MANAGING CASH AND CAPITAL

1. VIRIMAYI CHINYAMA - FINANCING THE SUPPLY CHAIN - MANAGING CASH AND
CAPITAL
MANAGING CASH AND CAPITAL
This is done more effectively and efficiently through managing working capital.
Working Capital Management
Efficient working capital management entails monitoring the cash flow
of a business to ensure that it has access to cash to finance normal
operations. This therefore further requires monitoring of the pressure
points in the working capital cycle, namely:-
Stocks or inventories
• Calculate the number of times you buy and sell your merchandise, that
is, stock turnover rate:
Cost of Goods Sold = X times
Average Stock
• Turnover rates, if too low, then losses from pilfrage, low profitability
• Re-order quantities, to be cost effective and economic
1

2. • Stock should move quickly to facilitate turning into cash and to
shorten the working capital cycle
• Inventory management practices eg JIT, result in cost savings and in
avoiding tying up cash in idle stocks.
Debtors or accounts receivables
• Calculate the period (in days, weeks or months) in which your debtors
settle their bills
Average Trade Debtors x 365 = X days
Total Credit Sales
• Debtors collection period, if too long, bad for WC management.
Access to cash is delayed and this might prejudice settlement of
obligations
• High levels of debtors lead to losses through bad debts and
opportunity cost while cash is tied up in debtors
• Credit terms, to allow receipt of cash and investing it before paying
creditors, that is, debtor’s payment terms (days) should be shorter than
creditors payment days.
• Aged debtors – too old debtors tie up cash and mean piling up of
debtors which may end up as bad debts, leading to losses of cash and
profitability.
Cash
• Levels – should be adequate to cater for both primary and secondary
motives
• Analyse daily, weekly and monthly flow of cash
• Daily cash flow monitoring critical
• Cash is determined by management of above working capital items, ie
creditors management, inventory management and debtors
management.
• Idle cash leads to losses
• Cash investment very crucial eg into short-term and long-term assets.
Creditors or accounts payables
• Calculate the period (in days, weeks or months) in which you settle
your suppliers’ bills
2

3. Average Trade Creditors x 365 days = X days
Total Credit Purchases
• Payment period, if too short, then not good for working capital
• Credit terms, should be favourable
• Payment period and terms to be more favourable than those for
debtors
• Any payment discounts, to preserve cash
FINANCING THE SUPPLY CHAIN
 Every business requires money, cash or finance for capital goods, ie
equipment, machinery, buildings, motor vehicles etc and also for
working capital
 This money has two sources namely, from the owners of the business
and other people who lend money to the business.
 Finance from owners is capital introduced by them and in a limited
company is called share capital/equity capital.
 Finance from money lenders such as banks, individuals etc is called
borrowed or debt capital
 Borrowed capital attracts interest charges for the use of other people’s
money. These interest charges are agreed upon on borrowing the
money. The interest charges are a cost that reduces profit of a
business.
 Borrowed capital should be repaid by an agreed date and is at times
secured over a business’s fixed assets. So where security is required, a
business needs to have a suitable fixed asset that can be used as
security for a required loan.
3

4.  On the other hand, share capital does not need to be repaid neither are
there any interest charges on it. It does not require any security.
 Supply chain transactions can be financed by credit from the bank and
suppliers
 The bank can give a line of credit for say, the importation of goods
 Bank can also give credit guarantees for supplies on credit
 Banks can also finance purchases through short term or medium term
or long term loans
 The suppliers can allow favourable payment terms of up to 180 days,
but this depends on the economic situation of a country
 The credit days given by suppliers should be longer than those to your
debtors to allow you to receive funds and then invest before paying
your creditors
 Purchase of fixed assets on credit is normally done through hire
purchase or credit instalments.
 Purchases of immovable property can be done through lease to buy.
In this arrangement, a deposit is paid and you pay monthly rentals
with an option to purchase the asset at the end of the lease period
 There is also sale and leaseback arrangement. The firm acquires an
asset, sells it and then leases it back.
MANAGING CAPITAL STRUCTURE
 Capital structure is the way capital is contributed by the owners of
the business and outsiders
 In most businesses, finance comes from two sources, the owners
and money lenders, as it is necessary at times to borrow. After all it
is nearly impossible for business owners to put enough money
required in the business at all times
4

5.  Where the contribution by owners or shareholders is more than that
brought in by outsiders, the structure has a low gearing ratio or is
lowly geared.
 In this case there is no danger of high interest charges that may
adversely reduce the final profit that goes to the owners
 Again the danger of forced liquidation is low
 However where the cost of borrowing is very low, a business stands
to benefit immensely from profits made from using other people’s
money.
5

6.  Where the contribution by owners or shareholders is more than that
brought in by outsiders, the structure has a low gearing ratio or is
lowly geared.
 In this case there is no danger of high interest charges that may
adversely reduce the final profit that goes to the owners
 Again the danger of forced liquidation is low
 However where the cost of borrowing is very low, a business stands
to benefit immensely from profits made from using other people’s
money.
5