Working Capital Management

Case: ALAC International

 ALAC
• ALAC was founded in New York City in 2004 • PLASTICIZER
• Its philosophy of putting the customer first while • General Purpose
providing steadfast and reliable service • DINP
has fueled the company’s substantial growth • DIDP
covering the needs of US manufacturers in a
diverse range of industries • DOP
• ALAC’s principals and directors have decades of • Specialty
experience importing and distributing chemical • DOA
raw materials. They have well established • DIDPe
relationships with key Asian suppliers and • TOTM
maintain regular visits to make sure these • Non-phthalate
producers stay finely calibrated to US market
dynamics. • DHIN
• ALAC is an active member of the SPI, the plastics • DHEH
industry trade association in Washington, DC, and • DOTP
frequently participates in advocacy efforts to • PVC IMPACT MODIFIER
promote and protect the US plastics industry. • PVC PROCESSING AID
•   • TITANIUM DIOXIDE
• Lily Frishman, Managing Director, North • PP
America • HDPE
• Lily is a founding shareholder of ALAC and serves • LLDPE
as Managing Director, North America. 
•  
• She graduated from Beijing Second Foreign
Language Institute with a major in Economics and • NEW – ALAC Private Equity enterprise
Management and has 20 years of experience in • ALAC intends to purchase two or three privately
the global chemicals import and export business. owned domestic companies in the US chemical
and plastics industries to complement its existing
•  
business and facilitate its continued growth.
CCC
CCC
CCC
 CCC
• In management accounting, the Cash conversion cycle (CCC) measures how long a firm will be deprived of cash if it increases its investment in inventory in order to expand customer sales.[1] It is thus a measure of the liquidity risk entailed by
growth.[2] However, shortening the CCC creates its own risks: while a firm could even achieve a negative CCC by collecting from customers before paying suppliers, a policy of strict collections and lax payments is not always sustainable.
• CCC
• =
• # days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations.
•  
• Derivation[edit]
• Cashflows insufficient. The term "Cash Conversion Cycle" refers to the timespan between a firm's disbursing and collecting cash. However, the CCC cannot be directly observed in cashflows, because these are also influenced by investment and
financing activities; it must be derived from Statement of Financial Position data associated with the firm's operations.
• Equation describes retailer. Although the term "cash conversion cycle" technically applies to a firm in any industry, the equation is generically formulated to apply specifically to a retailer. Since a retailer's operations consist of buying and selling
inventory, the equation models the time between
• (1) disbursing cash to satisfy the accounts payable created by purchase of inventory, and
• (2) collecting cash to satisfy the accounts receivable generated by that sale.
• Equation describes a firm that buys and sells on account. Also, the equation is written to accommodate a firm that buys and sells on account. For a cash-only firm, the equation would only need data from sales operations (e.g. changes in
inventory), because disbursing cash would be directly measurable as purchase of inventory, and collecting cash would be directly measurable as sale of inventory. However, no such 1:1 correspondence exists for a firm that buys and sells on
account: Increases and decreases in inventory do not occasion cashflows but accounting vehicles (payables and receivables, respectively); increases and decreases in cash will remove these accounting vehicles (receivables and payables,
respectively) from the books. Thus, the CCC must be calculated by tracing a change in cash through its effect upon receivables, inventory, payables, and finally back to cash—thus, the term cash conversion cycle, and the observation that these
four accounts "articulate" with one another.
• Taking these four transactions in pairs, analysts draw attention to five important intervals, referred to as conversion cycles (or conversion periods):
• the Cash conversion cycle emerges as interval C→D (i.e. disbursing cash→collecting cash).
• the Payables conversion period (or "Days payables outstanding") emerges as interval A→C (i.e. owing cash→disbursing cash)
• the Operating cycle emerges as interval A→D (i.e. owing cash→collecting cash)
– the Inventory conversion period or "Days inventory outstanding" emerges as interval A→B (i.e. owing cash→being owed cash)
– the Receivables conversion period (or "Days sales outstanding") emerges as interval B→D (i.e.being owed cash→collecting cash)
• Knowledge of any three of these conversion cycles permits derivation of the fourth (leaving aside the operating cycle, which is just the sum of the inventory conversion period and the receivables conversion period.)
• Hence,
• In calculating each of these three constituent conversion cycles, the equation Time = Level/Rate is used (since each interval roughly equals the Time needed for its Level to be achieved at its corresponding Rate).
• Its LEVEL "during the period in question" is estimated as the average of its levels in the two balance-sheets that surround the period: (Lt1+Lt2)/2.
• To estimate its Rate, note that Accounts Receivable grows only when revenue is accrued; and Inventory shrinks and Accounts Payable grows by an amount equal to the COGS expense (in the long run, since COGS actually accrues sometime after
the inventory delivery, when the customers acquire it).
– Payables conversion period: Rate = [inventory increase + COGS], since these are the items for the period that can increase "trade accounts payables," i.e. the ones that grew its inventory.
• Note that an exception is made when calculating this interval: although a period average for the Level of inventory is used, any increase in inventory contributes to its Rate of change. This is because the purpose of the CCC is to measure the
effects of inventory growth on cash outlays. If inventory grew during the period, this would be important to know.
– Inventory conversion period: Rate = COGS, since this is the item that (eventually) shrinks inventory.
– Receivables conversion period: Rate = revenue, since this is the item that can grow receivables (sales).
• Aims[edit]
• The aim of studying cash conversion cycle and its calculation is to change the policies relating to credit purchase and credit sales. The standard of payment of credit purchase or getting cash from debtors can be changed on the basis of reports of
cash conversion cycle. If it tells good cash liquidity position, past credit policies can be maintained. Its aim is also to study cash flow of business. Cash flow statement and cash conversion cycle study will be helpful for cash flow analysis.[4] The CCC
readings can be compared among different companies in the same industry segment to evaluate the quality of cash management.[5]
•  
 CCC
• The cash conversion cycle (CCC) is a metric that
expresses the length of time (in days) that it takes
for a company to convert its investments in
inventory and other resources into cash flows
from sales
• Also called the Net Operating Cycle or simply
Cash Cycle, CCC attempts to measure the
duration of time for which each net input dollar
(cash) is tied up in the production and sales
process before it gets converted into cash
received through sales made to customers
• This metric takes into account the duration of
time it requires to sell its inventory, the duration
of time required to collect receivables, and the
duration of time the company is allowed to pay
its bills without incurring any penalties
• Selling more stuff for a profit is the primary way
for a business to make more earnings
• But how does one sell more stuff?
• If cash is easily available at regular intervals, one
can churn out more sales for profits as frequent
availability of capital leads to more products to
make and sell
• Usually a company acquires inventory on credit,
