Working capital refers to the capital available for conducting daily business operations and consists of current assets and current liabilities. It can be positive if current assets exceed current liabilities, or negative if the reverse is true. Effective working capital management ensures an optimal level of net current assets to meet operational demands while maximizing benefits. The working capital cycle measures the time between paying for goods and receiving cash from their sale, and should be kept as short as possible. Overtrading occurs when a company lacks sufficient working capital to support its level of trading.
Quick Books Managing Your Business FinancesCheryl Blazej
This document from Blazej Accounting provides an overview of financial management essentials for small businesses. It covers topics like the importance of accounts, using financial reports to understand sales and cash flow, establishing a chart of accounts to categorize transactions, and choosing an accounting method. The document aims to help small business owners better manage their business finances.
Freeing Up Cash In The Supply Chain White Paperioandaniels
1) The supply chain has a large opportunity to influence cash flow through measures like reducing obsolete inventory, negotiating lower minimum order quantities with suppliers, and optimizing safety stock levels.
2) Releasing value from obsolete stock through bulk sales can generate cash while contributing to profit. Small and frequent replenishments can reduce minimum order quantities and target order sizes.
3) Optimizing safety stock levels through upgraded planning systems or inventory management services can yield a 10-20% reduction in stock levels and improved cash flow within 12 months.
Working capital refers to a company's short-term assets such as cash, inventory, and receivables that are used to fund day-to-day operations, and there are two main concepts for defining it - the balance sheet approach looks at current assets minus current liabilities, while the operating cycle concept focuses on the time required to convert resources into cash from purchasing, producing, and selling goods. Proper management of working capital is important for companies to ensure they have sufficient cash flow and liquidity to pay debts and support daily operations.
The document discusses causes of and solutions to cash flow problems for businesses. It identifies several common causes such as seasonal demand, overtrading, and poor management. It then outlines five main ways to improve cash flow - bank overdrafts, short-term loans, factoring, selling assets, and sale and leaseback of assets. Each option is explained with benefits and drawbacks. The document also provides exercises for students to identify causes of cash flow problems and suggest solutions in case studies.
This document discusses working capital management. It covers short and medium term financing methods like overdrafts, trade credit, factoring, term loans, hire purchase and leasing. It also discusses managing inventory levels, trade payables, trade receivables and cash balances. The cash conversion cycle is explained as well as the importance of managing working capital. Key aspects include balancing inventory levels, exploiting trade credit terms, establishing credit policies and balancing cash holdings. Ratios for evaluating efficiency are also provided.
Bba 2204 fin mgt week 4 cashflow & financial planningStephen Ong
This document provides an overview of cash flow and financial planning. It discusses key concepts like depreciation, statements of cash flows, operating cash flow, free cash flow, and financial planning processes. The learning goals are to understand tax depreciation, statements of cash flows, and financial planning, including long-term strategic plans and short-term operating plans like cash budgets and pro forma financial statements. Examples are provided to illustrate concepts like depreciation calculations and developing statements of cash flows. Ethics examples consider appropriate CEO compensation and ways accountants could portray favorable earnings.
The document discusses the concept of working capital, which refers to a company's short-term assets and liabilities. It presents two definitions of working capital: the balance sheet concept, which is the excess of current assets over current liabilities, and the operating cycle concept, which refers to the time period between purchasing inventory and collecting cash from sales. The document outlines the key components of a company's operating cycle and how managing working capital, including inventory levels, accounts receivable, and accounts payable, can impact cash flows and the business.
Recession Proofing Your Business With OrmitaSelina Markham
Discusses how using the Ormita Commerce Network and offset trade can help a business defeat the recession.
Discusses the benefits of barter and offset trade in a broader sense and the particular benefits of using Ormita to act as a facilitator for these types of transactions.
See the Ormita website at www.ormita.com.
Licensee and franchisee enquiries are available for those interested in barter, offset trade, reciprocal trade, counter-trade, community currencies etc. If you ever thought of owning your own barter exchange franchise this is your chance - Visit www.ormita.com or www.ormitacorporate.com
Quick Books Managing Your Business FinancesCheryl Blazej
This document from Blazej Accounting provides an overview of financial management essentials for small businesses. It covers topics like the importance of accounts, using financial reports to understand sales and cash flow, establishing a chart of accounts to categorize transactions, and choosing an accounting method. The document aims to help small business owners better manage their business finances.
Freeing Up Cash In The Supply Chain White Paperioandaniels
1) The supply chain has a large opportunity to influence cash flow through measures like reducing obsolete inventory, negotiating lower minimum order quantities with suppliers, and optimizing safety stock levels.
2) Releasing value from obsolete stock through bulk sales can generate cash while contributing to profit. Small and frequent replenishments can reduce minimum order quantities and target order sizes.
3) Optimizing safety stock levels through upgraded planning systems or inventory management services can yield a 10-20% reduction in stock levels and improved cash flow within 12 months.
Working capital refers to a company's short-term assets such as cash, inventory, and receivables that are used to fund day-to-day operations, and there are two main concepts for defining it - the balance sheet approach looks at current assets minus current liabilities, while the operating cycle concept focuses on the time required to convert resources into cash from purchasing, producing, and selling goods. Proper management of working capital is important for companies to ensure they have sufficient cash flow and liquidity to pay debts and support daily operations.
The document discusses causes of and solutions to cash flow problems for businesses. It identifies several common causes such as seasonal demand, overtrading, and poor management. It then outlines five main ways to improve cash flow - bank overdrafts, short-term loans, factoring, selling assets, and sale and leaseback of assets. Each option is explained with benefits and drawbacks. The document also provides exercises for students to identify causes of cash flow problems and suggest solutions in case studies.
This document discusses working capital management. It covers short and medium term financing methods like overdrafts, trade credit, factoring, term loans, hire purchase and leasing. It also discusses managing inventory levels, trade payables, trade receivables and cash balances. The cash conversion cycle is explained as well as the importance of managing working capital. Key aspects include balancing inventory levels, exploiting trade credit terms, establishing credit policies and balancing cash holdings. Ratios for evaluating efficiency are also provided.
Bba 2204 fin mgt week 4 cashflow & financial planningStephen Ong
This document provides an overview of cash flow and financial planning. It discusses key concepts like depreciation, statements of cash flows, operating cash flow, free cash flow, and financial planning processes. The learning goals are to understand tax depreciation, statements of cash flows, and financial planning, including long-term strategic plans and short-term operating plans like cash budgets and pro forma financial statements. Examples are provided to illustrate concepts like depreciation calculations and developing statements of cash flows. Ethics examples consider appropriate CEO compensation and ways accountants could portray favorable earnings.
The document discusses the concept of working capital, which refers to a company's short-term assets and liabilities. It presents two definitions of working capital: the balance sheet concept, which is the excess of current assets over current liabilities, and the operating cycle concept, which refers to the time period between purchasing inventory and collecting cash from sales. The document outlines the key components of a company's operating cycle and how managing working capital, including inventory levels, accounts receivable, and accounts payable, can impact cash flows and the business.
Recession Proofing Your Business With OrmitaSelina Markham
Discusses how using the Ormita Commerce Network and offset trade can help a business defeat the recession.
Discusses the benefits of barter and offset trade in a broader sense and the particular benefits of using Ormita to act as a facilitator for these types of transactions.
See the Ormita website at www.ormita.com.
Licensee and franchisee enquiries are available for those interested in barter, offset trade, reciprocal trade, counter-trade, community currencies etc. If you ever thought of owning your own barter exchange franchise this is your chance - Visit www.ormita.com or www.ormitacorporate.com
AQA AS Business Unit 2 Cash Flow Managementtutor2u
This document discusses managing cash flow, including:
1) A quick quiz on cash flow management topics like which events could lead to problems and ways to improve short-term cash flow.
