A short presentation on managing working capital Small businesses often focus on financing capex but overlook their working capital requirements, often with the attitude that it will work itself out. This is a risky strategy.

1. Working Capital
Financial Management- Working Capital

2. Working Capital
Critical but often overlooked or misunderstood
Especially in finance proposals
It’s where your profits go and eventually flow out of
Difficult to manage:
• Many moving parts
• Elements outside your control e.g. cash collections

3. What is Working Capital?
• Realised in a relatively short period of time
• However represents a permanent investment
=> Needs to be managed
=> Needs to be financed
Current Assets
Less
Current Liabilities

4. Working Capital Cycle
Purchases
Stock holding
Manufacturing
Stock
holding/sale
Debtor
collection

5. Cash Conversion Cycle
Stock days (Cost of sales/Stock)*365
+
Debtor days (Debtors/Credit sales)*365
-
Creditor days (Creditors/Credit purchases)*365
=
Time taken to convert into CASH
Creditors are your first source of Working Capital finance and treat them as
such

6. Example
Funding Debtors
GWD Ltd has €10m sales; 20% are cash sales.
Credit of 30 days is allowed, though 50% of
credit customers take 50 days.
No credit given by suppliers
What is the funding requirement?
Solution
Credit sales: €8,000,000 (ie 80%)
Average debtors:
€8,000,000 * 50% * 30/365 = €328,767
€8,000,000 * 50% * 50/365 = €547,945
€876,712
Since no credit received this is the wc
funding requirement

7. Debtor Management
Credit Policy
•Approvals
•References
•Limits
•Insurance
•Invoice regularly
•Invoice on time
Credit Monitoring
•Responsibility
•Regular ledger
reviews
•Reconciliations
•Paperwork in order
•Deviations from
agreements pre
approved
Credit Collection
•Issue statements
•Someone
outside trading
relationship
•Know your
customers
processes
•Build a
relationship
•Facilitate
electronic
payments, DDs

8. Example
Cost of Settlement Discounts
• XYZ Ltd offers its customers 30
days credit, though customers
normally take 45 days
• Considering offering 2% discount
for payment within 10 days
Calculate the cost of this offering
Solution
Cost = 2/(100-2) = 2.04% for 35
days (ie 45-10)
10.43 35 day periods in a year
=>effective annual interest rate
= (1.0204)10.43 -1 = 23.44% pa

9. Example
Cost of Settlement Discounts (2)
• Cash discounts are expensive
• May be required if,
– Lack of alternatives
– Competitive pressure
– Needed to attract new customers

10. Stock Control
Need to consider:
• Stock management system (MRP, JIT, ABC)
• Stock control system (periodic or perpetual)
• Sales forecasting/demand management
• Waste/obsolescence management

11. Exercise
1. Cost of investing
in Working
Capital

12. Exercise (2)
ABC ltd can increase sales by €1m pa if it increases stock by €600k.
Contribution margin is 15%.
Debtors will increase by €300k, Creditor terms are same as Debtor terms
Overdraft rate is 10%
Ignore VAT for this example
Q what is the net impact on profits?

13. Solution
Solution
Additional sales 1000000
Additional costs 85% 850000
Additional contribution 15% 150000
W Capital cost
Additional debtors 300000
Additional stock 600000
Additional creditors -255000
645000
Finance cost 10% 64500
Increased profits 85500
Additional sales 1,000,000
Additional costs 85% 850,000
Additional contribution 15% 150,000
Working Capital cost
Additional debtors 300,000
Additional stock 600,000
Additional creditors -255,000
Working capital investment 645,000
Finance cost 10% 64,500
Increased profits 85,500

14. Contact
087 6299317
george@delaneycorpfin.com
www.delaneycorpfin.com