
eptco
nvert
ibl
ebonds

Co
mme rci
alpap
er :p
ayt hehi
ghes
tretu
rn.Bec
aus
eiti
siss
uedbyacor
porat
ionandismoreri
skt
hat
treas
urynotes,treas
u r
ybonds,o
rmo ne
ymarketac
count
s.Iti
siss
uedbyl ar
gec r
edit
-wor
thy
compani
es.

Whi
chchangesi
nco
stsaremo
stcondu
civ
et os
witc
hingfro
mat radi
ti
onalinvent
oryor
deri
ngsyst
em
toJI
Ts yst
em?Costpe
rpur
chas
eo r
der:dec
reasi
ng;i
nvent
oryuni
tcarryingcost
s:i
ncr
easi
ng

Tr
adi
ti
onals
yst
em:l
ots
izebas
edo
nimme
diat
ene
ed:

J
ITs
yst
em:l
ots
izebas
edo
nfo
rmu
las

Th
ebe
nefi
tso
fJI
Tsys
temfo
rrawmat
eri
alsi
ncl
ude
:el
imi
nat
iono
fno
n-v
alu
e-adde
dop
erat
ions

Be
llco.changedfr o
m atraditi
onalmanufacturingphil
osop
h ytoaJ I
Tp hi
lo
sop
hy.Whatarethe
expe
cte
de ffect
so ft
hischangeo nBell
’sinv
e ntor
yt ur
noverandinvent
oryasaperce
ntageof
tot
alas
s etsre
portedo
nBe l
l’
sbalancesheet
?I nty.TO:i
ncrease
;Int
y:%

Fi
rm’
sthatmai
ntai
nve
ryl
owo
rnoi
nve
nto
ryl
eve
ls:hav
ehi
ghe
ror
der
ingc
ost
s

J
ITmanage
ments
yst
em:r
eli
eshe
avi
lyo
ngo
odqu
ali
tymat
eri
als

Toev
alu
atet heeffic
ienc
yofpurc
hasetr
ansact
ions
,manage
me ntdeci
destocal
cul
atetheEOQfor
asampleoft hecompany’
spr
oducts
.Tocal
cul
ateEOQ:dat aaboutthevol
umeofp r
o du
ctsal
es,
thepurchasep r
ice
so ftheprodu
ctsandfixedc o
stofo rder
ingproduc
ts,ex
ceptv ol
umeof
pro
ductsininve
ntory

Th
eamountofinv
ent
orythataco
mpanywou
ldtendt
oholdi
nst
ockwoul
dincr
e as
east he
:co
sto
f
car
ryi
nginv
ento
rydec
reases
.Be
cau
seitwo
ulde
nabl
ethefi
rmtocar
rymoreinvent
ory.
Adecr
easei
ns al
es,decr
easei
nsal
esvari
abi
li
ty,andde
cre
asei
nthec
osto
fru
nni
ngo
uto
fst
ock
de
creas
estherequir
eslev
elo
finv
ent
o r
y

Anappr
opr
iat
et e
chni
queforpl
anni
ngandc o
ntrol
li
ngmanufactur
ingi
nve
nto
rie
swho
sede
mand
dep
endsonthel
eve
lofpr
oduc
tio
nis:mat
eri
alsr
equire
ment
sp l
anni
ng

Th
ep roc
edu
resfo
ll
owe
dbyt
hefi
rm fo
rens
uri
ngp
ayme
nto
fit
’sA/Rar
ecal
le
dit
s:Co
ll
ect
ion
pol
ic
y

Cr
edi
tcr
ite
ria:t
her
equ
ire
dfi
nanc
ials
tre
ngt
hofac
cep
tabl
ecu
sto
mer
s

Fo
rmsofs ho
rt-t
ermborro
wingsav
ail
abl
etoafirm:Rev
olvi
ngc r
edi
t,bank
er’
sac
cep
tanc
e,l
ineo
f
cre
dit
,andcommerc
ialp
aperareuns
ecur
edmeansofbor
rowing.

Acompanyo btai
ningshort
-termfinanci
ngwit
htradecredi
twil
lpayahigherper
c e
ntagefinanci
ng
cost
,e v
erythinge ls
ebe i
nge qual
,when:thesuppl
ie
ro ffe
rsal ongerdis
countp er
iod.Ifthe
dis
countpe r
iodislonge
r,thedayso fext
racre
ditobtai
nedbyfore
go i
ngthediscou
ntar efewer.
Thi
smak esthetr adecr
editmorecostl
y.

