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1、Chapter11WorkingCapitalManagement©2001Prentice-Hall,Inc.FundamentalsofFinancialManagement,11/eCreatedby:GregoryA.Kuhlemeyer,Ph.D.CarrollCollege,Waukesha,WIWorkingCapitalConceptsNetWorkingCapitalCurrentAssets-CurrentLiabilities.GrossWorkingCapitalThefirm’sinvestmentincurrentassets.WorkingCapit
2、alManagementTheadministrationofthefirm’scurrentassetsandthefinancingneededtosupportcurrentassets.SignificanceofWorkingCapitalManagementInatypicalmanufacturingfirm,currentassetsexceedone-halfoftotalassets.ExcessivelevelscanresultinasubstandardReturnonInvestment(ROI).Currentliabilitiesarethepri
3、ncipalsourceofexternalfinancingforsmallfirms.Requirescontinuous,day-to-daymanagerialsupervision.Workingcapitalmanagementaffectsthecompany’srisk,return,andshareprice.WorkingCapitalIssuesAssumptions50,000maximumunitsofproductionContinuousproductionThreedifferentpoliciesforcurrentassetlevelsarep
4、ossibleOptimalAmount(Level)ofCurrentAssets025,00050,000OUTPUT(units)ASSETLEVEL($)CurrentAssetsPolicyCPolicyAPolicyBImpactonLiquidityLiquidityAnalysisPolicyLiquidityAHighBAverageCLowGreatercurrentassetlevelsgeneratemoreliquidity;allotherfactorsheldconstant.OptimalAmount(Level)ofCurrentAssets02
5、5,00050,000OUTPUT(units)ASSETLEVEL($)CurrentAssetsPolicyCPolicyAPolicyBImpacton ExpectedProfitabilityReturnonInvestment=NetProfitTotalAssetsLetCurrentAssets=(Cash+Rec.+Inv.)ReturnonInvestment=NetProfitCurrent+FixedAssetsOptimalAmount(Level)ofCurrentAssets025,00050,000OUTPUT(units)ASSETLEVEL($
6、)CurrentAssetsPolicyCPolicyAPolicyBImpacton ExpectedProfitabilityProfitabilityAnalysisPolicyProfitabilityALowBAverageCHighAscurrentassetlevelsdecline,totalassetswilldeclineandtheROIwillrise.OptimalAmount(Level)ofCurrentAssets025,00050,000OUTPUT(units)ASSETLEVEL($)CurrentAssetsPolicyCPolicyAPo
7、licyBImpactonRiskDecreasingcashreducesthefirm’sabilitytomeetitsfinancialobligations.Morerisk!Strictercreditpoliciesreducereceivablesandpossiblylosesalesandcustomers.Morerisk!Lowerinventorylevelsincreasestockoutsandlostsales.Morerisk!OptimalAm