2) Identifying two ways a business could slow down cash outflows or speed up cash inflows, such as delaying supplier payments, reducing costs, or reducing customer payment periods.
3) Two mini case studies presenting cash flow problems and potential solutions to choose from and justify.
This document provides an overview of working capital management. It defines working capital as the difference between current assets and current liabilities. It discusses the working capital cycle and how managing it effectively through reducing collection and payment times is important for business cash flow and survival. The document emphasizes that senior management must prioritize working capital management and set clear targets and accountability to improve processes around areas like credit control, inventory, and accounts payable/receivable.
How to Manage working Capital in Hotel-Basic accounting principles #9 by Din...DINOLEONANDRI
The document discusses managing working capital in hotel industries. It defines working capital as the short-term assets used to fund daily operations, such as cash, receivables, and inventory. It also discusses the cash conversion cycle where cash is used to purchase inventory, turned into receivables through sales, and then collected as cash. Managing working capital involves balancing current assets and liabilities to ensure sufficient short-term funds and liquidity. The goal is to efficiently manage resources and improve cash flow.
This document discusses various ways that businesses can improve their cash flow to avoid or address cash flow problems. It identifies key causes of cash flow issues such as low profits, too much inventory, allowing too much customer credit, and overtrading. It then provides recommendations for improving cash flow through better cash flow forecasting, managing accounts receivable and payable more effectively, using different sources of financing, and reducing inventory levels.
Growing your business managing cost, funding, customer satisfaction - crosmaysite
The document discusses various aspects of financial management and funding for small businesses. It covers establishing financial rules and accounting practices, creating financial reports like income statements and cash flow statements, and managing cash flow. The document also discusses the importance of understanding your customers' payment terms and collecting payments on time. Finally, it addresses funding options for businesses and factors to consider when raising capital like the threshold amount needed and providing liquidity for investors.
This document provides an introduction to financial management. It discusses that finance uses accounting information together with other information to make decisions that affect a firm's market value. There are three primary decision areas in finance: investment decisions, financing decisions, and dividend decisions. The goal of a firm should be to maximize stock price in order to maximize owners' wealth. Important concepts in finance include focusing on market values rather than book values and cash flows rather than accounting income.
The document discusses budgets and cash flow forecasts, which are important financial planning tools for businesses. It provides guidance on creating a cash flow forecast, including estimating income and expenses on a monthly basis. Key points include showing anticipated cash inflows and outflows, establishing funding needs and timing, and ensuring capital expenditures are controlled. The cash flow forecast monitors short-term liquidity and can help identify future surpluses or shortfalls to inform decision making. Sample income and expense categories are also outlined.
Manage your Business Finances with QuickBooksJohn Wessells
Here are the steps to record a sale:
1. A customer buys something from your business (in this case, business cards)
2. The customer pays in cash
3. You issue a sales receipt to the customer
4. You then need to record the sale in your accounting records. The most important details to track are:
- Customer (who bought from you)
- Date of sale
- Items or services sold
- Price
- Payment method (cash, check, credit card)
5. Categorize the sale as income in your "Sales" account.
Does this help explain how to properly record a sale? Let me know if you have any other questions!
This presentation discusses managing cash flow. It defines cash flow management as forecasting, collecting, disbursing, investing, and planning for cash needs. A cash budget or "cash map" is created to predict cash needs over time. The five steps to prepare a cash budget are determining a minimum cash balance, forecasting sales, forecasting cash receipts, forecasting cash disbursements, and estimating the end-of-month cash balance. Managing accounts receivable, accounts payable, and inventory are described as the "Big Three" of cash flow management. Tips are provided to accelerate cash receipts and stretch out cash disbursements.
Accounting and Valuation Considerations in Business TransactionsSkoda Minotti
Determining the value of a privately-held entity is no easy task. More so, when you are buying or selling a business, the entire transaction process can be overwhelming and confusing. There are many financial and non-financial factors to consider in the transaction process. The implications of an improperly executed transaction can not only make a financial impact, but also put you at risk of key compliance matters, whether accounting, tax, or regulatory matters. This presentation will review the key accounting and valuation concepts that are important to consider in merger and acquisition transactions.
This document provides a concise guide to cash flow management for small businesses. It discusses the importance of cash flow and outlines key principles for managing cash flow, including actively monitoring cash inflows and outflows. The document also covers accelerating cash inflows through streamlining processes like customer ordering, credit decisions, fulfillment and invoicing. It emphasizes the importance of establishing a clear credit policy and checking customer creditworthiness to minimize risks.
Discusses how using the Ormita Commerce Network allows businesses to invest into new enterprises and socially responsible businesses without needing to pay cash to do so.
Discusses the benefits of barter and offset trade in a broader sense and the particular benefits of using Ormita to act as a facilitator for these types of transactions.
See the Ormita website at www.ormita.com.
Licensee and franchisee enquiries are available for those interested in barter, offset trade, reciprocal trade, counter-trade, community currencies etc. If you ever thought of owning your own barter exchange franchise this is your chance - Visit www.ormita.com or www.ormitacorporate.com
This document discusses key concepts related to managing cash and receivables. It covers cash needs and considerations, credit policies, evaluating accounts receivable levels, and methods for financing receivables. It also addresses estimating uncollectible accounts, writing off accounts, and making and paying promissory notes. Specific topics include cash requirements, receivable turnover, days' sales uncollected, allowance method for estimating bad debts, percentage of net sales method, accounts receivable aging method, and discounting and factoring receivables.
The document provides tips for small businesses to improve cash flow management. It recommends extending payment terms and improving cash collection. It also suggests analyzing expenditures and forecasting cash flow regularly. Some key tips include keeping only key suppliers, paying suppliers on time, offering discounts for early payment, pursuing outstanding debts weekly, and ending relationships with customers with poor payment histories. The document stresses the importance of forecasting cash flow at least weekly and reviewing forecasts against bank statements to improve over time.
The document provides strategies and tips for managing cash flow in a small business. It discusses developing a cash flow forecast to monitor incoming and outgoing money. Tips include getting cash in quickly from sales while slowing outflows, managing accounts receivable, inventory, and debt, and cutting expenses where possible. Regularly updating the cash flow forecast can help alert businesses before running out of money and improve effective management.
A cash flow forecast tracks a business's projected cash inflows and outflows over a period of time, usually a year. It allows businesses to see if they will have enough cash to cover costs and where any shortfalls may occur. Having a cash flow forecast is essential for borrowing money and is a key part of any business plan. The forecast outlines components like sales revenue, expenses, opening and closing monthly balances, and net cash flows.
A business may experience cash flow problems if it does not have enough cash to pay its liabilities. Common causes include low profits, overinvestment, too much stock, allowing too much customer credit, or unexpected changes. To improve cash flow, a business should manage working capital effectively by focusing on reducing debtors, creditors, and stock levels. It can also choose appropriate short-term financing like a bank overdraft or bank loan to meet temporary cash shortfalls. Maintaining a good cash flow forecast helps identify risks so problems can be addressed early.
The document discusses working capital, which is the cash needed for day-to-day business operations and is calculated as current assets minus current liabilities; it also covers liquidity ratios like the current ratio and acid test ratio to measure a business's ability to pay debts, and risks like overtrading that can occur if too much business is taken on without sufficient working capital. Managing working capital effectively through inventory, debtors, creditors and cash flow is important for business success.
