Working Capital Management^173
than cash and marketable securities will be converted into cash is quite difficult. The
more predictable these cash inflows are the less net working capital a firm requires.
It is because an electric utility has a very predictable pattern of cash inflows that it can
operate with little or no net working capital. Firms with more uncertain cash inflows
must maintain levels of current assets adequate to cover current liabilities.
It is the inability of most firms to match cash receipts and cash disbursements that
makes sources of cash receipts, (current assets) that will more than cover current
liabilities necessary. For example, if the GHI Company has the current position given
in Table 1, the following situation may exist. All $600 of the firmís accounts payable,
plus $200 of its notes payable and $100 in accruals, are due at the end of the current
period. That this $900 in outlays must be made is certain; how the firm will cover these
outlays is not certain,. The firm can be sure that $700 will be available since it has $500
in cash and $200 in marketable securities, which can be easily converted into cash. The
remaining $200 must come from the collection of an account receivable and/or the sale
of inventory for cash. The firm cannot be sure when either a cash sale or the collection
of an account receivable will occur. More uncertainty is associated with the collection
of accounts receivable than with a cash sale. Although customers who have purchased
goods on credit are expected to pay for them by the date specified in the credit
arrangement, quite often they will not pay until a later date. Thus the cash flows
associated with the purchases will not occur at the point in time they were
expected.
Table 1: The current position of the GHI Company
Current assets Current liabilities
Cash $500 Accounts payable $600
Marketable securities 200 Notes payable 800
Accounts receivable 800 Accruals 200
Inventory 1,200 Total $1,600
Total $2,700Of course, some solution to this dilemma must exist. In order to have a higher probability
of having sufficient cash to pay its bills, a firm should attempt to make sales, since in
many cases they will result in the immediate receipt of cash and in other cases they
will result in accounts receivable which will eventually be converted into cash. A level
of f inventory adequate to satisfy the probable demand for the firmís products should
be maintained. As long as the firm is generating sales and collecting receivables as they
come due, sufficient cash should be forthcoming to satisfy its cash payment obligations.
The GHI Company can increase the probability of its being able to satisfy its obligations
by maintaining of some of these items into cash. The more accounts receivable and
inventories there are on hand, the greater the probability that some of
these items will be turned into cash. As a rule a certain level of net working capital