Chapter 15 Working Capital Management 501SELF^ TEST From the borrower’s standpoint, what are the advantages and disadvan-
tages of securing a loan?
What two types of current assets are frequently used as security for short-
term loans?
How could borrowers take advantage of lenders if UCC-1s did not exist?This chapter discussed the management of current assets, including cash, market-
able securities, inventory, and receivables. Current assets are essential, but there are
costs associated with holding them. So if a company can reduce its current assets
without hurting sales, this will increase its pro! tability. The investment in current
assets must be! nanced; and this! nancing can be in the form of long-term debt,
common equity, and/or short-term credit. Firms typically use trade credit and accru-
als; they also may use bank debt or commercial paper.
Although current assets and procedures for! nancing them can be analyzed as
we did in this chapter, decisions are normally made within the context of the! rm’s
overall! nancial plan. We take up! nancial planning in the next chapter; hence, we
continue our discussion of working capital there.
T Y I N G I T A L L T O G E T H E R
KEY TERMS Define each of the following terms:
a. Working capital; net working capital
b. Relaxed current asset policy; restricted current asset policy; moderate current asset
policy
c. Permanent current assets; temporary current assets
d. Current asset financing policy; maturity matching (self-liquidating) approach to
financing working capital
e. Cash conversion cycle; inventory conversion period; average collection period;
payables deferral period
f. Cash budget; target cash balance
g. Lockbox; account receivableSELF!TEST QUESTIONS AND PROBLEMS
(Solutions Appear in Appendix A)
SELF!TEST QUESTIONS AND PROBLEMS
(Solutions Appear in Appendix A)
ST-1ST-1
When the collateral securing a loan is to be kept on the borrower’s premises, a
form called a UCC-1 (Uniform Commercial Code Form 1) is! led with the secre-
tary of the state in which the collateral is located, along with a Security Agreement
(also part of the Uniform Commercial Code) that describes the nature of the agree-
ment. The UCC-1 prevents the borrower from using the same collateral to secure
loans from different lenders, and the security agreement spells out conditions
under which the lender can seize the collateral.