This document discusses working capital and its components. It defines working capital as the capital required to finance short-term operating needs such as inventory, accounts receivable, and cash. It also discusses the operating cycle as the continuous flow of cash being converted into inventory, then receivables, and back into cash. Finally, it notes that companies must determine the optimal level of working capital to support operations without having excess funds tied up in current assets.
The document discusses key financial concepts such as balance sheets, income statements, assets, liabilities, working capital, and depreciation. It explains that a balance sheet records a business's assets and liabilities on a given date, and must always balance. It also discusses how to interpret balance sheets and income statements to analyze a business's short-term and long-term financial positions. Key metrics like working capital, depreciation, and different types of profit are defined. The document aims to explain how to analyze and use financial data for decision making and performance evaluation.
The document discusses how to analyze balance sheets and income statements to understand a business's financial objectives and performance, examining assets, liabilities, revenues, expenses, profits, and using financial data for comparisons over time and between businesses. It also notes some strengths and limitations of relying solely on financial statements to judge a business.
AQA AS Business Unit 2 Cash Flow Managementtutor2u
This document discusses managing cash flow, including:
1) A quick quiz on cash flow management topics like which events could lead to problems and ways to improve short-term cash flow.
2) Identifying two ways a business could slow down cash outflows or speed up cash inflows, such as delaying supplier payments, reducing costs, or reducing customer payment periods.
3) Two mini case studies presenting cash flow problems and potential solutions to choose from and justify.
This document provides an overview of working capital management. It defines working capital as the difference between current assets and current liabilities. It discusses the working capital cycle and how managing it effectively through reducing collection and payment times is important for business cash flow and survival. The document emphasizes that senior management must prioritize working capital management and set clear targets and accountability to improve processes around areas like credit control, inventory, and accounts payable/receivable.
How to Manage working Capital in Hotel-Basic accounting principles #9 by Din...DINOLEONANDRI
The document discusses managing working capital in hotel industries. It defines working capital as the short-term assets used to fund daily operations, such as cash, receivables, and inventory. It also discusses the cash conversion cycle where cash is used to purchase inventory, turned into receivables through sales, and then collected as cash. Managing working capital involves balancing current assets and liabilities to ensure sufficient short-term funds and liquidity. The goal is to efficiently manage resources and improve cash flow.
This document discusses various ways that businesses can improve their cash flow to avoid or address cash flow problems. It identifies key causes of cash flow issues such as low profits, too much inventory, allowing too much customer credit, and overtrading. It then provides recommendations for improving cash flow through better cash flow forecasting, managing accounts receivable and payable more effectively, using different sources of financing, and reducing inventory levels.
Growing your business managing cost, funding, customer satisfaction - crosmaysite
The document discusses various aspects of financial management and funding for small businesses. It covers establishing financial rules and accounting practices, creating financial reports like income statements and cash flow statements, and managing cash flow. The document also discusses the importance of understanding your customers' payment terms and collecting payments on time. Finally, it addresses funding options for businesses and factors to consider when raising capital like the threshold amount needed and providing liquidity for investors.
This document provides an introduction to financial management. It discusses that finance uses accounting information together with other information to make decisions that affect a firm's market value. There are three primary decision areas in finance: investment decisions, financing decisions, and dividend decisions. The goal of a firm should be to maximize stock price in order to maximize owners' wealth. Important concepts in finance include focusing on market values rather than book values and cash flows rather than accounting income.
The document discusses budgets and cash flow forecasts, which are important financial planning tools for businesses. It provides guidance on creating a cash flow forecast, including estimating income and expenses on a monthly basis. Key points include showing anticipated cash inflows and outflows, establishing funding needs and timing, and ensuring capital expenditures are controlled. The cash flow forecast monitors short-term liquidity and can help identify future surpluses or shortfalls to inform decision making. Sample income and expense categories are also outlined.
Manage your Business Finances with QuickBooksJohn Wessells
Here are the steps to record a sale:
1. A customer buys something from your business (in this case, business cards)
2. The customer pays in cash
3. You issue a sales receipt to the customer
4. You then need to record the sale in your accounting records. The most important details to track are:
- Customer (who bought from you)
- Date of sale
- Items or services sold
- Price
- Payment method (cash, check, credit card)
5. Categorize the sale as income in your "Sales" account.
Does this help explain how to properly record a sale? Let me know if you have any other questions!
This presentation discusses managing cash flow. It defines cash flow management as forecasting, collecting, disbursing, investing, and planning for cash needs. A cash budget or "cash map" is created to predict cash needs over time. The five steps to prepare a cash budget are determining a minimum cash balance, forecasting sales, forecasting cash receipts, forecasting cash disbursements, and estimating the end-of-month cash balance. Managing accounts receivable, accounts payable, and inventory are described as the "Big Three" of cash flow management. Tips are provided to accelerate cash receipts and stretch out cash disbursements.
Accounting and Valuation Considerations in Business TransactionsSkoda Minotti
Determining the value of a privately-held entity is no easy task. More so, when you are buying or selling a business, the entire transaction process can be overwhelming and confusing. There are many financial and non-financial factors to consider in the transaction process. The implications of an improperly executed transaction can not only make a financial impact, but also put you at risk of key compliance matters, whether accounting, tax, or regulatory matters. This presentation will review the key accounting and valuation concepts that are important to consider in merger and acquisition transactions.
This document provides a concise guide to cash flow management for small businesses. It discusses the importance of cash flow and outlines key principles for managing cash flow, including actively monitoring cash inflows and outflows. The document also covers accelerating cash inflows through streamlining processes like customer ordering, credit decisions, fulfillment and invoicing. It emphasizes the importance of establishing a clear credit policy and checking customer creditworthiness to minimize risks.
Discusses how using the Ormita Commerce Network allows businesses to invest into new enterprises and socially responsible businesses without needing to pay cash to do so.
Discusses the benefits of barter and offset trade in a broader sense and the particular benefits of using Ormita to act as a facilitator for these types of transactions.
See the Ormita website at www.ormita.com.
Licensee and franchisee enquiries are available for those interested in barter, offset trade, reciprocal trade, counter-trade, community currencies etc. If you ever thought of owning your own barter exchange franchise this is your chance - Visit www.ormita.com or www.ormitacorporate.com
This document discusses key concepts related to managing cash and receivables. It covers cash needs and considerations, credit policies, evaluating accounts receivable levels, and methods for financing receivables. It also addresses estimating uncollectible accounts, writing off accounts, and making and paying promissory notes. Specific topics include cash requirements, receivable turnover, days' sales uncollected, allowance method for estimating bad debts, percentage of net sales method, accounts receivable aging method, and discounting and factoring receivables.
The document provides tips for small businesses to improve cash flow management. It recommends extending payment terms and improving cash collection. It also suggests analyzing expenditures and forecasting cash flow regularly. Some key tips include keeping only key suppliers, paying suppliers on time, offering discounts for early payment, pursuing outstanding debts weekly, and ending relationships with customers with poor payment histories. The document stresses the importance of forecasting cash flow at least weekly and reviewing forecasts against bank statements to improve over time.
The document provides strategies and tips for managing cash flow in a small business. It discusses developing a cash flow forecast to monitor incoming and outgoing money. Tips include getting cash in quickly from sales while slowing outflows, managing accounts receivable, inventory, and debt, and cutting expenses where possible. Regularly updating the cash flow forecast can help alert businesses before running out of money and improve effective management.
A cash flow forecast tracks a business's projected cash inflows and outflows over a period of time, usually a year. It allows businesses to see if they will have enough cash to cover costs and where any shortfalls may occur. Having a cash flow forecast is essential for borrowing money and is a key part of any business plan. The forecast outlines components like sales revenue, expenses, opening and closing monthly balances, and net cash flows.
