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Chukumba also projects the year as another stock pickers market for the group given the widely diverging prospects. A Look Forward As we ponder the year ahead, we believe the U.S. macroeconomic backdrop is generally favorable for specialty hardlines retailers, including rising consumer confidence, falling unemployment, a relatively stable personal savings rate, and a strengthening housing market, Chukumba wrote in a note. On the valuation front, the analyst said specialty hardlines retailer valuations remain fairly inexpensive due to relatively low square footage growth prospects and growing investor concern with e-commerce disintermediation. Headwinds Chukumba also warned that the ongoing shift to e-commerce will hit retailers in the form of gross margins and heavy investments, forcing many of them to reassess the size of their respective brick-and-mortar store bases. Another key headwind for retailers in 2017 is likely to be wage inflation. The minimum wage increased in 20 U.S. states and the District of Columbia at the start of 2017, with increases ranging from $0.05 to nearly $2.00/hour. The move will benefit 4.4 million employees across the United States, with majority of those working in the retail industry. But, the analyst says that retailers appear to have dodged a bullet with the November 2016 delay of the Fair Labor Standards Act .

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The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the project-relevant financing mix. 19 Managers use models such as the CACM or the opening a small business APT to estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital WAAC to reflect the financing mix selected. Effectively managing accounts receivables: o Process and maintain records efficiently by regularly coordinating and communicating with credit managers’ and treasury in-charges o Prepare performance measurement reports o Control accuracy and security of accounts receivable records. o Captive finance subsidiary can be used to centralize accounts receivable functions and provide financing for company’s sales D Management of accounts payable: Creditors are a vital part of effective cash management and have to be managed carefully to enhance the cash position of the business. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company’s stock through a share buyback program. Factors effecting working capital: • Nature of business: generally working capital is higher in manufacturing compared to service based organizations • Volume of sales: higher the sale, higher the working capital required • Seasonality: peak seasons for sales need more working capital • Length of operating and cash cycle: longer the operating and cash cycle, more is the requirement of working capital A Matching or hedging approach: This approach matches assets and liabilities to maturities. Negative Working Capital on the Balance Sheet Can Be a Good Thing for High-Turn Businesses Companies that enjoy high inventory turns and do business on a cash basis such as a grocery store or discount retailer need very little working capital. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company’s obligations. Inadequate working capital has its disadvantages where the company is not capable to pay off its short term liabilities in time, difficulty in exploring favourable market situations, day to day liquidity worsens and ROM and RMI fall sharply. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. As a general rule, shareholders of growth companies would prefer managers to retain earnings and pay no dividends use excess cash to reinvest into the company’s operations, whereas shareholders of value or secondary shares would prefer the management of these companies to payout surplus earnings in the form of cash dividends when a positive return cannot be earned through the reinvestment of undistributed earnings. That is why working capital is also known as revolving or circulating capital or short-term capital.

This calculation is just basic subtraction. If you borrow $10,000 $9,500 loan + $500 fixed fee, you are required to pay $1,000 every 90 days for the first 540 days of the loan. Finding ways to smooth out cash payments in order to keep working capital stable is particularly difficult for manufacturers and other companies that require a lot of upfront costs. It’s helpful to compare the working capital turnover ratio to that of other companies, and also to the company’s use of capital in the past. So, whereas in a DC valuation the most likely or average or scenario specific cash flows are discounted, here the “flexible and staged nature” of the investment is modelled, and hence “all” potential pay-offs are considered. Implement appropriate Credit scoring policies and techniques such that the risk of default on any new business is acceptable given these criteria. Terms of the preferred stock are stated in a “Certificate of Designation”.