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Managing Assets

One of your long-standing clients is a domestic manufacturer, who up until now has not only manufactured their products solely in the US but also only sold their products in the US. About a month ago, their CEO visited and said they were planning to "go global"; this would include both sourcing of manufactured parts from overseas, and selling their products all over the world. Back then, he asked you to prepare a report on how he should expect this new direction to change the existing challenges of cash flow and working capital management. Given Joan now being on board, prepare a report in Question and Answer format.

The questions to be answered are:

•What are the components of working capital management; which are under the control of a firms management, and which does management have little if any control over?
•Describe what the cash conversion cycle is all about and which parts of it change negatively when sourcing parts from overseas?
•Which parts of it change negatively when selling products overseas?
•What strategies a firm can use to mitigate the disadvantages described in 2 or 3 above?

Solution Preview

Step 1
The components of working capital at the fundamental level are current assets and current liabilities. If we break up these components we have cash, short term investments, net receivables, inventory, prepaid expenses, accounts payable, accrued expenses, short term debts, current portion of long term debt, and other current assets/liabilities.
The components over which the managers have control are accounts receivable, inventory, and accounts payable. The items over which the management has little control are prepaid expenses, notes payable, or short term debt, the current portion of the long term debt, and payments to be made for capital leases.
Step 2
This is a measure that shows the length of time in ...

Solution Summary

This posting gives you a step-by-step explanation of managing working capital in the context of foreign trade. The response also contains the sources used.