A business may experience cash flow problems if it does not have enough cash to pay its liabilities. Common causes include low profits, overinvestment, too much stock, allowing too much customer credit, or unexpected changes. To improve cash flow, a business should manage working capital effectively by focusing on reducing debtors, creditors, and stock levels. It can also choose appropriate short-term financing like a bank overdraft or bank loan to meet temporary cash shortfalls. Maintaining a good cash flow forecast helps identify risks so problems can be addressed early.
The document discusses working capital, which is the cash needed for day-to-day business operations and is calculated as current assets minus current liabilities; it also covers liquidity ratios like the current ratio and acid test ratio to measure a business's ability to pay debts, and risks like overtrading that can occur if too much business is taken on without sufficient working capital. Managing working capital effectively through inventory, debtors, creditors and cash flow is important for business success.
This document discusses working capital and its components. It defines working capital as the capital required to finance short-term operating needs such as inventory, accounts receivable, and cash. It also discusses the operating cycle as the continuous flow of cash being converted into inventory, then receivables, and back into cash. Finally, it notes that companies must determine the optimal level of working capital to support operations without having excess funds tied up in current assets.
The document discusses key financial concepts such as balance sheets, income statements, assets, liabilities, working capital, and depreciation. It explains that a balance sheet records a business's assets and liabilities on a given date, and must always balance. It also discusses how to interpret balance sheets and income statements to analyze a business's short-term and long-term financial positions. Key metrics like working capital, depreciation, and different types of profit are defined. The document aims to explain how to analyze and use financial data for decision making and performance evaluation.
The document discusses how to analyze balance sheets and income statements to understand a business's financial objectives and performance, examining assets, liabilities, revenues, expenses, profits, and using financial data for comparisons over time and between businesses. It also notes some strengths and limitations of relying solely on financial statements to judge a business.
The document discusses working capital management. It defines working capital and its components like current assets and current liabilities. It explains the operating cycle involving conversion of raw materials to work-in-progress to finished goods and then into cash from sales. Different approaches to calculating working capital and ratios used for working capital analysis are summarized. Factors influencing working capital requirements and techniques to manage cash, receivables and inventory are highlighted. Efficient working capital management can free up cash and reduce borrowing needs.
This document discusses working capital management. It defines working capital as a company's investment in short-term assets like cash, accounts receivable, and inventory. It also defines concepts like gross working capital, net working capital, and operating cycle. The document emphasizes the importance of managing working capital and outlines different methods for estimating working capital needs. It also discusses the components of the operating cycle and how receivables and inventory are managed.
The document discusses working capital, which refers to the capital required to finance short-term operating needs like inventory, accounts receivable, and cash. It provides definitions of working capital concepts like net working capital, gross working capital, and operating cycle. It also examines different approaches to calculating and financing working capital, including the balance sheet approach, operating cycle approach, hedging/matching approach, conservative approach, and aggressive approach. Key points covered include the importance of adequate but not excessive working capital, factors that influence working capital needs, and the trade-offs between different financing approaches in terms of liquidity, risk and profitability.
The document discusses working capital, which refers to the capital required to finance short-term operating needs of a business, such as inventory and receivables. It defines working capital as the difference between current assets and current liabilities. Managing working capital is important as it affects a firm's cash flows and ability to meet short-term obligations. The document also outlines different types of working capital and factors that influence working capital needs, such as the nature of the business and production cycles.
The document discusses the working capital cycle, which measures how quickly a business can convert current assets like inventory and accounts receivable into cash. It explains the typical steps in the working capital cycle as inventory days, receivable days, and payable days. The working capital cycle formula is given as inventory days + receivable days - payable days. An example calculation is provided. The document also discusses strategies for managing working capital, including aggressive versus conservative approaches and sources of working capital financing.
Finance for strategic managers Part 2 of 4Parag Tikekar
This document provides information about Prof. Parag Tikekar and the agenda for the first day of his Finance for Strategic Managers course. It discusses managing cash and working capital, including defining key terms like cash, capital, working capital, the working capital cycle, and current and quick ratios. It emphasizes the importance of cash for businesses and explains why businesses hold cash. The working capital cycle and how it relates to stock, debtors, creditors, and cash is also explained.
Falcon is one of the leading P2P Invoice Discounting platforms in India where we connect blue chip companies with investors. We aim to revolutionize the investment market in India by creating a one-stop shop for all borrowers & investors with varied profiles and needs who can have access without any risk. Unlike banks and financial institutions Falcon increases investor's yields by eliminating mediators like commercial banks, depository institutions etc
This document discusses managing current liabilities to fund working capital. It explains that short-term assets like working capital should be funded by current liabilities like trade creditors and bank overdrafts. Trade creditors are preferable to fund working capital before relying on expensive bank overdrafts. The business can negotiate longer payment terms with suppliers to increase trade creditor funding. However, suppliers may increase prices or refuse further supply if payment terms are extended without approval.
Meaning
Types of working capital
Factors of determining working capital
Operating working capital cycle
Importance of operating cycle concept
Internal factors
External factors
General factors
Types of capital structure
Characteristics of security
Introduction
Working capital typically means the firm’s holding of current or short-term assets such as cash, receivables, inventory and marketable securities.
These items are also referred to as circulating capital
Corporate executives devote a considerable amount of attention to the management of working capital
Definition
Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.
Nature Of Working Capital
Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelations that exist between them.
Current assets refer to those assets which in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm.
Examples- cash, marketable securities, accounts receivable and inventory.
Current liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, within a year, out of the current assets or the earnings of the concern.
Examples- accounts payable, bills payable, bank overdraft and outstanding expenses.
This document discusses working capital management. It defines working capital as current assets minus current liabilities. Working capital management refers to monitoring current assets and liabilities to ensure efficient company operations. Gross working capital are current assets, while net working capital is the difference between current assets and liabilities. Permanent working capital is always required, while temporary/variable working capital fluctuates. Factors like inventory, cash, receivables, and the operating cycle must be managed to maintain adequate working capital levels.
A Project on Working Capital Management by Alok, PGDM, IPE, Hyderabad.Alok Reddy
Working Capital Management at Rajapushpa Properties Pvt Ltd, a privately owned real-estate firm with projects around Hyderabad's IT corridor and financial district.
1. Financial ratio analysis
2. Trend analysis of the components of working capital
3. Forecasting working capital requirement
4. Calulation of the cash conversion cycle, DSO, DPO
Working capital management involves managing a company's current assets and current liabilities. It aims to balance financial stability and profitability. Key aspects of working capital management include:
1) Managing inventory levels through techniques like economic order quantity to reduce holding and shortage costs.
2) Managing trade receivables through practices like credit analysis, credit controls, and debt collection to increase sales while controlling risks of bad debts.
3) Matching the cash operating cycle of converting assets into cash with funding sources like trade payables or short/long-term borrowing to minimize liquidity risks.
4) Preparing cash flow forecasts to identify cash surpluses or deficits and arrange appropriate funding. The objective is to
This document provides an overview of working capital, including its definition, relevance, management, calculation, requirements, and trends. It defines working capital as the difference between current assets and current liabilities. Working capital is essential for business operations and reflects a company's liquidity and financial health. The document discusses calculating working capital, analyzing trends over time, measuring efficiency through turnover ratios, and assessing a company's liquidity position.
Mr. Khan, the president of Dynamics Inc., was shocked to learn that one of the company's main suppliers would no longer supply them with needed parts. This was due to Dynamics' inability to pay its obligations on time, despite record sales and profits. Mr. Khan did not understand how the company could be short on cash to pay bills. Effective working capital management is needed to balance current assets and liabilities to ensure sufficient cash flow for daily operations. The cash conversion cycle and operating cycle must be optimized by managing areas like inventory levels, accounts receivable, accounts payable, and cash balances.