which results in accounts payable (AP)
• A company can also sell products on credit, which
results in accounts receivable (AR)
• Therefore, cash is not a factor until the company
pays the accounts payable and collects the
accounts receivable, and the timing becomes an
important aspect of business from the point of
view of cash management by the company
• CCC traces the time-based lifecycle of cash which
is used for a business activity
• It starts by following the cash as it is first
converted into inventory and accounts payable,
then into expenses for product/service
development, through to sales and accounts
receivable, and then back into cash in hand
• Essentially, CCC represents how fast a company
can convert the invested cash from start
(investment) to end (returns)
 CCC
• The lower this number, the better it is for a
business
• Calculating CCC Through Various Business Stages
• A company’s cash conversion cycle broadly
moves through three distinct stages
• The first stage focuses on the existing inventory
level and represents how long it will take for the
business to sell its inventory. This figure is
calculated by using the  •
Days Inventory Outstanding (DIO). A lower value
of DIO is preferred as it indicates that the
company is making sales rapidly, and higher
frequency implies more turnover for the
business.
• DIO is calculated based on cost of goods sold
 (COGS), which represents the cost of acquiring or
manufacturing the products that a company sells
during a period. Mathematically,  to pay off those obligations
• DIO = Average inventory/COGS per day
• where, Average Inventory = (Beginning
Inventory + Ending Inventory)/2
• The second stage focuses on the current sales
and represents the duration of time it takes to
collect the cash generated from the sales. This
figure is calculated by using the 
Days Sales Outstanding (DSO). A lower value is
preferred for DSO which indicates that the
company is able to collect capital in a short time
which enhances its cash position.
DSO = Average AR / Revenue per day
• where, Average AR = (Beginning AR + Ending
AR)/2
• The third stage focuses on the current
outstanding payable for the business
• It takes into account the amount of money the
company owes to its current suppliers for the
inventory and goods it purchased, and represents
the time horizon when the company is required
• This figure is calculated by using the 
Days Payables Outstanding (DPO)
• Since it represents the outflow of cash from the
business, a higher DPO value is preferred
 CCC
• By maximizing this number, the company is able to
hold on to the cash for long and increases its
investment potential.
• DPO = Average AP/COGS per day
• where, Average AP = (Beginning AP + Ending AP)/2
• All the above mentioned figures are available as
standard items in the financial statements filed by a
publicly listed company as a part of its annual and
quarterly reporting. The number of days in the
corresponding period is taken as 365 for a year and
90 for a quarter.
• Cash Conversion Cycle (CCC) Formula
• Since CCC involves calculating the net aggregate time
involved across the above three stages of the cash
conversion lifecycle, the mathematical formula for
CCC is represented as:
• CCC = DIO + DSO - DPO
• DIO and DSO are associated with company’s cash
inflows, while DPO is linked to cash outflow
• Hence, only DPO is the negative figure in the
calculation
• Another way to look at the formula construction is
that DIO and DSO are linked to inventory and
accounts receivable, respectively, which are
considered as short term assets and are taken as
positive
• DPO is linked to accounts payable which is a liability,
and is taken as negative
• Interpreting CCC
• Inventory management, sales realization and
payables are the three key ingredients of a business
• If any of these goes for a toss – say, inventory being
mismanagement, sales getting constrained, or
payables becoming higher and frequent – the
business is set to suffer
• Beyond the monetary value involved, CCC accounts
for the time-cycle involved in these processes that
provides another view of the company’s operating
efficiency
• In addition to other financial measures, the CCC value
indicates how efficiently a company’s management is
using the short-term assets and liabilities to generate
and redeploy the cash, and gives a peek into the
company’s financial health with respect to the cash
management
 CCC
• The figure also helps assess the  •
liquidity risk linked to a company’s
operations
• If a business has hit all the right notes and
is efficiently serving the needs of the
market/customer, it will have a lower CCC
value
• CCC may not provide meaningful
inferences as a stand-alone number for a
given period
• Analysts use it to track a business over
multiple time horizons, and to compare the
company to its competitors
• Comparing a company’s CCC over multiple
quarters indicates if it is improving or
worsening its operational efficiency
• While comparing competing businesses,
investors may look at a combination of
factors to select the best fit
If two companies are having similar values
for return on equity (ROE) and 
return on assets (ROA), it may be worth
investing in the company that has a lower
CCC value
• It indicates that the company is able to
generate similar returns in shorter periods
of time
• CCC is also used internally by the
company’s management to adjust their
methods of credit purchase payments or
cash collections from debtors
• CCC Applies to Select Sectors
• CCC has a selective application to different
industrial sectors based on the nature of
business operations
• The measure has a great significance for
retailers like Walmart Inc. (WMT), Target
Corp. (TGT), and CostCo Wholesale Corp. (
COST), which are involved in buying and
managing inventories and selling them to
customers
 CCC
• All such businesses may have a high positive
value of CCC
• However, CCC does not apply to companies that
don’t have needs for inventory management
• For example, software companies like Microsoft
Corp. (MSFT) offer computer programs as online
downloads or through CD/DVD, and can realize
sales (and profits) without the need to manage
large stockpiles
• Similarly, insurance or brokerage companies
don’t buy stuff in wholesale and retail them and
CCC does not apply to such businesses
• An interesting exception is the cash cycle
of online retailers like eBay Inc. (EBAY) and
Amazon.com Inc. (AMZN) which can have
negative CCC values
• Often, online retailers receive funds in their
account for sale of goods which actually belong
to and are served by third-party sellers who use
the online platform
• However, these companies don’t pay the sellers
immediately after the sale, but may follow a
monthly or threshold-based payment cycle
• This mechanism allows these companies to hold
onto the cash for a longer period of time, and
they often end up with a negative CCC
• Additionally, if the goods are directly supplied by
the third-party seller to the customer, the online
retailer doesn’t need to hold any inventory in
house
• A Harvard Business blogpost attributes the
negative CCC as the important factor which
helped 
Amazon successfully survive the dot com bubble
 of 2000
• The operating method with negative CCC became
a source of cash for the company, instead of
being a cost for i
• The Bottom Line
• CCC is one of several quantitative measures that
can help in evaluating the efficiency of a
company's operations and of the management. A
trend of decreasing or steady CCC values over
multiple periods is a good sign, while rising ones
should lead to more investigation and analysis
based on other factors. One should bear in mind
that CCC applies only to select sectors which have
high dependence on inventory management and
related operations
• Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organisation or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as  current assets minus current liabilities.
[1]  If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

