Debtor and Working Capital Management

Course Objectives

On completion of this course you should be able to:

• Distinguish between the internal working capital management function and an external interpretation of a firm’s working capital position revealed by its published accounts, Calculate the working capital operating cycle and financing cycle from published accounting data and analyse the inter-relationships between the two,
• Define the dynamics of a company’s credit-related funds system,
• Explain how the terms of sale, which comprise the credit period, cash discount and discount period, affect the demand for a firm’s goods and services,
• Understand the impact of alternative credit policies on the revenues and costs, which are associated with a capital budgeting decision,
• Appreciate the disparities between the theory and practice of working capital management, given our normative wealth maximisation assumption.

Course Outline

Working Capital Management

• The Objectives and Structure of Working Capital Management
• The Objectives of Working Capital Management
• The Structure of Working Capital

The Accounting Concept of Working Capital: A Critique

• The Accounting Notion of Solvency
• Liquidity and Accounting Profitability
• Financial Interpretation: An Overview
• Liquidity and Turnover

The Working Capital Cycle and Operating Efficiency

• The Working Capital Cycle
• Operating Efficiency

Real World Considerations and the Credit Related Funds System

• Real World Considerations
• The Credit Related Funds System

Strategic Debtor Investment

The Effective Credit Price and Decision to Discount

• The Effective Credit Price
• The Effective Discount Price
• The Decision to Discount

The Opportunity Cost of Capital and Credit Related Funds System

• The Opportunity Cost of Capital Rate
• The Credit Related Fund System
• The Development of Theory

The Strategic Impact of Alternative Credit Policies on Working Capital and Company Profitability

• Effective Prices and the Creditor Firm
• Alternative Credit Policies, Working Capital Investment and Corporate Profitability

Empirical Evidence and Theoretical Review

• The Theory
• The Empirical Evidence
• Late Payments and the Case for Legislation