A review of the growth of the Israel Genealogy Research Association Database Collection for the last 12 months. Our collection is now passed the 3 million mark and still growing. See which archives have contributed the most. See the different types of records we have, and which years have had records added. You can also see what we have for the future.
How to Setup Warehouse & Location in Odoo 17 InventoryCeline George
In this slide, we'll explore how to set up warehouses and locations in Odoo 17 Inventory. This will help us manage our stock effectively, track inventory levels, and streamline warehouse operations.
Walmart Business+ and Spark Good for Nonprofits.pdfTechSoup
"Learn about all the ways Walmart supports nonprofit organizations.
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Chapter wise All Notes of First year Basic Civil Engineering.pptxDenish Jangid
Chapter wise All Notes of First year Basic Civil Engineering
Syllabus
Chapter-1
Introduction to objective, scope and outcome the subject
Chapter 2
Introduction: Scope and Specialization of Civil Engineering, Role of civil Engineer in Society, Impact of infrastructural development on economy of country.
Chapter 3
Surveying: Object Principles & Types of Surveying; Site Plans, Plans & Maps; Scales & Unit of different Measurements.
Linear Measurements: Instruments used. Linear Measurement by Tape, Ranging out Survey Lines and overcoming Obstructions; Measurements on sloping ground; Tape corrections, conventional symbols. Angular Measurements: Instruments used; Introduction to Compass Surveying, Bearings and Longitude & Latitude of a Line, Introduction to total station.
Levelling: Instrument used Object of levelling, Methods of levelling in brief, and Contour maps.
Chapter 4
Buildings: Selection of site for Buildings, Layout of Building Plan, Types of buildings, Plinth area, carpet area, floor space index, Introduction to building byelaws, concept of sun light & ventilation. Components of Buildings & their functions, Basic concept of R.C.C., Introduction to types of foundation
Chapter 5
Transportation: Introduction to Transportation Engineering; Traffic and Road Safety: Types and Characteristics of Various Modes of Transportation; Various Road Traffic Signs, Causes of Accidents and Road Safety Measures.
Chapter 6
Environmental Engineering: Environmental Pollution, Environmental Acts and Regulations, Functional Concepts of Ecology, Basics of Species, Biodiversity, Ecosystem, Hydrological Cycle; Chemical Cycles: Carbon, Nitrogen & Phosphorus; Energy Flow in Ecosystems.
Water Pollution: Water Quality standards, Introduction to Treatment & Disposal of Waste Water. Reuse and Saving of Water, Rain Water Harvesting. Solid Waste Management: Classification of Solid Waste, Collection, Transportation and Disposal of Solid. Recycling of Solid Waste: Energy Recovery, Sanitary Landfill, On-Site Sanitation. Air & Noise Pollution: Primary and Secondary air pollutants, Harmful effects of Air Pollution, Control of Air Pollution. . Noise Pollution Harmful Effects of noise pollution, control of noise pollution, Global warming & Climate Change, Ozone depletion, Greenhouse effect
Text Books:
1. Palancharmy, Basic Civil Engineering, McGraw Hill publishers.
2. Satheesh Gopi, Basic Civil Engineering, Pearson Publishers.
3. Ketki Rangwala Dalal, Essentials of Civil Engineering, Charotar Publishing House.
4. BCP, Surveying volume 1
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LAND USE LAND COVER AND NDVI OF MIRZAPUR DISTRICT, UPRAHUL
This Dissertation explores the particular circumstances of Mirzapur, a region located in the
core of India. Mirzapur, with its varied terrains and abundant biodiversity, offers an optimal
environment for investigating the changes in vegetation cover dynamics. Our study utilizes
advanced technologies such as GIS (Geographic Information Systems) and Remote sensing to
analyze the transformations that have taken place over the course of a decade.
The complex relationship between human activities and the environment has been the focus
of extensive research and worry. As the global community grapples with swift urbanization,
population expansion, and economic progress, the effects on natural ecosystems are becoming
more evident. A crucial element of this impact is the alteration of vegetation cover, which plays a
significant role in maintaining the ecological equilibrium of our planet.Land serves as the foundation for all human activities and provides the necessary materials for
these activities. As the most crucial natural resource, its utilization by humans results in different
'Land uses,' which are determined by both human activities and the physical characteristics of the
land.
The utilization of land is impacted by human needs and environmental factors. In countries
like India, rapid population growth and the emphasis on extensive resource exploitation can lead
to significant land degradation, adversely affecting the region's land cover.
Therefore, human intervention has significantly influenced land use patterns over many
centuries, evolving its structure over time and space. In the present era, these changes have
accelerated due to factors such as agriculture and urbanization. Information regarding land use and
cover is essential for various planning and management tasks related to the Earth's surface,
providing crucial environmental data for scientific, resource management, policy purposes, and
diverse human activities.
Accurate understanding of land use and cover is imperative for the development planning
of any area. Consequently, a wide range of professionals, including earth system scientists, land
and water managers, and urban planners, are interested in obtaining data on land use and cover
changes, conversion trends, and other related patterns. The spatial dimensions of land use and
cover support policymakers and scientists in making well-informed decisions, as alterations in
these patterns indicate shifts in economic and social conditions. Monitoring such changes with the
help of Advanced technologies like Remote Sensing and Geographic Information Systems is
crucial for coordinated efforts across different administrative levels. Advanced technologies like
Remote Sensing and Geographic Information Systems
9
Changes in vegetation cover refer to variations in the distribution, composition, and overall
structure of plant communities across different temporal and spatial scales. These changes can
occur natural.
How to Make a Field Mandatory in Odoo 17Celine George
In Odoo, making a field required can be done through both Python code and XML views. When you set the required attribute to True in Python code, it makes the field required across all views where it's used. Conversely, when you set the required attribute in XML views, it makes the field required only in the context of that particular view.
Beyond Degrees - Empowering the Workforce in the Context of Skills-First.pptxEduSkills OECD
Iván Bornacelly, Policy Analyst at the OECD Centre for Skills, OECD, presents at the webinar 'Tackling job market gaps with a skills-first approach' on 12 June 2024
2. 10.1 Working capital
Working capital is the capital available for conducting the day-to-day operations of the
business and consists of current assets and current liabilities.
Current assets Current liabilities
Inventories Trade payables
Trade receivables Bank overdrafts
Cash
Short term investments
Working capital can be viewed as a whole but interest is usually focussed on the individual
components such as inventories or trade receivables. Working capital is effectively the net
current assets of a business.
Working capital can either be:
Positive Current assets are greater than current liabilities
Negative Current assets are less than current liabilities
Working capital management
Working capital management is the administration of current assets and current liabilities.
Effective management of working capital ensures that the organisation is maximising the
benefits from net current assets by having an optimum level to meet working capital
demands.
It is difficult trying to achieve and maintain an optimum level of working capital for the
organisation. For example having a large volume of inventories will have two effects, firstly
there will never be stock outs, so therefore the customers are always satisfied, but secondly it
means that money has been spent on acquiring the inventories, which is not generating any
returns (i.e. inventories is a non productive asset), there are also additional costs of holding
the inventories (i.e. warehouse space, insurance etc).
The important aspect of working capital is to keep the levels of inventories, trade receivables,
cash etc at a level which ensures customer goodwill but also keeps costs to the minimum.
With trade payables, the longer the period of credit the better as this is a form of free credit,
but again the goodwill with the supplier may suffer.
