ADM658 – Chapter 2: Working Capital Management.

General principle: CA-CL

Working capital management.

Net working capita...
ADM658 – Chapter 2: Working Capital Management.

hedge risk by matching the
maturities of assets and
liabilities.

Approch...
ADM658 – Chapter 2: Working Capital Management.
CASH CONVERSION CYCLE.
Purchase of
Inventory

Credit Sales
Inventory conve...
ADM658 – Chapter 2: Working Capital Management.

OPTIMAL CASH
BALANCE.
•Firm's desired cash level.
•Involves trade off bet...
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ADM 658: Chapter 2 - Working Capital Management

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ADM 658: Chapter 2 - Working Capital Management

  1. 1. ADM658 – Chapter 2: Working Capital Management. General principle: CA-CL Working capital management. Net working capital: the differences between the firm's current asset and current libilities. Working capital management involves all aspect of the administration of current asset and current liabilities. Sales impact - must determine the appropriate levels of receivables and inventories to maintain. Liquidity - must choose the levels of cash and marketable securities to maintain. Covers basic relationship Relations with stakeholders customers are concerned with proce, availability, quality and service, goodwill and reputation of a firm. Firm's reputation - depends on its ability to efficiently manage its currents assets and current liabilities. Maturity-matching approach. Financing working capital. (3 approaches) Conservative Approach Cash Management Cycle Aggresive approach. NurAisyahBintiMahbob (2010312861) Faculty of Administration Science and Policies Studies. Page 1
  2. 2. ADM658 – Chapter 2: Working Capital Management. hedge risk by matching the maturities of assets and liabilities. Approches adapted to finances working capital. Maturity-matching approaches. permanent current assets are financed wth long-term financing temporary current assets are financed with short-term No excess funds. Long-term are used to finance both permanent as well as temporary short-term assets. Conservative Approach when there are excess funds, they are invested in marketable securities. Aggresive approach NurAisyahBintiMahbob (2010312861) Faculty of Administration Science and Policies Studies. use less long-term and more short-term financing than the conservative approach. Page 2
  3. 3. ADM658 – Chapter 2: Working Capital Management. CASH CONVERSION CYCLE. Purchase of Inventory Credit Sales Inventory conversion period (70 Days) Payable credits (45 days)s Debtors Collection Period (30 days) Inventory conversion period (60 Days) Payment of account payable CASH CONVERSION CYCLE: INVENTORY CONVERSION PERIOD. DEBTORS COLLECTION PERIOD. PAYABLES CREDIT PERIOD. FORMULAS: Inventory Conversion Period: Debtors Collection Period: Creditors Credit Period: Cash Turnover: Minimum Operating Cash: Inventory/COGS x 365 Receivables/sales x 365 Account payable/COGS x 365 360/Cash Conversion Cycle Annual Cash Outlays/Cash Turnover EXERCISE: 1. Seri Flore Comp. turnover inventory 10 times a year. Account Receivables collected in 65 days. Account Payables are paid in 42 days. What change will occur in cash cycle if AAI, ACP, APP – changes to 20 days, 45 days and 50 days a year? 2. Shestar Comp. sell 16” stand fan. Sales on credit, net 50 days. Payment of purchase will occur evenly a period of 30 days. The worker takes an average of 20 days to complete the stand fan immediately. Annual outlay is 1.8 million. Calculate cash cycle, cash turnover, MOC. NurAisyahBintiMahbob (2010312861) Faculty of Administration Science and Policies Studies. Page 3
  4. 4. ADM658 – Chapter 2: Working Capital Management. OPTIMAL CASH BALANCE. •Firm's desired cash level. •Involves trade off between opportunity cost of: •Holding to much cost •The cost of holding to little cash. •Means: a position when the cash balance amount is on the most ideal proportion so that the company has the ability to invest the excess cash for a return (profit) and at the same time, have sufficient liquidity for future needs. •Key ingredient: cash balance should neither be excessive or deficient. CASH BUDGET •Detailed plan of a firm's future cash flows. •An estimation of the cash inflows and outflows for a firm for a specific period of time in the future. •Assess whether has sufficient cash to fulfill its cash flow requirements in the future and whether excess cash exists. •3 main components necessary for creating cash budget: REASONS FOR HOLDING CASH. •The need for cash make everyday payments transaction. •The need to have cash on hand to meet unexpected needs of unforseen expenses - precautionary. •Based on the desired to take advatage of potential profit making opportunities that required cash - speculative. •Time budget. •Desired cash position •Estimated sales and expenses. NurAisyahBintiMahbob (2010312861) Faculty of Administration Science and Policies Studies. Page 4

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