Managing Working Capital and Controlling Cash

Chapter 4
Managing Working Capital and

Controlling Cash
Copyright © 2007 by John Wiley

& Sons, Inc. All rights reserved
Chapter Overview
• Working Capital
• Cash Management
– Controls
– Forecasts
– Banking Services
– Credit Cards

Working Capital Defined
• Difference between current assets and
current liabilities
OR
• Amount of cash required to operate a
business

Working Capital
• Amount of working capital is impacted by:
– Mix of cash and credit sales
– Credit card transaction processing
– Accounts receivables
– Food and beverage turnover
– Vendor terms
– Growth

Working Capital
• Ways to minimize working capital
– Cash discounts
– Inventory turnover
– Good credit rating
– Managing accounts payables
– Tracking transactions

Cash Management
• Cash is convertible into any other type of
asset
• Forms of cash:
– Checks
– Money orders
– Marketable securities

Cash Forecast
• Assists in determining the amount of
working capital
• Management estimates cash inflows and
projects cash needs for 90 days
• Alerts management to probable cash
shortages or surpluses in advance

Need for Growth
• Essential to a company’s success
– Private company owners expect profits, cash
flow, and ROI to increase
– Stockholders expect the price of their stock to
rise
• Growth company’s earnings increase at
least 15% each year

Shareholder Value
• Shareholder Value = Market Value
• Market Value
– Public Company
• Current market price of common stock multiplied
by number of shares outstanding
– Private Company
• Sale price of the company on the open market

Public Company Goals
• Increase earnings per share (EPS)
– EPS = EBIDTA / Shares of Common Stock
• Increase the company’s stock multiple
– Multiple = Current Market Price / EPS
• Increase the market price of common
stock

Risk and Reward
• Investors are risk averse
– The greater the risk, the higher the ROI
demanded by investors

Private Company Goals
• Increase cash flow
• Generate a favorable return for owners

Benefits of Growth
• Clear career paths for employees
• Attract qualified employees
• Increase market share
• Limit new competition
• Diversify risk

Growth Strategies
• Increase sales and Productivity of Existing
Properties
– Increase Profit Margin
– Increase sales
– Reduce expenses
– Increase labor productivity
– Reduce credit card commissions

Growth Strategies
• Expansion of Physical Facilities
– Focus on current or new markets
– Requires large quantities of new capital
– Earnings of additional assets must be greater
than the company’s cost of capital
• If earnings are lower, earnings per share are
diluted

Growth Strategies
• Franchising
– Sell the rights to a brand in a specific
location/market for a stated number of years
– Franchisees pay:
• Franchise fees
• Franchise royalty fee
• Ancillary services
– Marketing, training, purchasing fees, etc.

Franchising
• Benefits
– Greater distribution system
– Rapid growth without large amounts of capital
– Higher profit margins
• Disadvantages
– Risk of not being able to control brand standards
– Unable to control quality and consistency of the
product and services

Growth Strategies
• Management Contracts
– Operate properties for owners without management
capabilities
– Available primarily to lodging companies
– Fees
• 3% to 5% of total sales
• Incentive fee based on a percentage of operating profit
– Disadvantage
• Risk of contract being terminated

Growth Strategies
• Mergers and Acquisitions
– Available to large public companies
– Must have substantial amounts of capital
– Funded by:
• Debt
• Existing equity
• Selling new shares of stock
• Bartering
Growth Strategies
• Initial Public Offering (IPO)
– Utilized when:
• a company is ready for rapid growth
• a company’s potential future value is much greater
than its current value

IPO Process
1. Investment banker manages process
2. Law firm writes prospectus
3. Accounting firm prepares certified audits for
prior three years
4. Road show
5. Stock offering is priced
6. Management meets with the stock exchange


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Chapter 4

Managing Working Capital and

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

Copyright © 2007 by John Wiley

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