1. Chapter 3 ASSESSING LIQUIDITY AND OPERATIONAL EFFICIENCY

4. Figure 3.1 The Managerial Balance Sheet Versus the Standard Balance Sheet. THE STANDARD BALANCE SHEET TOTAL ASSETS LIABILITIES AND OWNER’S EQUITY Short-term debt Cash Operating assets Accounts receivable plus Inventories plus Prepaid expenses Net fixed assets Operating liabilities Accounts payable plus Accrued expenses Long-term financing Long-term debt plus Owners’ equity

6. Exhibit 3.1 TSP’s Balance Sheets. Figures in millions of dollars DEC. 31, 2000 DEC. 31, 2001 DEC. 31, 2002 ASSETS CURRENT ASSETS $26.70 $32.90 $47.95 Cash $2.30 $2.50 $1.50 Accounts receivable 10.10 12.10 18.45 Inventories 14.30 18.30 28.0 NONCURRENT ASSETS 18.80 22.65 28.40 Financial assets & intangibles 0.0 0.0 0.0 Property, plant, & equip. (net) 18.80 22.65 28.40 Gross value $24.40 $29.50 $36.50 Accumulated depreciation (5.60) (6.85) (8.10) TOTAL ASSETS $45.50 $55.55 $76.35

7. Exhibit 3.2 TSP’s Balance Sheets. Figures in millions of dollars LIABILITIES AND OWNERS’ EQUITY CURRENT LIABILITIES $8.78 $10.59 $24.48 Short-term debt $4.00 $4.60 $11.10 Owed to banks $4.00 $4.60 $11.10 Current portion of long-term debt 0.0 0.0 0.0 Accounts payable 4.08 5.14 12.43 Accrued expenses 0.70 0.85 0.95 NONCURRENT LIABILITIES 13.80 17.20 21.50 Long -term debt 13.80 17.20 21.50 Owners’ equity 22.92 27.76 30.37 TOTAL LIABILITIES AND OWNERS’ EQUITY 45.50 $55.55 $76.35 DEC. 31, 2000 DEC. 31, 2001 DEC. 31, 2002

8. Figure 3.2 The Managerial Balance Sheet Versus the Standard Balance Sheet. THE MANAGERIAL BALANCE SHEET INVESTED CAPITAL OR NET ASSETS CAPITAL EMPLOYED Cash Working capital requirement (WCR) Operating assets less Operating liabilities Net fixed assets Short-term debt Long-term financing Long-term debt plus Owners’ equity

10. Figure 3.3: The Firm’s Operating Cycle and Its Impact on the Firm’s Balance Sheet.  = Change in the balance sheet account

11. Figure 3.4: The Firm’s Operating Cycle, Showing Cash-to-Cash Period. An alternative way to describe the operating cycle in terms of the cash-to-cash period is presented in Exhibit 3.4 .

13. Exhibit 3.3 TSP’s Managerial Balance Sheets. All data from the balance sheets in millions of dollars

15. Figure 3.5: The Behavior of Working Capital Requirement over Time for a Firm with Seasonal Sales. WCR is assumed to be set at 25 percent of sales Exhibit 3.5 shows that when sales are seasonal WCR will have a seasonal component, and according to the matching strategy, the permanent component of WCR should be financed with long-term funds (long-term debt and equity) and the seasonal component of WCR with short term funds (short-term debt).

18. Exhibit 3.4 TSP’s Net Investment in Its Operating Cycle and Its Financing. figures in millions of dollars $9.6/$33.07 = 29.0% $2.1/$24.41= 6.5% Net short-term financing working capital requirement Percentage of working capital requirement financed short term $23.47/$33.07 = 71.0% $22.83/$24.41 = 93.5% Net long-term financing  working capital requirement Percentage of working capital financed long term $11.1 - $1.5 = $9.6 $4.6 - $2.5 = $2.1 Net short-term financing (NSF) = Short-term debt – Cash $21.5 + $30.37 - $28.4 = $23.47 $17.72 + $27.76 - $22.65 = $22.83 Net long-term financing (NLF) = Long-term debt + Owners’ equity – Net fixed assets THE FINANCING OF THE OPERATING CYCLE [$18.45 + $28.0] – [$12.43 + $0.95] = $33.07 [$12.1 + $18.3] – [$5.14 + $0.85] = $24.41 WCR = [Accounts receivable + Inventories] – [Accounts payable + Accrued expenses NET INVESTMENT IN THE OPERATING CYCLE OR WORKING CAPITAL REQUIREMENTS (WCR) DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000