• A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing  short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts
receivable and payable, and cash.
• Calculation[edit]
• Working capital is the difference between the current assets and the current liabilities.
• The basic calculation of the working capital is done on the basis of the gross current assets of the firm.
• Working Capital
• =
• CURRENT ASSETS
• −
• CURRENT LIABILITIES
• {\displaystyle {\text{Working Capital}}={\text{CURRENT ASSETS}}-{\text{CURRENT LIABILITIES}}}
• Inputs[edit]
• Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:
• accounts receivable (current asset)
• inventory (current assets), and
• accounts payable (current liability)
• The current portion of debt (payable within 12 months) is critical because it represents a short-term claim to current assets and is often secured by long-term assets. Common types of short-term debt are bank loans and lines of credit.
• An increase in net working capital indicates that the business has either increased current assets (that it has increased its receivables or other current assets) or has decreased current liabilities—for example has paid off some short-term creditors, or a combination of both.
• Working capital cycle[edit]
• Definition[edit]
• The working capital cycle (WCC) is the amount of time it takes to turn the net current assets and current liabilities into cash. The longer the cycle is, the longer a business is tying up capital in its working capital without earning a return on it. Therefore, companies strive to reduce their working capital cycle by collecting receivables quicker or sometimes stretching accounts payable.
• Meaning[edit]
• A positive working capital cycle balances incoming and outgoing payments to minimize net working capital and maximize free cash flow. For example, a company that pays its suppliers in 30 days but takes 60 days to collect its receivables has a working capital cycle of 30 days. This 30-day cycle usually needs to be funded through a bank operating line, and the interest on this financing is a carrying cost
that reduces the company's profitability. Growing businesses require cash, and being able to free up cash by shortening the working capital cycle is the most inexpensive way to grow. Sophisticated buyers review closely a target's working capital cycle because it provides them with an idea of the management's effectiveness at managing their balance sheet and generating free cash flows.
• As an absolute rule of funders, each of them wants to see a positive working capital. Such situation gives them the possibility to think that your company has more than enough current assets to cover financial obligations. Though, the same can’t be said about the negative working capital. [2] A large number of funders believe that businesses can’t be sustainable with a negative working capital, which is a
wrong way of thinking. In order to run a sustainable business with a negative working capital, it’s essential to understand some key components.
• 1. Approach your suppliers and persuade them to let you purchase the inventory on 1-2 month credit terms, but keep in mind that you must sell the purchased goods, to consumers, for money. 2. Effectively monitor your inventory management, make sure that it’s often refilled and with the help of your supplier, back up your warehouse.
• Plus, big companies like McDonald’s, Amazon, Dell, General Electric and Wal-Mart are using negative working capital. [citation needed]
• Working capital management[edit]
• Corporate finance
• Working capital
• Cash conversion cycle
• Return on capital
• Economic value added
• Just-in-time
• Economic order quantity
• Discounts and allowances
• Factoring
• Sections
• Managerial finance
• Financial accounting
• Management accounting
• Mergers and acquisitions
• Balance sheet analysis
• Business plan
• Corporate action
• Societal components
• Financial law
• Financial market
• Financial market participants
• Corporate finance
• Personal finance
• Peer-to-peer lending
• Public finance
• Banks and banking
• Financial regulation
• Clawback
• vte
• Decisions relating to working capital and short-term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and
upcoming operational expenses.
• A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets, and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
• Decision criteria[edit]
• By definition, working capital management entails short-term decisions—generally, relating to the next one-year period—which are "reversible". These decisions are therefore not taken on the same basis as capital-investment decisions ( NPV or related, as above); rather, they will be based on cash flows, or profitability, or both.
• One measure of cash flow is provided by the cash conversion cycle—the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is
tied up in operations and unavailable for other activities, management generally aims at a low net count.
• In this context, the most useful measure of profitability is return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital,
which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See economic value added (EVA).
• Credit policy of the firm: Another factor affecting working capital management is credit policy of the firm. It includes buying of raw material and selling of finished goods either in cash or on credit. This affects the cash conversion cycle.
• Management of working capital[edit]
• Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. The policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short-term financing, such that cash flows and returns are acceptable.
• Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
• Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials—and minimizes reordering costs—and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid overproduction
—see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity
• Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.
• Short-term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
 Overtrading
• Overtrading is a term in financial statement • Cash flow problem or short of working capital
analysis • Inaccurate or unrealistic cash budget 
• Overtrading often occurs when companies • Having many unpaid vendors
expand their own operations too quickly • High level of interest / debt servicing costs
(aggressively)
• High gearing ratio
• Overtraded companies enter a negative cycle,
where an increase in interest expenses negatively • Keen market competition
impacts the net profit, which leads to lesser  • Overstock or slow movement of inventory
working capital, and that leads to increased • Current and quick ratios fall
borrowings, which in turn leads to  interest
 expenses and the cycle continues
• Overtraded companies eventually face liquidity
 problems and/or run out of working capital
• Conditions
• Rapid growth in business development and sales
• Less net profit
• The business running with limited knowledge
 Working Capital Management
• Managing the corporation's working capital position to sustain ongoing business operations is referred to as working capital management.[45][46] These involve managing the relationship between a firm's short-term assets and its short-term liabilities. 
• In general this is as follows: As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capital budgeting, firm value is enhanced through appropriately selecting and funding NPV positive investments. These investments, in turn, have
implications in terms of cash flow and cost of capital. 
