Working Capital Management

are the sources of cash it uses in its normal day-to-day operations. The company's cash balances result from selling goods and services, collecting receivables, and generating cash from other sources such as short-term investments. Typical sources of short-term funding include trade credit from vendors and lines of credit from banks. Effective cash flow management of a firm's collections and payments can also be a source of liquidity for a company.

Secondary sources of liquidity include liquidating short-term or long-lived assets, negotiating debt agreements (i.e., renegotiating), or filing for bankruptcy and reorganizing the company

delay or reduce cash inflows, or increase borrowing costs. Examples include uncollected receivables and bad debts, obsolete inventory (takes longer to sell and can require sharp price discounts), and tight short-term credit due to economic conditions.

accelerate cash outflows. Examples include paying vendors sooner than is optimal and changes in credit terms that require repayment of outstanding balances.

Liquidity ratios are employed by analysts to determine the firm's ability to pay its short-term liabilities

The operating cycle, the average number of days that it takes to turn raw materials into cash proceeds from sales, is:

operating cycle = days of inventory + days of receivables

Daily cash position refers to uninvested cash balances a firm has available to make routine purchases and pay expenses as they come due. The purpose of managing a firm's daily cash position is to have sufficient cash on hand (that is, make sure the firm's net daily cash position never becomes negative) but to avoid keeping excess cash because of the interest income foregone by not investing the cash.

U.S. Treasury bills.
Short-term federal agency securities.
Bank certificates of deposit.
Banker's acceptances.
Time deposits.
Repurchase agreements.
Commercial paper.
Money market mutual funds.
Adjustable-rate preferred stock.

When evaluating the performance of its short-term securities investments, a company should compare them on a bond equivalent yield basis

Uncommitted line of credit
Committed (regular) line of credit
Revolving line of credit

A bank extends an offer of credit for a certain amount but may refuse to lend if circumstances change

A bank extends an offer of credit that it "commits to" for some period of time. The fact that the bank has committed to extend credit in amounts up to the credit line makes this a more reliable source of short-term funding than an uncommitted line of credit. Banks charge a fee for making such a commitment

An even more reliable source of short-term financing than a committed line of credit, revolving lines of credit are typically for longer terms, sometimes as long as years. Along with committed lines of credit, revolving credit lines can be verified and can be listed on a firm's financial statements in the footnotes as a source of liquidity

are used by firms that export goods. A banker's acceptance is a guarantee from the bank of the firm that has ordered the goods stating that a payment will be made upon receipt of the goods. The exporting company can then sell this acceptance at a discount in order to generate immediate funds.

Factoring refers to the actual sale of receivables at a discount from their face values. The size of the discount will depend on how long it is until the receivables are due, the creditworthiness of the firm's credit customers, and the firm's collection history on its receivables. The "factor" (the buyer of the receivables) takes on the responsibility for collecting receivables and the credit risk of the receivables portfolio.

Large, creditworthy companies can issue short-term debt securities called commercial paper. Whether the firm sells the paper directly to investors (direct placement) or sells it through dealers (dealer-placed paper), the interest costs are typically slightly less than the rate they could get from a bank.