Working capital management reminds me of the story of Goldilocks and the Three Bears, where Goldilocks found the beds in the bears’ home to be either too soft, too hard, or just right. The book provides some discussion about the tradeoffs when managing working capital.
In this Discussion Board posting, I am asking you to provide your take on the benefits and pitfalls of managing working capital. For example, many people admire the Just-In-Time (JIT) inventory approach — until the inventory doesn’t arrive in time. Once upon a time, my parents operated a bar/pizza joint in Florida, and they had to order cases of beer a week ahead of time, based on projected sales. If you ran out of the favorite type of beer (long neck Budweisers, don’t ask me to explain it) then customers would start hanging out at one of the other three bars on the island. If you kept too much of it stacked in the storage room, you were tying up precious capital in excess inventory, and they didn’t have a lot of excess capital. My stepfather’s solution was to buy a huge walk-in cooler with a pot of money that fell into their laps and purchase beer in bulk from that point forward. He was more worried about running out of beer than he was worried about running out of cash. That was not my solution, and it certainly violated a lot of the principles espoused in the textbook, but he slept better at nights, and it was his money. Our textbook focuses on managing publicly traded firms, which means managing other people’s money, so the principles may be different. But we note many, many instances where the managers of publicly traded firms hold different amounts of inventory or receivables or payables or cash than our textbook might consider appropriate. That’s because people, not math formulas, actually manage firms
Group A: Excessive cash doesn’t earn much (if any) interest, but on the other hand, having cash when you need it is like having fresh air to breath when you need it — there is not a better substitute. On the other hand, when you are trying to put out a forest fire, fresh air impedes the process. What should drive a firm’s choice of the “right” amount of cash?
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