Table Of ContentWorking Capital and Debtor Management:
Exercises
Robert Alan Hill
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Robert Alan Hill
Working Capital And Strategic Debtor
Management
Exercises
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Working Capital And Strategic Debtor Management: Exercises
1st edition
© 2013 Robert Alan Hill & bookboon.com
ISBN 978-87-403-0588-3
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Working Capital And Strategic
Debtor Management: Exercises Contents
Contents
About the Author 8
Part One: An Introduction 9
1 An Overview 10
1.1 Introduction 10
1.2 Working Capital Management 13
1.3 Strategic Debtor Management 15
1.4 Exercise 1: The Terms of Sale 17
1.5 Summary and Conclusions 19
1.6 Selected References 20
Part Two: Working Capital Management 21
2 Th e Objectives and Structure of Working Capital Management 22
2.1 Introduction 22
2.2 Exercise 2.1: Financial Strategy: An Overview 22
2.3 Exercise 2.2: Financial Strategy and Working Capital 23
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Working Capital And Strategic
Debtor Management: Exercises Contents
2.4 Summary and Conclusions 25
2.5 Selected References 26
Part Two: Working Capital Management 27
3 Th e Accounting Concept of Working Capital Management: A Critique 28
3.1 Introduction 28
3.2 Exercise 3.1: Working Capital Investment and Risk 29
3.3 Exercise 3.2: Working Capital Finance and Risk 30
3.4 Summary and Conclusions 34
3.5 Selected References 35
Part Two: Working Capital Management 36
4 Th e Working Capital Cycle and Operating Efficiency 37
4.1 Introduction 37
4.2 The Case Study: An Introduction 37
4.3 The Case Study: The Analysis 40
4.4 Summary and Conclusions 44
4.5 Selected References 45
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Working Capital And Strategic
Debtor Management: Exercises Contents
Part Two: Working Capital Management 46
5 R eal World Considerations and the Credit Related Funds System 47
5.1 Introduction 47
5.2 Exercise 5: Real World Solvency and Liquidity 47
5.3 Summary and Conclusions 50
5.4 Selected References 51
Part Three: Strategic Debtor Investment 52
6 Th e Effective Credit Price and Decision to Discount 53
6.1 Introduction 53
6.2 Exercise 6.1: Terms of Sale: A Theoretical Overview 54
6.3 Exercise 6.2: The Decision to Discount 58
6.4 Exercise 6.3: The Effective Price Framework 60
6.5 Exercise 6.4: “The Real” Cost of Trade Credit 63
6.6 Summary and Conclusions 66
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Working Capital And Strategic
Debtor Management: Exercises Contents
Part Four: Summary and Conclusions 68
7 Review Exercises 69
7.1 Introduction 69
7.2 Exercise 7.1: Working Capital: A Review 70
7.3 Exercise 7.2: Cash Flow and the Budgeting Process 73
7.4 Exercise 7.3: Cash Flow and Accounting Profit 75
7.5 Exercise 7.4: The Preparation of a Cash Budget 76
7.6 Exercise 7.5: Terms of Sale: A Review 81
7.7 Summary and Conclusions 86
7.8 Selected References 87
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Working Capital And Strategic
Debtor Management: Exercises About the Author
About the Author
With an eclectic record of University teaching, research, publication, consultancy and curricula
development, underpinned by running a successful business, Alan has been a member of national
academic validation bodies and held senior external examinerships and lectureships at both undergraduate
and postgraduate level in the UK and abroad.
With increasing demand for global e-learning, his attention is now focussed on the free provision of a
financial textbook series, underpinned by a critique of contemporary capital market theory in volatile
markets, published by bookboon.com.
To contact Alan, please visit Robert Alan Hill at www.linkedin.com.
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Part One:
An Introduction
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Working Capital And Strategic
Debtor Management: Exercises An Overview
1 An Overview
1.1 Introduction
Irrespective of the research area (whether in the physical or social sciences) a logical procedure when
constructing theoretical models has always been to make simplifying assumptions to improve our
understanding of the real world. As a convenient benchmark, all the texts in my bookboon series
(referenced at the end of this Chapter) therefore begin with an idealised picture of investors (including
management) who are rational and risk-averse, operating in reasonably efficient capital markets. With
a free flow of information and no barriers to trade, they can formally analyse one course of action in
relation to another for the purpose of wealth maximisation with a degree of confidence.
In a sophisticated mixed economy, summarised in Figure 1.1 below, where the ownership of corporate
assets is divorced from control (the agency principle), we can also define and model the normative goal
of strategic financial management under conditions of certainty as:
• The implementation of investment and financing decisions using net present value (NPV)
maximisation techniques to generate money profits from all a firm’s projects in the form of
retentions and distributions. These should satisfy the firm’s existing owners (a multiplicity of
shareholders) and prospective investors who define the capital market, thereby maximising
share price.
Figure 1.1: The Mixed Market Economy
Over their life, individual projects should eventually generate cash flows that exceed their overall cost of
funds (i.e. the project discount rate) to create wealth. This positive net terminal value (NTV) is equivalent
to a positive NPV, defined by a recurring theme of strategic financial management, namely the time
value of money (i.e. the value of money over time, irrespective of inflation) determined by borrowing
and lending rates.
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