• The goal of Working Capital (i.e. short term) management is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to service long-term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is
enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA). Managing short term finance and long term finance is one task of a modern CFO.
• Working capital[edit]
• Working capital is the amount of funds which are necessary to an organization to continue its ongoing business operations, until the firm is reimbursed through payments for the goods or services it has delivered to its customers.[47] Working capital is measured through the difference
between resources in cash or readily convertible into cash (Current Assets), and cash requirements (Current Liabilities). As a result, capital resource allocations relating to working capital are always current, i.e. short-term. 
• In addition to time horizon, working capital management differs from capital budgeting in terms of discounting and profitability considerations; they are also "reversible" to some extent. (Considerations as to Risk appetite and return targets remain identical, although some constraints –
such as those imposed by loan covenants – may be more relevant here).
• The (short term) goals of working capital are therefore not approached on the same basis as (long term) profitability, and working capital management applies different criteria in allocating resources: the main considerations are (1) cash flow / liquidity and (2) profitability / return on
capital (of which cash flow is probably the most important).
• The most widely used measure of cash flow is the net operating cycle, or cash conversion cycle. This represents the time difference between cash payment for raw materials and cash collection for sales. The cash conversion cycle indicates the firm's ability to convert its resources into
cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. (Another measure is gross operating cycle which is the same as net operating cycle except that it
does not take into account the creditors deferral period.)
• In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. As above, firm
value is enhanced when, and if, the return on capital exceeds the cost of capital.
• Management of working capital[edit]
• Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital.[48] These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such
that cash flows and returns are acceptable.[46]
• Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
• Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials – and minimizes reordering costs – and hence increases cash flow. Note that "inventory" is usually the realm of operations management: given
the potential impact on cash flow, and on the balance sheet in general, finance typically "gets involved in an oversight or policing way".[49]:714 See Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Dynamic lot size model; Economic production quantity (EPQ); 
Economic Lot Scheduling Problem; Inventory control problem; Safety stock.
• Debtors management. There are two inter-related roles here: (1) Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice
versa); see Discounts and allowances. (2) Implement appropriate Credit scoring policies and techniques such that the risk of default on any new business is acceptable given these criteria.
• Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
• Relationship with other areas in finance[edit]
• Investment banking[edit]
• Use of the term "corporate finance" varies considerably across the world. In the United States it is used, as above, to describe activities, analytical methods and techniques that deal with many aspects of a company's finances and capital. In the United Kingdom and Commonwealth
 countries, the terms "corporate finance" and "corporate financier" tend to be associated with investment banking – i.e. with transactions in which capital is raised for the corporation.[50] These may include
• Raising seed, start-up, development or expansion capital
• Mergers, demergers, acquisitions or the sale of private companies
• Mergers, demergers and takeovers of public companies, including public-to-private deals
• Management buy-out, buy-in or similar of companies, divisions or subsidiaries – typically backed by private equity
• Equity issues by companies, including the flotation of companies on a recognised stock exchange in order to raise capital for development and/or to restructure ownership
• Raising capital via the issue of other forms of equity, debt and related securities for the refinancing and restructuring of businesses
• Financing joint ventures, project finance, infrastructure finance, public-private partnerships and privatisations
• Secondary equity issues, whether by means of private placing or further issues on a stock market, especially where linked to one of the transactions listed above.
• Raising debt and restructuring debt, especially when linked to the types of transactions listed above
• Financial risk management[edit]
• Main article: Financial risk management
• See also: Credit risk, Default (finance), Financial risk, Interest rate risk, Liquidity risk, Operational risk, Settlement risk, Value at Risk, Volatility risk, and Insurance
• Risk management [42][51] is the process of measuring risk and then developing and implementing strategies to manage ("hedge") that risk. Financial risk management, typically, is focused on the impact on corporate value due to adverse changes in commodity prices, interest rates, 
foreign exchange rates and stock prices (market risk). It will also play an important role in short term cash- and treasury management; see above. It is common for large corporations to have risk management teams; often these overlap with the internal auditfunction. While it is
impractical for small firms to have a formal risk management function, many still apply risk management informally. See also Enterprise risk management.
• The discipline typically focuses on risks that can be hedged using traded financial instruments, typically derivatives; see Cash flow hedge, Foreign exchange hedge, Financial engineering. Because company specific, "over the counter" (OTC) contracts tend to be costly to create and monitor,
derivatives that trade on well-established financial markets or exchanges are often preferred. These standard derivative instruments include options, futures contracts, forward contracts, and swaps; the "second generation" exotic derivatives usually trade OTC. Note that hedging-related
transactions will attract their own accounting treatment: see Hedge accounting, Mark-to-market accounting, FASB 133, IAS 39.
• This area is related to corporate finance in two ways. Firstly, firm exposure to business and market risk is a direct result of previous capital financial investments. Secondly, both disciplines share the goal of enhancing, or preserving, firm value. There is a fundamental debate [52] relating to
"Risk Management" and shareholder value. Per the Modigliani and Miller framework, hedging is irrelevant since diversified shareholders are assumed to not care about firm-specific risks, whereas, on the other hand hedging is seen to create value in that it reduces the probability of
financial distress. A further question, is the shareholder's desire to optimize risk versus taking exposure to pure risk (a risk event that only has a negative side, such as loss of life or limb). The debate links the value of risk management in a market to the cost of bankruptcy in that market.
•  
Di-Isononyl Phthalate (DINP)
 ALAC International
