Uploaded byAvik Munshi
Procurement Finance
The document provides an overview of procurement finance, focusing on working capital management, current assets and liabilities, and the cash conversion cycle. It includes key financial metrics such as days payables outstanding (DPO), days inventory outstanding (DIO), and days sales outstanding (DSO) to assess business efficiency. Additionally, it addresses the importance of strategic cash management and the balance between inventory levels and payables to optimize cash flow.
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Procurement Finance
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- 3. 01 – shareholderequity 02 – long term liabilities liabilities 01 – PP&E 02 – current assets assets 00 01 02 03 – current liabilities 03 – cash & equivalents 04 – investments
- 4. liabilities 02 – currentassets assets 03 – current liabilities 03.1 – creditors for expenses / payables 03.2 – creditors for supply / payables 03.3 – short-term loans / cash credit 03.4 – current year portion of long-term loans 02.1 – accounts receivables / credit sales 02.2 – inventory (raw material, finished goods) 00 01 02
- 5. current liabilities to currentassets ratio accrual accounting all transactions are not settled in cash; collections trail sales and payments trail purchase business cycle time required for complete rotation of one cycle from sales to delivery followed by cash settlement constraints subject to industry practices, market dynamics, and company policies
- 6. liabilities 03 – currentliabilities 03.1 – creditors for expenses / payables 03.2 – creditors for supply / payables 03.3 – short-term loans / cash credit 03.4 – current year portion of long-term loans 02 – current assets assets 02.1 – accounts receivables / credit sales 02.2 – inventory (raw material, finished goods) working capital difference between, current assets & current liabilities ∆ 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 (𝑎𝑠𝑠𝑒𝑡𝑠, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠) deficit amount of finance needed until all sales receivables are collected > working capital management surplus cash surplus generated from sales operations > liquidity management
- 7. amount, $ time working capital current assets currentliabilities amount, $ time working capital current assets current liabilities
- 8. amount, $ time working capital current assets currentliabilities amount, $ time working capital current assets current liabilities
- 9. new courses business essentials all fundamentalsthat you need to know about business along with an interesting section on evolution of business. product costing and pricing calculating product cost with fundamental understanding of business and various pricing strategies! plan your business introductory course about the business landscape and method to fill up the business canvas.
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- 11. DPO days payables outstanding DIO days inventory outstanding DSO days sales outstanding 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 ∗ 365 𝑎𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 ∗ 365 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 ∗ 365 average numerator & denominator to be of the same nature balance sheet, & income statement numerator & denominator should be of the same nature 365 time-elapsed in-between the balance sheet dates, used to convert unitless ratio into days
- 12. DSO DIO DPO +- business cycle # days for which working capital finance is required ensure business as usual zero inventory in JIT, inventory is consumed in little or no time, eliminating book inventory, thus reducing exposure DSO - DPO balance ü credit sale - credit purchase ü advance sale – cash purchase o advance sale – credit purchase? industry average benchmark industry leaders and compare with industry average cash conversion cycle # days required to convert the invested working capital into cash proceeds from sales
- 13. DPO DIO DSO 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 ∗ 365 𝑎𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 ∗ 365 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 ∗ 365 * 365 * 365 * 365 (8,402) (2,103 + 2,102) / 2 end of 2022 end of 2021 during 2022 (8,402) (2,329 + 2,086) / 2 end of 2022 end of 2021 during 2022 (13, 017) (2,518 + 2,159) / 2 end of 2022 end of 2021 during 2022 example, using DuPont de Nemours Inc 2022 Annual Report
- 14. DPO DIO DSO * 365 (8,402) (2,103 +2,102) / 2 end of 2022 end of 2021 during 2022 * 365 (8,402) (2,329 + 2,086) / 2 end of 2022 end of 2021 during 2022 * 365 (13, 017) (2,518 + 2,159) / 2 end of 2022 end of 2021 during 2022 = 91 days = 96 days = 65 days example, using DuPont de Nemours Inc 2022 Annual Report
- 15. DSO DIO DPO +- = 70 days # days for which working capital finance is required ensure business as usual inventory > not – zero inventory > sufficient to cover 2 months sale 65 96 91 + - payables > longer credit cycle than sales > levels are 1/4th of cost of sales sales > not – zero inventory > levels are 1/6th of revenues limitations > payables include supply & service > inventory raw material + finished
- 16. new courses business essentials all fundamentalsthat you need to know about business along with an interesting section on evolution of business. product costing and pricing calculating product cost with fundamental understanding of business and various pricing strategies! plan your business introductory course about the business landscape and method to fill up the business canvas.
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- 18. DPO DIO DSO 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 ∗ 365 𝑎𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 ∗ 365 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 ∗ 365 365 7 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑎𝑣𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 365 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 365 7 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑎𝑣𝑔 𝑖𝑛𝑣𝑒𝑡𝑜𝑟𝑦 365 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 365 7 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑎𝑣𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 365 𝑠𝑎𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
- 19. 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 workingcapital turnover number of times the invested working capital is materialized into cash during one accounting period inventory optimize levels by synchronizing consumption, stock, and lead time payables improve vendor rapport for credit, while leveraging finance cost and cash discount amounts sales tighter credit policies along with better enforcement without affecting sales revenue higher the better ü operating efficiency ü credit balance on either sides: supply and demand
- 20. cash discount discount onbill amount in lieu of early payment buyer > reduces cost-of-goods > increases working capital > prolongs cash conversion cycle seller > improves liquidity > reduces working capital > shortens cash conversion cycle trade-off for buyer > reduced cost of goods > increased working capital cost 𝟐% 𝟏𝟓 | 𝒏𝒆𝒕 𝟒𝟓 𝟐 − 𝟏𝟓 | 𝒏𝒆𝒕 𝟒𝟓 2% discount, if settled within 10 days, otherwise due in 45 days ⁄ 𝟐 𝟏𝟓, ⁄ 𝒏 𝟒𝟓
- 21. trade-off using cash tosettle vs using cash for other purposes 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 % 100% − 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 % 𝑐𝑎𝑙𝑒𝑛𝑑𝑎𝑟 𝑑𝑎𝑦𝑠 𝑓𝑢𝑙𝑙 𝑠𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡 𝑑𝑎𝑦𝑠 − 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑑𝑎𝑦𝑠 * effective savings quantifying the %discount in % of interest per annum 2 % 100% − 2 % 365 45 − 15 * = 0.02 * 12.17 = 0.2434 or 24.34% litmus test which interest rate is greater? 24% savings > 18% loan interest
- 22. new courses business essentials all fundamentalsthat you need to know about business along with an interesting section on evolution of business. product costing and pricing calculating product cost with fundamental understanding of business and various pricing strategies! plan your business introductory course about the business landscape and method to fill up the business canvas.