3.4 Management of Working Capital 393.3.5 Repos and Securities Lending
Sale and repurchase arrangements (“repos”) and securities lending enable the firm
to release capital for a certain period of time (repos) or to use assets for a certain
period of time (securities lending). Repos and securities lending have been dis-
cussed in Volume II in more detail.
Repos. Sale and repurchase arrangements are a form of title finance. Under a
repo contract, a seller raises capital on an asset by selling it to a buyer. The con-
tract requires the seller to repurchase the assets, or equivalent assets, at a future
date or possibly upon demand. The seller pays a repurchase price equal to the pur-
chase price and a financing charge. Repos are normally used where the assets are
investment securities or investments such as shares, debentures, stock, bonds, bills
of exchange and other forms of tradeable debt.^69
Securities lending. Repos can be distinguished from securities lending. Securi-
ties lending is not really “lending” and “borrowing”. A securities lending contract
consists of two sales contracts. A securities lender undertakes an obligation to
transfer (sell) securities to a securities borrower. A securities borrower undertakes
an obligation to replace the securities in due course on a specified future date (sell
them back). A typical agreement requires the securities borrower to pay a fee to
the lender and also provide collateral in the form of cash or other securities. The
collateral is transferred through a title transfer arrangement, which enables the col-
lateral to be further used.^70
3.4 Management of Working Capital
3.4.1 General Remarks
The previous section dealt with how the firm can reduce its investment in tangible
and intangible assets. Another important method to release capital is by better
management of working capital.
Working capital is an investment. It has no certain return, but it has a real and
explicit cost. An increasing working capital means two things: a larger investment,
and more funding to be raised in order to finance that investment. The firm can
therefore benefit from a reduction in working capital.
Working capital consists of three components: accounts payable, inventories,
and accounts receivable. Accounts payable consist of unpaid purchases (obliga-
tions and debts due to outside suppliers). Inventories consist of unsold production
(raw materials, bought-in components, work in progress and finished goods). Ac-
counts receivable consist of uncollected sales (credit sales owed to the company).
The firm can reduce working capital through management of accounts payable,
credit management (management of accounts receivable and the use of factoring),
(^69) The Law Commission, Registration of Security Interests, paragraph 6.38.
(^70) Ibid, paragraph 6.46.