Working capital management

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Working capital management-CIMA-P1

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Working capital management

  1. 1. PERFORMANCEMANAGEMENTSession 3-Working Capital Management
  2. 2. Topics CoveredElements of working capitalObjectives of working capital managementShortening working capital cycleOvertradingWorking capital Ratios KAPP Edge Solutions
  3. 3. Elements of working capital KAPP Edge Solutions
  4. 4. Objectives of working capital management• Liquidity-Maintenance of working capital at appropriate level.• Profitability-maximising the return on capital employed hence minimizing the investment in working capital. In the accomplishment of these two objectives, the management has to consider the composition of current assets pool. The working capital position sets the various policies in the business with respect to general operations like purchasing, financing, expansion and dividend etc. KAPP Edge Solutions
  5. 5. Cash flow Vs. Profit• Unprofitable companies can survive if they have liquidity.• Profitable companies can not survive if they don’t have liquidity KAPP Edge Solutions
  6. 6. Operating Cycle KAPP Edge Solutions
  7. 7. Shortening working capital cycle• Reduce raw material inventory holding• More finance from suppliers by delaying payments.• Reducing work in progress by improving production techniques.• Reducing finished goods inventory by reorganizing the production schedule and distribution methods.• Reducing credit given to customers.• Debt factoring. KAPP Edge Solutions
  8. 8. Overtrading• Meaning- when the business is not having access to sufficient capital to fund the increase.• Indicators:Rapid increase in turnoverRapid increase in current assetsDramatic drops in liquidity ratiosMost of the increase is financed by credit. KAPP Edge Solutions
  9. 9. Overtrading-SolutionsRaising of more long term capitalProfit should be more than increase in working capitalImprove working capital management KAPP Edge Solutions
  10. 10. Working capital Ratios Current ratio:• Current asset• Current liabilities Quick ratio:• Current asset-inventory Current liabilitiesCurrent Assets - Current Liabilities = Working Capital KAPP Edge Solutions
  11. 11. Working capital Ratios Inventory Turnover Ratio: Raw Material ( Average inventory / Material usages) x 365 days Work in process: ( Average inventory / Production cost) x 365 days Finished Goods:• ( Average inventory / Cost of goods sold ) x 365 days• Significance-this tells us how long on average each unit of stock is in the shop/warehouse etc. before being sold. Clearly, the shorter this length of time the better. KAPP Edge Solutions
  12. 12. Working capital Ratios Debtor days• ( Average accounts relievable / Sales ) x 365 days• Significance- this tells us how long on average each debtor takes to settle their debt to the business. Clearly, the shorter this length of time the better. A very large debtor collection period might indicate that the business may be unable to collect its debts. Creditor days• ( Average accounts payable / Cost of sales ) x 365 days• Significance- this tells us how long on average the business takes to pay its creditors. The longer this length of time the better. However, a very large credit period may indicate that the business does not have the cash to pay its debts. KAPP Edge Solutions
  13. 13. KAPP EDGE SOLUTIONSWWW.ONLINEGLOBALCAREER.COM

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