Working Capital Management

CHAPTER 11 Managing the Working Capital Cycle

This chapter covers these topics:

• Understanding risk management issues in working capital, including ERM.
• Appreciation for the measurement of working capital efficiency.
• Determination of the process of liquidity management.
• Consideration of how traditional and modern attitudes have changed the management of working capital.
• Review of working capital ideas and implementation procedures.

THROUGHOUT THIS BOOK WE HAVE discussed the accounts on the balance sheet that drive working capital, including current assets and liabilities. In addition, we devoted chapters to international and information systems issues. There are three concerns in managing the working capital cycle that encompass essential topics in managing any business: risk management, efficiency, and liquidity. Each will be discussed in this chapter.

RISK AND WORKING CAPITAL

Risk is in the possibility of loss or injury. The measurement of risk has traditionally been through the frequency of human or property loss in specific categories, such as death or disability by age, sex and occupation, or the frequency of fire damage to specific types of construction at various locations. In the past, we managed risk using established hedging mechanisms, including insurance, futures, and options.

With insurance, the policyholder accepts a small certain loss—the premium expense—rather than the possibility of a large catastrophic loss. Futures and options are types of derivative contracts ...