• Alan Frishman (MBA 1980),
chief operating officer of ALAC
International (ALAC), was
pondering different financing
alternatives for the company
to facilitate its growth
• ALAC was an importer of
specialty industrial chemicals
from Asia that sold to
manufacturers in the United
States
• At the end of 2009, the
company was awarded the
U.S. distributorship for the
specialty chemical di-isononyl
phthalate (DINP) from a large
Taiwanese producer, and had
• Lily Frishman, ALAC’s
president, had convinced her
husband, Alan, that she could
double sales in 2011 and
dramatically increase the
company’s profits
• However, ALAC needed to
obtain financing for its much
larger inventory and accounts
receivable balances
• The problem was how to fund
the explosive growth in
working capital
 ALAC International
• ALAC was founded in mid-2004 by Lily Frishman, • ALAC was able to achieve gross margins higher
who originally owned 51%, and her partner than was typical in the commodity chemicals
Aaron Wei, who owned the remaining 49% import and export business
• In 2010, Alan Frishman joined ALAC as COO to • The company was almost immediately profitable,
focus on the company’s financing needs and with attractive gross margins of about 15% and
operations an economical overhead structure
• Lily Frishman and Wei diluted their ownership so • By 2009, revenues reached $14.2 million and
that Lily Frishman held 40% of the company, Wei profit before taxes was $310,000
held 40%, and Alan Frishman held 20% (See • ALAC distributed over 20 products for
Exhibit 1 for biographical sketches of ALAC’s petrochemical producers throughout Asia, and no
management team) individual product accounted for more than 20%
• ALAC’s strategy was to import chemicals directly of its 2009 sales
from Asian petrochemical producers and to • It sold to 85 different customers in the United
distribute those products to end users in the States
United States
• Traditionally, this supply chain consisted of four
distinct agents: the Asian exporter, the U.S.
importer, the regional wholesaler, and the local
distributor
• ALAC served all of these roles
• It therefore had a higher potential margin than
any single element of the supply chain, giving it
more flexibility and information to manage its
risks
• Also, ALAC focused on materials with restricted
access or limited production
Nan Ya Plastics Corporation (Nan Ya)
Exxon
UPC (Taiwan)
Aekyung (Korea)
 DINP Opportunity
• At the end of 2009, the company developed an
unanticipated opportunity
• The U.S. representative of Taiwan’s Nan Ya
Plastics Corporation (Nan Ya) that imported the
plasticizer DINP went bankrupt
• Nan Ya was a fully integrated chemicals producer
and was the second-largest company in Taiwan
• Most of its production of DINP was sold in Asia,
but the company allocated a small amount of
production to the United States to maintain
market diversification
• DINP was a petroleum-based chemical and was a
commonly used plasticizer to make PVC soft and
flexible
• The size of the plasticizer market in the United
States was approximately 680,000 metric tons
annually, or approximately $1.8 billion at 2010
prices
• Nan Ya was one of the two largest vertically
integrated producers of DINP; the other was
Exxon, which had the largest share of the market
in the United States
• There were also some large producers such as
UPC (Taiwan), Aekyung (Korea), and others that
were not vertically integrated
• Globally, the major growth markets for DINP
were in India and Asia, and all of the major new
plants were being built near those markets
• The international price of these commodity
chemicals rose as market demand grew and
manufacturing supply remained relatively fixed
• Periodically, as a new plant came online, adding
to supply, prices would fall sharply and then
resume a multi-year increase until the next
expansion of manufacturing capacity
• The supply of DINP in the United States was
limited, so the bankruptcy created a potential
opportunity for ALAC to expand its business
• The bankrupt importer had an inventory of DINP
in a New Jersey storage tank
 DINP Opportunity
• Several competitors approached the court-
appointed receiver and offered to market the
inventory on a consignment basis
• Lily Frishman intuited that the receiver
wanted a guaranteed price to resolve the
estate quickly and with certainty
• She differentiated ALAC by offering a fixed
price and won the inventory at a below-
market price
• ALAC paid 25% down and agreed to pay the
remainder of the purchase price in advance
as the company sold and removed the
inventory, guaranteeing that it would be paid
off in two months
• ALAC then approached Nan Ya and asked to
become its new distributor of DINP in the
United States
• ALAC had previously developed a good
relationship with the company, and Nan Ya
awarded ALAC its DINP distributorship in the
United States
• This agency relationship created the
opportunity for ALAC to substantially
increase sales and profits and to position the
• Projected revenues in 2010 grew 146% to
$35.0 million, and profit before taxes
increased to $3.1 million
• In 2010, 82% of ALAC’s volume came from
importing and selling DINP
• Exhibit 2 contains a summary of ALAC’s
financial results and projections
• This rapid expansion required a substantial
expansion of ALAC’s working capital
• By September 2010, inventory was at $5.5
million, which included $4.2 million in
prepaid bulk DINP in transit from Taiwan,
$0.4 million in warehoused DINP, and $0.9
million in other warehoused dry chemicals
• ALAC financed that growth by cobbling
together $4.3 million in private loans from
friends and family and a $5 million loan from
a wealthy individual, John Herzog
• (Exhibit 3 shows the balance sheet for ALAC
as of September 30, 2010.)
 ALAC’s Economics
• ALAC accounted for less than 2% of the DINP • Each 2,000-metric-ton shipment cost about
market in the United States $4.5 million (including freight, duty, and
other variable expenses)
• ALAC generally priced its product at a small
premium to the market leader, Exxon, by • Shipment from Taiwan to ALAC’s leased tank
focusing on smaller users and by positioning terminal in New Jersey took about 60 days
itself as a second source of supply to larger
users that purchased DINP from Exxon and • Each shipment took an additional month to
sell and then a month to collect receivables
preferred not to rely totally on a single
source of supply or could not secure enough • Thus, the DINP cash cycle was roughly four
DINP from Exxon to meet their needs months, at best
• ALAC imported six parcels of DINP in 2010 • Because of its limited working capital and the
about two months apart; the first four were resulting inability to import 2,000 metric tons
1,000 metric tons and the last two were every month, ALAC retained some DINP to
2,000 metric tons assure customers of monthly deliveries
• The annualized imports by year-end were up • The bimonthly shipments also prevented
to 12,000 metric tons, and ALAC believed it ALAC from negotiating monthly allocations
could double or triple its DINP imports with its largest customers
without triggering a competitive response
from Exxon
• ALAC’s objective was to double its imports by
increasing shipments in 2011 to 2,000 metric
tons each month
• Its sales would double from 2010’s $35
million to almost $70 million in 2011 (see
Exhibit 2)
Ex. 2
 ALAC’s Risk Management
• All ALAC accounts receivable were covered with credit insurance
to 90% of face value
Risk of Bad Debt • Those accounts on which ALAC’s credit insurer declined
coverage were required to pay cash in advance