Lo
ansi
nvo
lvi
ngi
nve
nto
ry:Bl
ank
etl
ie
ns,
tru
str
ece
ipt
s,war
eho
usi
ng,
exc
eptfac
tor
ing

LI
BORi
sane
xamp
leo
fno
minalr
ate

AnadvantageoftheuseofLTdebtaso
ppose
dt oSTde bttofinanc
ec ur
rentas
sets
:itdec
reas
es
theri
sko fthefi
rm.LTdoesno
thav
etoberepaidASAP.Earl
yp aymentcanres
ulti
nprep
ayment
penal
tie
s .
Debtcov
enant
saremorer
est
ric
tiv
einLTde btagre
eme nts.

Th
eCFOo fSmit
hCo.foll
owsthepol
ic
yo fmatchi
ngt
hemat
uri
tyo
fas
set
swi
tht
hemat
uri
tyo
f
financ
ing.
Thei
mpl
icat
ionsofthi
spol
ic
yinc
lude
:

Theseaso
nale x
pans
ionofcas
h,rec
eiv
abl
esandi
nve
nto
rys
hou
ldbefi
nanc
edbySTde
btss
uchas
v
endorpayabl
esandbankdebt

Themini
mumlev
elo
fc as
h,A/R,int
y,r
equ
ire
dtos
tayi
nbu
sine
ssc
anbec
ons
ide
redp
ermane
nt,
and
fi
nanc
edwi
thLTdebtorequi
ty

LTas
set
s,l
ik
ePPEs
hou
ldbefi
nanc
edwi
thLTde
bto
requ
ity

Cas
h,A/Randint
ysho
uldbefi
nanc
edwi
thLTde
bto
requ
ity.Cu
rre
ntas
set
sar
efi
nanc
edwi
th
curr
entl
iab

I
nWCM,
ris
kisme
asu
redbyt
hep
rofi
tabi
li
tyt
hatafi
rmwi
llbe
come
:Te
chni
cal
lyi
nso
lve
nt

Th
ec onver
sio
nofCAfromint
y.t
oA/Rt
ocas
hpr
ovi
dess
our
ceo
fcas
hus
edt
opayt
heCL,whi
ch
rep
re s
entsaus
eofc
ash.

Th
ego
alo
fWCMi
stoac
hie
ve:bal
anc
ebe
twe
enr
iskandr
etu
rni
nor
dert
omax
imi
zet
hefi
rm’
sval
ue
Cu
rre
ntLi
abc
anbev
iewe
das
:so
urc
eso
fcas
hou
tfl
ows

Th
emo
stdi
ffi
cul
tse
tofac
cou
ntst
opr
edi
ctar
e:c
urr
entas
set
s

+CA;-NWC:-r
isko
fte
chni
cali
nso
lve
ncy

+CL;-NWC:+r
isko
fte
chni
cali
nso
lve
ncy

I
nge
ner
al,
themo
reWCafi
rmhas
:thel
owe
rit
sri
sk

Re
lat
ivet
ocas
hfl
owsaffe
cti
ngNWC:

Cas
hou
tlaysfo
rCLar
ere
lat
ive
lyp
redi
ctabl
e

Themo
rep
redi
ctabl
ethec
ashi
nfl
ows
,thel
essNWCafi
rmne
eds

Be
c au
semos
tfirmsar
eu nabl
etomatc
hc atchi
nfl
owstoout
flo
wswi
thc
ert
aint
y,c
urr
entas
set
s
thatmo
rethanov
ero
utflowsfr
ocu
rrentl
iabar
eneces
sar
y

Cas
hinfl
owsar
ege
ner
all
ymo
rep
redi
ctabl
ethanc
asho
utl
ays

Th
efi rm’sp
ermanentfi
nanc
ingr
equ
ire
menti
sfi
nanc
edwi
thl
ong-t
erms
our
cesi
ntheaggr
ess
ive
financi
ngstr
ategy

Mo
stfi
rmse
mpl
oyat
rade
-offfi
nanc
ings
trat
egy

Th
ebas
ics
trat
egi
esfo
rde
ter
mini
ngt
heap
pro
pri
atefi
nanc
ingmi
xar
e:aggr
ess
iveandc
ons
erv
ati
ve