Working capital refers to a company's short-term assets and liabilities, specifically current assets like cash, inventory, and accounts receivable minus current liabilities like accounts payable. It is important for business operations as it represents the cash available for daily expenses and unplanned costs. Liquidity, or the ability to pay short-term debts, is measured using ratios that compare current assets to current liabilities like the current ratio. Managing working capital involves strategies for accounts receivable, payable, and inventory levels to optimize cash flow and the cash conversion cycle.

1. Managing Working Capital

2. Learning Outcomes
• What is Working Capital?
• Why is it important for business operations?
• What is Liquidity?
• How do we measure Liquidity?
• Defining Operating Working Capital
• Case Study Companies

3. What is Working Capital?
Working capital management is the management of the
short-term investment and financing of a company.

4. What is Working Capital?
Working Capital = Current Assets - Current Liabilities
Working Capital Formula

5. Why is Working Capital Important?
Working capital is the cash available for daily operations,
to cover short term expenses and also any unplanned
expenses.
Working Capital is important for young companies that
cannot access capital on the financial markets.

6. Why is Working Capital Important?
Liquidity is the ability of the company to satisfy its short-
term obligations using assets that are readily converted
into cash.
Liquidity management is the ability of the company to
generate cash when and where needed.

7. Sources of Liquidity
•Existing cash
•Short-term funds
•Converting customers invoices quickly into cash
•Sale of assets

8. Current Assets
Current Assets Definition
Cash & Cash Equivalents
Cash, money market securities, short-term
government bonds
Short-term investments
Investments in stocks and bonds that will be
redeemed within 12 months
Accounts Receivable
Money owed to a business, usually in the form
of invoices
Prepaid Expenses
Future expenses that have been paid in
advance. eg. insurance
Inventories Stock of goods for eventual sale

9. Question
Which of the follow is not a current asset?
A. Cash
B. Accounts Payable
C. Accounts Receivable

10. Question
Which of the follow is not a source of liquidity?
A. Sale of assets
B. Capital Expenditure
C. Converting customers’ invoices

11. Current Liabilities
Current Liabilities Definition
Short term loans Money owed to the bank within 12 months.
Accounts Payable
Total amount owed to suppliers (creditors) for goods
and services received but not paid
Accrued Income Taxes
Income tax payable to the Government within 12
months
Accrued Liabilities
Includes salaries, dividends payable. Typically booked
on balance sheet before payment takes place

12. London Coffee Company
View of the
Balance Sheet

13. Question
Which of the following is not a current liability:
A. Accrued Income Taxes
B. Prepaid Expenses
C. Short-term Loans

14. Current Liabilities
If accounts receivable is: money owed to a
business, usually in the form of invoices
What are some strategies can we use to manage
accounts receivable?
Question for you
Hit and have a go at answering before we continue

15. Accounts Receivable
• Strategies to manage accounts receivable:
- Effective processing and tracking of invoices
- Invoice clients sooner
- Establish credit policies
- Extend payment methods
- Review accounts receivable regularly and prepare performance measurement reports

16. Current Liabilities
If accounts payable is the: Total amount owed to
suppliers (creditors) for goods and services received
but not paid
What are some strategies can we use to manage
accounts payable?
Question for you
Hit and have a go at answering before we continue

17. Accounts Payables
• Effective strategies for accounts payable management
include:
- Use technology to centralise the accounts payable process
- Negotiate vendor terms (30days, 90 days etc.)
- Trade credit and the cost of alternative forms of short-term financing

18. Inventories
Inventory (stock) is the goods that a business holds for the eventual
purpose of selling.
Inventory management involves preserving a balanced level of
inventory that meets market demand.
Why hold inventory?
• For regular sales operations
• Incase of excess demand / To guarantee stock

19. Current Liabilities
If inventories are the goods that a business holds for
the eventual purpose of selling.
What are some strategies can we use to manage
inventories?
Question for you
Hit and have a go at answering before we continue

20. Inventory Management
What might be different ways to manage inventory?
•A system where actual orders indicate when a unit should be
produced (‘demand-pull’) - Just in Time
•Determining the number of units produced with each order to
minimise holding/order/storage costs - Economic order quantity

21. Measuring Liquidity: Ratios
By measuring liquidity, we can tell how easy it will be for the
company to raise cash or convert assets into cash.
In the below formulas, we include current assets such as
accounts payable, short term investments and receivables as
they can be ‘liquidated’ converted into cash quickly.

22. Measuring Liquidity: Ratios
1. Current Ratio
2. Quick Ratio
3. Cash Ratio
4. Accounts Payable Days
5. Accounts Receivable Days
6. Inventory Days
7. Cash Conversion Cycle

23. Liquidity Ratios - Current Ratio
Current Ratio
Indicates if a company has sufficient resources to cover
its short term obligations.
Current Assets
Current Liabilities
Current Ratio =

24. Liquidity Ratios - Current Ratio
Quick Ratio
Indicates if a company has sufficient resources to cover
its short term obligations using its assets which are as
near to cash.
Quick Ratio =
Current Assets− Inventories
Current Liabilities

25. Liquidity Ratios - Current Ratio
Cash Ratio
A more specific measure of a company’s liquid assets
relative to its short term obligations.
Cash Ratio =
Cash&Cash Equivalents
Current Liabilities

26. Question
Current assets DIVIDED BY current liabilities is:
A. Quick Ratio
B. Cash Ratio
C. Current Ratio

27. Question
The quick ratio EXCLUDES which of the following?
A. Accounts receivable
B. Inventories
C. Cash

28. Liquidity Ratios - Inventory Days
Inventory days
Tells us how many days inventories eg. products stored in a
factory take to be sold.
Inventories
Cost of Goods Sold
x 365 days

29. Liquidity Ratios - Receivables Days
Accounts Receivable
Total Sales
x 365 days
Receivables days
Calculates how many days it takes for debtors (someone
who owes us money) eg. client invoices to pay us.

30. Liquidity Ratios - Payables Days
Accounts Payable
Cost of Goods Sold
x 365 days
Payables days
How many days we need to make payments to creditors.

31. Question
To improve our cash flow position, should we aim to:
1. Decrease Payables Days?
2. Decrease Receivables Days?
3. Increase Inventory Days?

32. Liquidity Ratios: Cash Conversion Cycle
Cash Conversion Cycle
How long does it take for these assets and liabilities to
convert into cash overall?
Inventory Days + Receivables Days - Payables Days =
Cash Conversion Cycle

33. Case Study: Working Capital Reporting

34. Case Study: Working Capital Reporting

35. • Working capital is a measure of a company’s short term financial
health.
• The objective of working capital management is to ensure a smooth
operating cycle.
• Companies can use a number of operational strategies to improve
their working capital positions.
• Financial analysts measure liquidity by calculating ratios from a
company’s financial statements.
Recap