Fundamentals of Financial Management (Concise 6th Edition)

B e s t B u y Ma n a g e s

I t s Wo r k i n g C a p i t a l We l l

(^15) Working Capital Management

CHAPTER

472

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SCHEIN/ALAMY

Best Buy Company, North America’s largest

consumer electronics retailer, has performed

extremely well over the past decade. Its stock

sold for $50 in late 2007, up from $2 only 10 years

earlier. This excellent performance stemmed

from sound financial and operating practices,

especially its working capital management, the

focus of this chapter.

Working capital management involves find-

ing the optimal levels for cash, marketable secu-

rities, accounts receivable, and inventory and

then financing that working capital for the least

cost. Most of Best Buy’s customers use credit

cards, so neither in-store cash nor accounts

receivable is significant. Therefore, Best Buy’s

working capital policy focuses on its inventories.

To maintain sales, its stores must be well stocked

with the goods customers are seeking at the

time they are shopping. This involves determin-

ing what new products are hot, determining

where they can be obtained at the lowest cost,

and delivering them to stores in a timely

manner.

Dramatic improvements in communications

and computer technology have transformed the

way Best Buy manages its inventories. It now col-

lects real-time data from each store on how each

product is selling, and its computers place orders

automatically to keep the shelves full. Moreover,

if sales of an item are slipping, prices are lowered

to reduce stocks of that item before the situation

gets so bad that drastic price cuts are necessary.

After studying this chapter, you will have a good

understanding of how working capital should be

managed so as to maximize profits and stock

prices.

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