Risk of Inventory
• ALAC purchased insurance on its inventory through every stage
Loss or of its distribution
Destruction

• ALAC sought to mitigate this risk by having independent

Risk of Quality surveyors conduct quality tests before loading overseas, before
unloading in the United States, and again before removing from
Claims the tank storage and delivering to customers
 ALAC’s Risk Management
• ALAC generally bought from major producers to avoid the problem of a supplier receiving
Risk of Supplier a payment and not delivering product as promised
• The company also put in place a letter-of-credit program with an international bank so

Performance that an overseas supplier would only be paid from ALAC’s bank account after providing all
requested documentation, including title and quality certificates

• This risk was integral to ALAC’s business model

Risk of Price • The company bought DINP in Taiwan at a fixed price, and it took about three months to ship and sell
• During this period, ALAC was exposed to price declines
• ALAC tried to mitigate this risk through good market intelligence
• It was in continuous dialogue with end users, and it believed it would be able to spot the potential for price declines early

Decline • It could increase pre-selling, divert cargo to better markets, and stop new orders
• ALAC evaluated the prospect of pre-selling a significant portion of the DINP at the time it bought DINP in Taiwan, but rejected this approach
because it would have required offering a large discount to buyers that would lower its gross margin to 5%

Maintaining the
Nan Ya
• ALAC had an excellent relationship with Nan Ya, although it was important for ALAC to get imports back up to the 3,000 tons a month that the
prior importer had accomplished
• ALAC’s sole distributorship could be modified or terminated at Nan Ya’s discretion