2
3. 10.2 Working capital cycle (operating/trading/cash cycle)
The working capital cycle measures the time between paying for goods supplied to you and
the final receipt of cash to you from their sale. It is desirable to keep the cycle as short as
possible as it increases the effectiveness of working capital. The diagram below shows how
the cycle works.
Cash
Trade payables Trade receivables
Money owing to Customer owing money,
suppliers as stock as sales made on credit
purchased on credit
Inventories
Sold on credit
The table below shows how the activities of a business have an impact on the cash flow.
TRADE PROCESS EFFECTS ON CASH
Inventories are purchased on credit Inventories bought on credit temporarily help with
which creates trade payables. cash flow as there is no immediate to pay for these
inventories.
The sale of inventories is made on This means that there is no cash inflow even
credit which creates trade though inventory had been sold. The cash for the
receivables. sold inventory will be received later.
Trade payables need to be paid, and The cash has to be collected from the trade
the cash is collected from the trade receivables and then paid to the trade payables
receivables. otherwise there is a cash flow problem.
3
4. The control of working capital is ensuring that the company has enough cash in its bank.
This will save on bank interest and charges on overdrafts. The company also needs to ensure
that the levels of inventories and trade receivables is not too great, as this means funds are
tied up in assets with no returns (known as the opportunity cost).
The working capital cycle therefore should be kept to a minimum to ensure efficient and cost
effective management.
Working capital cycle for a trade
Inventories days (time inventories are (Inventories / cost of sales) x 365 days
held before being sold)
+ +
Trade receivables days (how long the (Trade receivables / credit sales) x 365 days
credit customers take to pay)
- -
Trade payables days (how long the (Trade payables / purchases) x 365 days
company takes to pay its suppliers)
= =
Working capital cycle (in days) Working capital cycle (in days)
Please note that for the trade payable days calculation, if information about credit
purchases is not known then cost of sales is used instead.
Example 10.1 (CIMA P7 Nov 06)
DX had the following balances in its trial balance at 30 September 2006:
Trial balance extract at 30 September 2006
$000 $000
Revenue 2,400
Cost of sales 1,400
Inventories 360
Trade receivables 290
Trade payables 190
Cash and cash equivalents 95
Calculate the length of DX s working capital cycle at 30 September 2006.
4
5. Working capital cycle in a manufacturing business
Average time raw materials are in stock (Raw materials / purchases) x 365 days
+ +
Time taken to produce goods (WIP & finished goods / cost of sales) x 365 days
+ +
Time taken by customers to pay for goods (Trade receivables / credit sales) x 365 days
- -
Period of credit taken from suppliers (Trade payables / purchases) x 365 days
= =
Working capital cycle (in days) Working capital cycle (in days)
Please note that for the trade payable days calculation, if information about credit
purchases is not known then cost of sales is used instead.
Example 10.2 (CIMA P7 May 05)
AD, a manufacturing entity, has the following balances at 30 April 2005:
Extract from financial statements: $000
Trade receivables 216
Trade payables 97
Revenue (all credit sales) 992
Cost of sales 898
Purchases in year 641
Inventories at 30 April 2005:
Raw materials 111
Work in progress 63
Finished goods 102
Calculate AD s working capital cycle.
5
6. The shorter the cycle, the better it is for the company as it means:
Inventories are moving though the organisation rapidly.
Trade receivables are being collected quickly.
The organisation is taking the maximum credit possible from suppliers.
The shorter the cycle, the lower the company s reliance on external supplies of finance like
bank overdrafts which is costly.
Excessive working capital means too much money is invested in inventories and trade
receivables. This represents lost interest or excessive interest paid and lost opportunities (the
funds could be invested elsewhere and earn a higher return).
The longer the working capital cycle, the more capital is required to finance it.
Exam questions often ask how working capital can be managed effectively. To answer the
question you need to discuss the overall working capital levels, and then the individual
components like stock, debtors and creditors.
10.3 Overtrading
When a company is trading large volumes of sales very quickly, it may also be generating
large amounts of credit sales, and as a result large volume of trade receivables. It will also be
purchasing large amounts of inventories on credit to maintain production at the same rate as
sales and therefore have large volumes of trade payables. This will extend the working capital
cycle which will have an adverse effect on cash flow. If the company doesn t have enough
working capital, it will find it difficult to continue as there would be insufficient funds to
meet all costs as they fall due.
Overtrading occurs when a company has inadequate finance for working capital to support its
level of trading. The company is growing rapidly and is trying to take on more business that
its financial resources permit i.e. it is under-capitalised . Overtrading typically occurs in
businesses which have just started to trade and where they may have suddenly begun to
experience rapid sales growth. In this situation it is quite easy to place high importance on
sales growth whilst neglecting to manage the working capital.
6
7. Symptoms of overtrading Remedies for overtrading
· Fast sales growth. Short-term solutions
· Increasing trade payables. · Speeding up collection from customers.
· Increasing trade receivables. · Slowing down payment to suppliers.
· Fall in cash balances and · Maintaining lower inventory levels.
increasing overdraft.
Long term solutions
· Increase the capital by equity or long-
term debt.
Overtrading may result in insolvency which means a company has severe cash flow
problems, and that a thriving company, which may look very profitable, is failing to meets its
liabilities due to cash shortages.
Over-capitalisation
This is the opposite of over trading. It means a company has a large volume of inventories,
trade receivables and cash balances but very few trade payables. The funds tied up could be
invested more profitably elsewhere and so this an effective use of working capital.
Differences in working capital for different industries
Manufacturing Retail Service
High volume of WIP Goods for re-sale only None or very little
Inventories and finished goods. and usually low inventories.
volume.
High levels of trade Very low levels as Usually low levels as
Trade receivables, as they tend most goods are bought services are paid for
receivables be dependant on a few in cash. immediately.
customers.
Low to medium levels Very high levels of Low levels of
Trade of trade payables. trade payables due to payables.
payables huge purchases of
inventory.
7
8. 10.4 Types of working capital policy
Within a business, funds are required to finance both non-current and current assets. The
level of current assets fluctuates, although there tends to be an underlying level required for
current assets.
Assets
£m
100
Temporary fluctuating current assets
80
Permanent current assets
(Core level of inventories, trade receivables etc)
50
Non current assets
0
Time
A company must decide on a policy on how to finance its long and short-term assets. There
are 3 types of policies that exist:
Conservative policy Moderate policy Aggressive policy
All the non current assets, All the non current assets All the non current assets
permanent assets and some and permanent asset are and part of permanent
of the temporary current financed by long-term assets financed by long
assets are financed by long- finance. The temporary term. Remaining
term finance. fluctuating assets financed permanent assets all
by short-term finance. temporary fluctuating assets
by short term.
£90m long term debt and £80m long term debt and £65m long term debt and
equity. equity. equity.
£10m short term overdrafts £20m short term overdrafts £35m short term overdrafts
and bank loans. and bank loans. and bank loans.
8
9. Summary of the three policies:
Conservative policy Moderate policy Aggressive policy
Non current assets Non current assets Non current assets
Long term
Permanent assets Permanent assets Permanent assets
finance
Temporary current assets
Short term Temporary current assets Temporary current assets Permanent assets
finance Temporary current assets
With an aggressive working capital policy, a company will hold minimal levels of inventories
in order to minimise costs. With a conservative working capital policy the company will hold
large levels of inventories. The moderate policy is somewhere in between the conservative
and aggressive.
Short-term debt can be cheap, but it is also riskier than long-term finance since it must be
continually renewed. Therefore with an aggressive policy, the company may report higher
profits due to lower level of inventories, trade receivables and cheaper finance, but there is
greater risk.
