This document discusses working capital and its importance for businesses. It provides an overview of working capital components like cash, debtors, creditors, stock and work in progress. Key ratios for managing working capital like debtor days, creditor days and stock days are explained. Strategies are presented for effectively managing stock, work in progress, debtors, creditors and setting action plans to review processes and improve working capital management.

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Finance
Working Capital

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Agenda
• Business surgery
• Workshop
– Working capital
• Action planning

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Course Overview and Positioning
MARKETING SALES OPERATIONS MONEY
SYSTEMISATION AND RESILIENCE
BUSINESS PLANNING
VALUE
BUSINESS DIRECTION
PEOPLE

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Learning Objectives
• Workshop objectives
– To understand the concept of working capital and
its importance to your business
– To understand how to manage working capital
effectively

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Working Capital Components
• The day-to-day distribution of funding in a
business
• It appears on the balance sheet
– Cash
– Debtors
– Creditors
– Stock
– Work in progress

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Working Capital In Use
Work done
Customer invoiced
Materials purchased
Materials paid for
Invoice paid
Creditors StockRetained
profit
WIP Debtors Cash

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Working Capital Ratios
• Debtor days – the amount of money owed to you
by customers – minimise this
– 365 * Debtors/annual turnover
• Creditor days – the amount of money you owe
suppliers – maximise this
– 365 * Creditors/annual turnover
• Stock days – indicates the amount of stock you
hold – minimise this
– 365 * Stock value/annual turnover
• These ratios will vary from industry to industry
and over a business lifecycle

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Managing Stock
• Limit the range of items you sell as far as possible within the
constraints of your market proposition
• Set up consignment stock arrangements (you hold the stock but
only pay your supplier when you sell the item)
• Set up just in time or drop-ship arrangements
• Incentivise your salespeople to sell slow-moving or obsolescent
stock
• Balance volume discounts against holding cost and risk of
obsolescence
• Ship older stock first – adopt a strict first-in-first-out approach
• Understand usage patterns
• Stock-take regularly and control wastage/shrinkage

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Managing Work In Progress (WIP)
• Measure it
• Communicate between operations and finance
– Identify where a small amount of work will release a
large amount of WIP
• Invoice quickly
• For long projects, agree scheduled part-payments
so that you do not have to wait until the end of
the job to invoice
• Ask for payments up-front, especially where you
have significant up-front costs

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Managing Debtors
• Measure it
• Use standard terms and conditions which are geared to
getting money in quickly
• Control the amount of credit you extend to any customer
• Get work signed-off
• Invoice accurately, with all required information
• Issue statements and reminders early
• Develop good relationships with their accounts payable
people
• Use a factoring, invoice-financing or invoice insurance
service

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Managing Creditors
• Measure it
• Always try to have alternative suppliers
• Include the credit terms they are offering in
your negotiations with suppliers
• Try to match or exceed the payment terms
that you offer to your customers
• Pay on the due date and not before
• Use sales order factoring

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Action Planning
• Suggestions
– Review your balance sheet every month
– Include working capital ratios in your KPIs and set
stretch targets
– Review your terms and conditions and working
capital related processes