19. EXHIBIT 3.5: TSP’s Net Investment in Its Operating Cycle and Its Financing. All data from the balance sheets in Exhibit 3.1; figures in millions of dollars 100% 100% 100% 80.5% NLF $23.47 84.1% NLF $22.83 84.7% NLF WCR 19.5% NSF $9.60 15.9% NSF $2.1 15.3% NSF WCR $33.07 WCR $22.83 WORKING CAPITAL REQUIREMENT AND ITS FINANCING DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000

23. EXHIBIT 3.6: Some Benchmark Ratios of Working Capital Requirement to Sales for a Sample of U.S. Economic Sectors in 1999 1 . 1 Source: Calculated by the authors using Compustat data. Average all sectors: 11% -3% Air transport 12% Motor vehicles 0% Grocery stores 12% Computer equipment 0% Wholesale: Nondurables 13% Paper 2% Natural gas distribution 13% Plastic products 4% Retail: Nongrocery stores 16% Steel works 4% Electric services 18% Department stores 6% Soap & perfumes 19% Wholesales: Durables 9% Publishing 21% Aircraft 9% Wood products and buildings 22% Textile 9% Food 24% Apparel products 10% Beverages 25% Machinery & equipment Sector Sector WORKING CAPITAL REQUIREMENT AS PERCENTAGE OF SALES

25. EXHIBIT 3.7: TSP’s Management of Its Operating Cycle. All data from the balance sheets in Exhibit 3.1 and the income statements in Exhibit 2.2; figures in millions of dollars Working capital requirement (WCR) 1 Sales Cost of goods sold (COGS) Inventories Accounts receivable Average daily sales 2 Accounts payable Average daily purchases 2,3 To evaluate the overall efficiency with which the firm’s operating cycle is managed OBJECTIVE DEC. 31, 2000 DEC. 31, 2002 1 WCR is found on slide 18. 2 We assume the year has 365 days. 3 Purchases are equal to COGS plus the change in inventories (see equation 3.11). In 1999, inventories were $11.96, thus purchases (2000) = $61.44 + ($14.3-11.96) = $63.78. Purchases (2002) = $83.08 + ($28 – $18.3) = $92.78; = $33.1 $120.4 = 27.5% To evaluate the efficiency with which inventories are managed = $83.1 $28 = 3.0 times To evaluate the efficiency with which accounts receivable are managed = $18.45 $120/365 = 56 days To evaluate the efficiency with which accounts payable are managed = $12.4 $93/365 = 93 days

30. Exhibit 3.8 TSP’s Net Working Capital (NWC) and Current and Quick Ratios. figures in millions of dollars NWC = [Current assets – Current liabilities] 1 NWC = [Long-term financing 2 – Net fixed assets] 3 Current ratio = Current assets Current liabilities Quick ratio = Cash + Accts receivable Current liabilities DEC. 31, 2000 DEC. 31, 2001 DEC. 31, 2002 1 This is the traditional definition of net working capital. 2 Long-term financing = Long-term debt + Owners’ equity. 3 According to this definition, net working capital is the same as net long-term financing (see equation 3.4). $32.9-10.6 = $22.3 $48.0-24.5 = $23.5 ($17.2 + $27.76) – $22.65 = $22.3 ($21.5 + $30.37) – $28.4 = $23.5 = $32.9 $10.59 = 3.11 $47.95 $24.48 = 1.96 = $14.6 $10.59 = 1.38 $19.95 $24.48 = 0.81