Example 10.3 (CIMA P7 May 06)
A conservative policy for financing working capital is one where short-term finance is used
to fund:
A all of the fluctuating current assets, but no part of the permanent current assets.
B all of the fluctuating current assets and part of the permanent current assets.
C part of the fluctuating current assets and part of the permanent current assets.
D part of the fluctuating current assets, but no part of the permanent current assets.
Example 10.4 (CIMA P7 Nov 05)
An entity s working capital financing policy is to finance working capital using short-term
financing to fund all the fluctuating current assets as well as some of the permanent part
of the current assets.
What is this policy an example of?
9
10. 10.5 Working capital ratios
Ratios are way of comparing financial values and quantities to improve our understanding. In
particular they are used to asses the performance of a company.
When analysing performance through the use of ratios it is important to use comparisons as a
single ratio is meaningless.
The use of ratios
· To compare results over a period of time
· To measure performance against other organisations
· To compare results with a target
· To compare against industry averages
We shall now look at some of the working ratios in detail and explain how they can be
interpreted.
1 Current ratio (CA) or working capital ratio
CA = Current assets (times)
Current liabilities
The current ratio measures the short term solvency or liquidity; it shows the extent to which
the claims of short-term creditors are covered by assets. The current ratio is essentially
looking at the working capital of the company. Effective management of working capital
ensures the organisation is running efficiently. This will eventually result in increased
profitability and positive cash flows. Effective management of working capital involves low
investment in non productive assets like trade receivables, inventory and current account
bank balances. Also maximum use of free credit facilities like trade payables ensures
efficient management of working capital.
The normal current ratio is around 2:1 but this varies within different industries. Low current
ratio may indicate insolvency. High ratio may indicate not maximising return on working
capital. Valuation of inventories will have an impact on the current ratio, as will year end
balances and seasonal fluctuations.
2 Quick ratio or acid test
Quick ratio = Current assets less inventories (times)
Current liabilities
This ratio measures the immediate solvency of a business as it removes the inventories out of
the equation, which is the item least representing cash, as it needs to be sold. Normal is
around 1: 1 but this varies within different industries.
10
11. 3 Trade payable days (turnover)
Year end trade payables x 365 days
Credit purchases (or cost of sales)
This is the length of time taken to pay the suppliers. The ratio can also be calculated using
cost of sales, as credit purchases are not usually stated in the financial statements. High trade
payable day s is good as credit from suppliers represents free credit. If it s too high then there
is a risk of the suppliers not extending credit in the future and may lose goodwill. High trade
payable days may also indicate that the business has no cash to pay which indicates
insolvency problems.
4 Trade receivable days (turnover)
Year end trade receivables x 365 days
Credit sales (or turnover)
This is the average length of time taken by customers to pay. A long average collection
means poor credit control and hence cash flow problems may occur. The normal stated credit
period is 30 days for most industries. Changes in the ratio may be due to improving or
worsening credit control. Major new customer pays fast or slow. Change in credit terms or
early settlement discounts are offered to customers for early payment of invoices.
5 Inventory days
Average inventory x 365 days
Cost of sales
Average inventory can be arrived by taking this year s and last year s inventory values and
dividing by 2 - (Opening inventories + closing inventories) / 2. This ratio shows how long
the inventory stays in the company before it is sold. The lower the ratio the more efficient
the company is trading, but this may result in low levels of inventories to meet demand. A
lengthening inventory period may indicate a slow down in trade and an excessive build up of
inventories, resulting in additional costs.
6 Inventory turnover is the reciprocal of inventory days.
Cost of sales x number of times
Average inventory
This shows how quickly the inventory is being sold. It shows the liquidity of inventories, the
higher the ratio the quicker the inventory is sold.
11
12. Example 10.5 (CIMA P7 May 07)
DR has the following balances under current assets and current liabilities:
Current assets $ Current liabilities $
Inventory 50,000 Trade payables 88,000
Trade receivables 70,000 Interest payable 7,000
Bank 10,000
Calculate DR s quick ratio.
Example 10.6
A company's current assets are less than its current liabilities. The company issues new
shares at full market price.
What will be the effect of this transaction upon the company s working capital and on
its current ratio?
Working capital Current ratio
A Increase Increase
B Constant Increase
C Constant Decrease
D Decrease Decrease
Example 10.7
If the current ratio for a company is equal to its acid test (that is, the quick ratio), then:
A The current ratio must be less than one.
B Working capital is negative.
C Trade payables and overdraft are greater than trade payables plus inventories.
D The company does not carry any inventories
12
13. Example 10.8
The following are extracts of the Income Statement and Balance Sheet for Umar plc.
Extract Balance Sheet at 30 June
20X2 20X1
£ 000 £ 000 £ 000 £ 000
Current assets
Inventories 84 74
Trade receivables 58 46
Bank 6 10
148 130
Current liabilities
Trade payables 72 82
Taxation 20 20
92 102
Net current assets 56 -
Extract Income Statement for the year ended 30 June
20X2 20X1
£ 000 £ 000 £ 000 £ 000
Turnover 418 392
Opening inventory 74 58
Purchases 324 318
398 376
Closing inventory (84) (74)
314 302
Gross profit 104 90
Calculate and comment on the following ratios for Umar plc:
1 Current ratio
2 Quick ratio
3 Inventory days
4 Trade receivable days
5 Trade payable days
6 Working capital cycle in days
13
14. Example 10.9
Controlling working capital
Explain how a manufacturing company could control its working capital levels, and the
impact of the suggested control measures.
Example 10.10
Working capital mini Q s
During January 20X4, Gazza Ltd made credit sales of £30,000, which have a 25% mark up.
It also purchased £20,000 of inventories on credit.
Calculate by how much the working capital will increase or decrease as a result of the
above transactions?
Tuffy Ltd has an annual turnover of £18m on which it earns a margin of 20%. All the sales
and purchases are made on credit and it has a policy of maintaining the following levels of
inventories, trade receivables and payables throughout the year.
Inventory £2 million
Trade receivable £5 million
Trade payable £2.5 million
Calculate Tuffy Ltd s cash cycle to the nearest day?
14
15. Key summary of chapter
Working capital is the capital available for conducting the day-to-day operations of the
business and consists of current assets and current liabilities.
Working capital management is the administration of current assets and current liabilities.
Effective management of working capital ensures that the organisation is maximising the
benefits from net current assets by having an optimum level to meet working capital
demands.
TRADE PROCESS EFFECTS ON CASH
Inventories are purchased on credit Inventories bought on credit temporarily help with
which creates trade payables. cash flow as there is no immediate to pay for these
inventories.
The sale of inventories is made on This means that there is no cash inflow even though
credit which creates trade inventory had been sold. The cash for the sold
receivables. inventory will be received later.
Trade payables need to be paid, and The cash has to be collected from the trade
the cash is collected from the trade receivables and then paid to the trade payables
receivables. otherwise there is a cash flow problem.
Working capital cycle
Inventories days (time inventories are (Inventories / cost of sales) x 365 days
held before being sold)
+ +
Trade receivables days (how long the (Trade receivables / credit sales) x 365 days
credit customers take to pay)
- -
Trade payables days (how long the (Trade payables / purchases) x 365 days
company takes to pay its suppliers)
= =
Working capital cycle (in days) Working capital cycle (in days)
15
16. Working capital cycle in a manufacturing business
Average time raw materials are in stock (Raw materials / purchases) x 365 days
+ +
Time taken to produce goods (WIP & finished goods / cost of sales) x 365 days
+ +
Time taken by customers to pay for goods (Trade receivables / credit sales) x 365 days
- -
Period of credit taken from suppliers (Trade payables / purchases) x 365 days
= =
Working capital cycle (in days) Working capital cycle (in days)
Overtrading occurs when a company has inadequate finance for working capital to support
its level of trading. The company is growing rapidly and is trying to take on more business
that its financial resources permit i.e. it is under-capitalised .