Relationship
Ex. 3
Ex. 4
 Financial Strategy – Friends and Relatives
• To date, the company had financed its growth
principally through private short-term loans from
the Frishmans’ friends and other relationships,
along with a wealthy individual
• These loans had been renewed regularly as they
matured
• ALAC’s cost of this debt financing averaged
slightly over 13%
• This had attractively preserved a large portion of
the earnings for the three shareowners
• However, this financing had been stitched
together by the Frishmans using their personal
contacts, and, in some instances, they personally
guaranteed the loans
• Alan Frishman was skeptical that private loans
could meet the firm’s expanded 2011 financing
needs through this network
• In his words:
• Fundraising for an existing cash-starved business
isn’t the same as planning in advance for a start-
up
• ALAC, with financial needs that are outstanding,
urgent, and in excess of what any one party could
likely provide, is taking whatever forms of
financing it can now get
• Its needs are immediate
• No single form of financing is likely going to be
able to provide sufficient capital to ALAC for 2011
• We are proceeding on the assumption that we
will need more than one of them
Financial Strategy – Bank Financing
• Alan Frishman had recently met with several banks
specializing in international trade
• Now that ALAC had a track record, there seemed to
be some interest from one bank in providing
financing (see Exhibit 4)
• Again, in his words:
• I view bank financing as the most permanent form of
financing
• The lending process is long and will involve a field
exam of our assets, time to complete a review of our
2010 financials, and paperwork
• But when it is in place, the bank line won’t replace
but will hopefully complement existing forms of
financing, at a far lower cost
• The bank this week quoted under 4% (based on
LIBOR) for any and all financing that they provide
• While they ultimately may only provide up to $9
million in financing, it simply isn’t an and/or choice
for us
• The personal guarantee issue looms large
• It may very well be a deal breaker for Lily, who isn’t
doing anything in her life that might force her family
onto the street
• I have proposed that any personal guarantee would
automatically expire in two years
• The bank could then insist on its renewal for
maintaining a facility, but I’d rather be in that position
than asking them to remove it
• The limit of any facility is probably not affected by
our net worth
• The facility will be based on discounted asset values
of 80% for the receivables and about 60% for the
inventory
• The primary stated purpose of the personal
guarantee is to make sure we are there to help clean
up any mess and convert assets to cash
• In any case, the more we borrow unsecured from
other parties and thereby increase the bank’s
security, the more the value of our personal
guarantee is simply collecting assets rather than
selling our home
Mezzanine Debt
 Financial Strategy
• Because the bank financing would not cover
ALAC’s 2011 working capital needs, Alan
Frishman also explored using other forms of
private financing
• Ideally, we would have $9 million from the bank
and $4.5 million from senior subordinated and
another $4.5 million of preferred equity
• Or even $6 million each with an average cost of
capital still below 12%
• The cost of capital would be 12% for senior
subordinated debt and about 18% for a preferred
equity-like return
• In both cases, ALAC would provide either option
to any investor and would ideally have
participation at both levels
• The incremental cost of capital for the preferred
equity is essentially irrelevant if each dollar can
earn over 50 cents, and I really like the notion of
a layer of capital sitting below friends and family
• Alan Frishman also believed it made sense to first
negotiate the bank financing and then secure the
private financing. In his words:
• We have been focusing on the bank and have yet
to seriously look for the mezzanine level
• The key issue here is that we need more money,
and are less concerned with which form it takes
• But knowing where we stand with any bank is
taking our priority because (a) we believe it
provides comfort to other investors and actually
makes it easier to raise more capital, (b) it
certainly increases our leverage to reduce the
cost of mezzanine financing, (c) the bank’s
security is going to come first, so it makes sense
to build up from there (we may not need to give
the bank security over every additional dollar we
raise), (d) even though we need more money
than we can easily raise, we desire as much of
the lowest-cost capital as possible, and (e) the
bank facility will help guide us in structuring and
determining the amount of necessary third-party
funds
 Financial Strategy
• I want to present an attractive
opportunity to those investors
rather than appear as someone
who needs to offer an 18% return
because they have nowhere else
to turn
• The Frishmans believed that there
also might be suitable tank
terminals on the West Coast of the
United States
• If they could receive shipments in
Los Angeles, they could reduce
shipping time from Taiwan by one
month, reducing the company’s
working capital requirements
• However, the three partners had
been extremely busy winning and
servicing clients as well as
managing the day-to-day
• A disadvantage of using a West-
Coast port was that most of
ALAC’s customers were in the
eastern half of the United States,
and trucking costs would add at
least $90 per ton to the company’s
cost
• Longer term, Lily Frishman and
her team could focus on
developing West-Coast clients,
which would shorten shipping
time without incurring these
trucking costs.
 Biographical Sketches of ALAC’s
Management Team
• Lily Frishman was a founding shareholder of ALAC. She was born and raised in the People’s Republic of
China. She graduated from the Beijing Second Foreign Language Institute with a major in Economics and
Management. She worked in the export department of Gansu Chemical Import-Export in Gansu, China. In
1995, she moved to New York City as a vice president of CNT, Inc., a Chinese joint venture that
represented chemical producers in the United States that exported their products to China. She married
Mr. Frishman in 1998 and eventually left CNT to start a family. During that time, she started a small
chemical trading company called Alipes International to export plastic raw materials such as PVC to China.
• Aaron Wei was a founding shareholder of ALAC. He was born and raised in Shanghai. He moved to the
United States in 1985 and graduated from Baruch College, City University of New York, with an
undergraduate degree in Finance and a master’s degree in International Marketing. He worked for various
international trading companies, including 15 years at Formosa Plastics USA, a supplier of plastic resins
and petrochemicals, where he was most recently Marketing Director for the Specialty PVC Division.
• Alan Frishman graduated from HBS in 1980. After graduation he spent seven years working for two
chemical companies in the United States and Hong Kong before starting his own company, Asiachem, in
1987. Asiachem grew to 19 offices throughout Asia where it distributed industrial raw materials such as
plastic resins and chemicals. In the late nineties, Mr. Frishman began selling Asiachem offices and moved
to New York City, where he met and married Lily, and started a family.
• Frank Antonucci was the Sales Director of ALAC. He worked for twenty years at Formosa Plastics USA,
most recently as Sales Manager of the Specialty PVC Division, before joining ALAC. He was also a member
in Washington, D.C., of the Executive Committee of the SPI’s Flexible Vinyl Group, of the Materials Council
for the National Board, and of the Liaison Group for The National Critical Materials Council that liaises with
Congress.
 Substantive Issues
• ALAC International (ALAC) was • ALAC planned to double the
awarded the U.S. distributorship number of shipments in 2011 to
of di-isononyl phthalate (DINP) twelve from the six in 2010
which provided ALAC an • ALAC needed to estimate its
opportunity to increase its sales working capital needs and then
and profits evaluate alternative ways to
• But the opportunity required a finance its needs
significant additional investment
in working capital
• The DINP, shipped by boat from
Taiwan, had a four month cash
conversion cycle; after purchasing
the DINP, it took two month to
arrive in the U.S., another month
to sell and distribute it, and then
another month to collect the
receivables
 Learning Opportunities
• Impact of rapid sales growth • Discuss the risks associated
on working capital with the cash cycle and ways
requirements and the to mitigate those risks
financing alternatives that • Suggest alternative financing
could be used to facilitate that for the increased investment
growth for a small business in working capital required for
• When ongoing operations ALAC’s planned growth.
provide a new opportunity, ‘a
startup,’ that could
substantially expand its sales
and profitability
• Assess the profitability of the
new opportunity using the
financial data provided in the
case exhibits
• Use information about the
DINP shipments, distributions
 Profitability of Importing DINP
• ALAC imported 12,000 metric tons of
DINP in 2010, the first year of its
newly awarded DINP distributorship
• The impact on its profit was huge:
profit before taxes increased ten fold
from $0.31 million in 2009 to $3.1
million in 2010 (see Case Exhibit 2)
• ALAC was planning to double its
import of DINP in 2011 to 12
shipments of 2,000 metric tons; the
resulting projected profit before tax
was $7.6 million
• To infer the per shipment profitability
of DINP, subtract the profit in 2009,
the last year before ALAC started
selling DINP, from the 2011 projected
profit
• The result is $7.2 million, or
approximately $0.6 million for each of
the 12 planned shipments in 2011a
 Discussion Question