Conservative policy Moderate policy Aggressive policy
Non current assets Non current assets Non current assets
Long term
Permanent assets Permanent assets Permanent assets
finance
Temporary current assets
Short term Temporary current assets Temporary current assets Permanent assets
finance Temporary current assets
16
17. Working capital ratios
Current assets_ (number of times)
Current ratio
Current liabilities
Current assets inventory (number of times)
Quick ratio
Current liabilities
Trade payables_____ x 365 days
Trade payable days
Cost of sales (or purchases)
Inventory_ x 365 days
Inventory days
Cost of sales
Trade receivable x 365 days
Trade receivable days
Sales
Cost of sales x number of times
Inventory turnover
Average inventory
17
19. Chapter 10
Example 10.1 (CIMA P7 Nov 06)
Inventories days (Inventories / cost of sales) x 365 days 93.9 days
(360 / 1,400) x 365 days
Trade receivable days (Trade receivables / credit sales) x 365 days 44.1 days
(290 / 2,400) x 365 days
Trade payable days (Trade payables / cost of sales) x 365 days 49.5 days
(190 / 1,400) x 365 days
Working capital cycle 93.9 + 44.1 49.5 88.5 days
Example 10.2 (CIMA P7 May 05)
1 Average time raw materials are in stock
(Raw materials / purchases) x 365 days
(111 / 641) x 365 = 63.2 days
2 Time taken to produce goods
(Work in progress & finished goods / cost of sales) x 365 days
(63 + 102 / 898) x 365 = 67.1 days
3 Time taken by customers to pay for goods
(Trade receivables / credit sales) x 365 days
(216 / 992) x 365 = 79.5 days
4 Period of credit taken from suppliers
(Trade payables / purchases) x 365 days
(97 / 641) x 36 = 55.2 days
Working capital cycle = 63.2 + 67.1 + 79.5 55.2 = 154.6 days
19
20. Example 10.3 (CIMA P7 May 06)
The answer is D.
Example 10.4 (CIMA P7 Nov 05)
An aggressive policy.
Example 10.5 (CIMA P7 May 07)
Quick ratio = (current assets inventory) / current liabilities
= (70,000 + 10,000) / (88,000 + 7,000)
= 0.84
Example 10.6
The answer is A.
The cash balance will increase, which means there is more working capital. The current ratio
will increase as there are more current assets than current liabilities.
Example 10.7
The answer is D.
20
21. Example 10.8
1 Current ratio = 148 / 92 = 1.61 for 20X2
=130 / 102 = 1.27 for 20X1
The current ratio has increased, meaning that the organisation is more liquid. This is due to
the fact that inventory and trade receivables have increased (which are non productive assets),
and trade payables have been reduced. Although this may be better for the current ratio, it
may not necessarily mean that the company is operating more efficiently. Has it increased it
inventory piles because it anticipates higher sales and doesn t want to run out? Is it offering
it s credit customers longer time to pay to increase sales? Why are they paying their suppliers
quicker? Surely it would be better to take as long as possible?
2 Quick ratio = (148 84) / 92 = 0.70 for 20X2
= (130 74) / 102 = 0.55 for 20X1
In 20X2 current liabilities are better covered than 20X1. Bad management of working capital
perhaps investigate further.
3 Inventory days = (74 + 84) x 0.5 / 314 x 365 days = 91.8 days for 20X2
= (58 + 74) x 0.5 / 302 x 365 days = 79.8 days for 20X1
Inventory is taking longer to sell; this could indicate poor inventory management. Why have
inventory levels risen? Maybe the company is taking a cautious approach and wants to
ensure enough is available to meet customer needs. But this is resulting in additional costs
(unproductive asset)
4 Trade receivable days = 58 / 418 x 365 days = 50.6 days for 20X2
= 46 / 392 x 365 days = 42.8 days for 20X1
The collection of debts is worsening. Have the credit terms been extended to increase sales.
Are there new customers who were not screened properly, resulting in delayed payments? Is
there a delay in issuing invoices, lack of screening new customers? Are the year end figures
representatives of the year? Perhaps there are seasonal fluctuations that need to be
considered. Further investigation required as yet again this is an unproductive asset.
5 Trade payable days = 72 / 324 x 365 = 81.1 days for 20X2
= 82 / 318 x 365 = 94.1days for 20X1
(Alternatively could have used cost of sales)
The suppliers are being paid quicker, which is good for relationship with the suppliers, but
bad for cash flow purposes. It is still quite high and might jeopardise supplier relationship,
discounts foregone etc. Trade credit is a free source of finance, and the company must try to
maximise this.
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22. 6 Working capital cycle
20X2 20X1
Inventories days 91.8 79.8
Plus
Trade receivables days 50.6 42.8
Minus
Trade payables days (81.1) (94.1)
Equals
Working capital cycle (in days) 61.3 28.5
In 20X2, the working capital cycle increased to 61.3 days from 28.5 days in 20X1. The
company is taking longer to covert its inventories into cash. The management of inventories,
receivables and payables has deteriorated, and this needs to be investigated and corrected.
Example 10.9
Controlling working capital
Some of the practical aspects that could be taken to achieve this include:
1 Reducing average raw material inventory holding period
· Ordering in small quantities to meet immediate production requirements, but could
lose quantity discounts.
· Reducing the level of buffer stocks if these are held, but this will increase the risk of
production being halted due to a stock out.
· Reducing the lead time allowed to suppliers, but could also increase the risk of a
stock out.
2 Increase the period of credit taken from suppliers
· If the credit period is extended then the company may lose discounts from prompt
payment. The financial effect of this should be calculated and compared with the cost
of funds from other sources.
· If credit period is extended then goodwill may be lost, which is important in the event
of goods being required urgently.
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23. 3 Reducing the time taken to produce goods and inventory holding period or
finished inventories
· Efficiency leads to cost savings, therefore finding an efficient way to produce goods
(i.e. in economic batch quantities), but the company must ensure than quality is not
sacrificed.
· The savings arising from inventory holding reduction must be evaluated against the
cost of inventory out, together with the effect on customer service.
4 Reducing the average debt collection period
· The administrative costs of speeding up debt collection and the effect on sales of
reducing credit period allowed must be evaluated.
Example 10.10
Working capital mini Q s
Firstly note the difference between a mark up and a margin
Mark-up = 100% + 25% = 125% Profit = (25 / 125) Cost = 100 / 125
Margin = 75% + 25% = 100% Profit = (25 / 100) Cost = 75 / 100
1 Effect on WC
Increase in trade receivables £30,000
Increase in trade payables (£20,000)
Inventories increase due to purchases £20,000
Inventories Decrease due to sales (i.e. COS)
{30,000 x 100 / 125} (£24,000)
Net effect on WC - increase £ 6,000
2 Cash cycle = inventory days + trade receivable days trade payable days
Inventory days = Average inventory x 365
Cost of sales
Cost of sales = £18 million x 0.8 = £14.4 million
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24. Inventory days = £2 / £14.4 x 365 = 51 days
Trade receivable days = Trade receivable / sales x 365
= £5 / £18 x 365 = 101 days
Trade payable days = Trade payable / COS x 365
= £2.5m / £14.4 x 365 = (63) days
Cash cycle = 89 days
89 days is the average time from the payment of a supplier to the receipt from a customer.
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