How much working capital was required to

facilitate twelve shipments and how to arrange
the financing of it?
 Working Capital Requirements
• The $4.5 million cost of each shipment was paid
when it was delivered to the ship
• Each cycle was four months long; two months for
the shipment to arrive in NJ, another month to
sell, and then a month to collect receivables
• The amount of working capital ALAC would need
depended on the number of shipments each year
• If ALAC imported just three shipments of DINP,
each four months apart, it would need just $4.5
million in working capital
• Sales proceeds would be collected in the fourth
month, just in time to pay for the second
shipment
• This would be repeated at the end of the eighth
month when sales proceeds would be collected
when payment for the third shipment was made
• This simplified approach abstracts from the
$600,000 in profits before tax that ALAC
anticipated to earn on each shipment
• If six cycles were executed, each two months
apart, a total of $9 million in working capital
would be required; $4.5 million to pay for the
first shipment and another $4.5 for the second
shipment
• When ALAC collected its receivables from the
first shipment, the proceeds can be used to pay
for the third shipment
• No additional working capital would be required
because shipment 4 would be paid with
receivables from shipment number 2, shipment 5
with receivables from 3, and the last shipment
ordered ten month into 2011 would be paid with
receivables from shipment
• ALAC would require $18 million in working capital
to execute all 12 shipments
• The shipments would be one month apart
• By the time the receivables from the first
shipment were collected, four months after it
was paid for, three more shipments would have
been ordered at $4.5 million each for a total of
$18 million
• No additional working capital would be required
thereafter because the fifth shipment would be
paid for with the receivables collected from the
first shipment, the sixth shipment would be paid
for with the receivables from the second
shipment, and so on
 Risk in the Cash Conversion Cycle
• ALAC managed its risks carefully with a
collection of insurance and contracts and
other actions like employing independent
surveyors
• Still, ALAC purchased the DINP at a fixed price
and sold it about three month later so it was
exposed to the risk of a price decline during
that period
• However, it is likely that ALAC would learn of
the price decline quickly and react
• Thus, it seems reasonable that this risk was
limited to just one shipment
• Moreover, given the $0.6 million profit on a
$4.5 million shipment, the price would have to
decline by more than 13.3% (0.6/4.5) for ALAC
to experience a loss
• New shipments after a price increase would be
priced accordingly
• ALAC could have avoided the risk of a price
decline by preselling part or all the DINP at the
same time it was purchased, but decided
against it because the partners believed that
the customers would require a substantially
lower price with preselling and that would
result in an unacceptable reduction in margin
• Given the ability to react quickly and the
bounded losses, ALAC decided the reward (in
the form of higher margins) was worth the risk
of a price decline
• It is unclear from the case why ALAC and
customers viewed this risk of a price decline
differently; if so, perhaps it suggests some
inefficiency in the DINP market or some value
to customers for flexibility so that the margin
difference had more to do with a hesitation to
commit to the purchase in advance than the
price risk
• Alternatively, ALAC could be under-estimating
the likelihood of a price drop
 Financing Alternatives
• ALAC had financed its working capital in 2010 through
‘friends and family’ along with non- traditional
lenders such as the wealthy individual, John Herzog.
However, Frishman decided seek a bank loan for the
additional working capital. When asked why ALAC
would prefer a bank loan over other sources of
capital, students first point to the relatively low cost
of bank loans. Non-traditional lenders typically have
interest rates between 10% and 15% whereas the
interest rate from banks will generally be much less.
Also, ALAC requires a total of $18 million in working
capital and that amount may be more than the
owners’ network of family and friends could provide.
Finally, if ALAC chose to issue equity instead of debt, it
would reduce the ownership of the three principals of
ALAC, and because of the limited DINP operating
history, it is unlikely that the equity price would be
high enough to compensate the owners for their
lower share in the future cash flows.
• A bank loan would be difficult to obtain for several
reasons. First, ALAC’s business was much smaller
before the DINP opportunity and so its historical
financials did not reflect the profitability of that
opportunity. Second, the cost of due diligence for a
complex international operation might be too high for
the loan size requested; $18 million was a small
commercial loan for most banks. Third, in assessing
the risk of the DINP, the bank could not rely on ALAC’s
track record, while at the same time it could not
ignore the fact that the previous distributor of DINP
went bankrupt. Fourth, the owners of ALAC were
• $3.4 million (9×$0.6×60%). Borrowing an amount equal to this profit and adding it to the working capital would provide more than $18 million in 2013
($13.5 + 2×$3.4), enough to finance 12 shipments. Thus, bootstrapping the growth would delay reaching the sales objective by just two years.
• This solution does have its drawbacks. ALAC would forego profits of $5.4 million (9×0.6) for making six less shipments in 2011 and three less in 2012,
and the risk of alienating customers. The delay might also strain the relationship with the Taiwanese DINP manufacturer. Still, bootstrapping could
provide ALAC a solution to its working capital problem.
• What Happened
• Alan sent a loan application to 16 banks and only one was ultimately approved. After experience with 18 shipments, the bank expanded the loan to
$20 million.
• Suggested Class Plan
• How much profit could ALAC make in 2011 per trip to Taiwan?
– What are projected before tax profits for 2011?
– What are projected profits from DINP sales in 2011?
– How many trips are planned for 2011?
• How much working capital would ALAC need in 2011?
– How long is a single sell cycle?
– How much working capital would ALAC need for 3 equally spaced cycles per year?
– How much working capital would ALAC need for 6, 9, and 12 equally spaced cycles per year?
• Is the DINP a good business opportunity?
– What are the advantages of the DINP opportunity?
– What are the risks of the DINP opportunity?
– Would you pursue the DINP opportunity?
• How could ALAC finance its working capital requirements?
– A bank loan
– Friends and family
– Pre selling at a discount
– Reinvesting retained profits
• How long would it take for retained profits to finance 12 shipments per year?
• What is the opportunity cost of using retained profits?
– How would you finance the working capital requirements?
• What happened
 Discussion Question

How profitable is the DINP opportunity for

ALAC? Hint: you can assume that the DINP is the
major difference between the 2009 and 2010P
results
 Discussion Question

ALAC imported 8,000 metric tons of DINP in

2010 and projected importing 24,000 metric
tons in 2011. How much working capital does
ALAC need? Assume six shipments of DINP
annually, each of which is 2,000 metric tons
 Discussion Question

How risky are the DINP shipments? How much

could money could they lose on a single
shipment?
 Discussion Question

Why is ALAC finding it difficult to fund its

working capital?
 Discussion Question

What would you advise Alan Frishman?

Cash Conversion Cycle for One Shipment
Cash Conversion Cycle for Three Shipments
Cash Conversion Cycle for Six Shipments
ALAC Working Capital Requirements
($million)