1) The document discusses working capital management strategies and how they can impact return on capital employed (ROCE). It analyzes data from annual working capital surveys.
2) While a shorter cash conversion cycle should theoretically increase ROCE by reducing capital tied up, the survey data does not show a clear relationship between changes in the cash conversion cycle and changes in ROCE.
3) The document then examines a company that has seasonal demand and discusses strategies for maintaining flexible working capital levels to maximize equity value across seasons while balancing cash availability and opportunity costs.
This document discusses working capital management. It defines working capital as the current assets of a company, such as cash, inventory, and receivables. It also discusses current liabilities. The key points made are:
- Working capital refers to the capital required to meet short-term expenses like salaries and supplier payments. Proper management is important for business liquidity and efficiency.
- The three main approaches to financing working capital are: matching short-term assets with short-term debt (hedging approach), financing all working capital with long-term debt (conservative approach), and maximizing short-term debt usage (aggressive approach).
- Working capital management aims to balance liquidity, risk exposure
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
3174 fm lecture 6 - working capital managementisaacsuiyu
Working capital refers to a company's short-term assets and liabilities related to day-to-day operations. It includes current assets like inventory, receivables, and cash, as well as current liabilities like payables. Managing working capital involves setting policies for maintaining optimal levels of current assets and financing them appropriately through short-term debt or long-term sources. The objective is to ensure sufficient liquidity while maximizing returns through efficient management of components like inventory, receivables, and payables.
The document discusses working capital management. It defines working capital as the difference between current assets and current liabilities, and how it represents a company's liquidity and short-term financial health. It discusses various metrics for measuring working capital, such as current ratio and quick ratio, and how companies can manage their working capital through policies that balance liquidity, profitability and risk. The document also covers financing of current assets, cash management, and methods for dealing with cash shortages or surpluses.
The main components of working capital are cash, receivables, and inventory. Cash is the most liquid current asset and includes funds held in bank accounts. Firms hold cash for transactional, precautionary, and speculative motives. The objectives of cash management are to maintain an optimal cash balance to meet payment obligations while minimizing costs. Common cash management strategies involve maintaining minimum cash levels, controlling cash inflows and outflows, and investing cash surpluses. Proper inventory management also aims to balance holding sufficient stock without excessive investment.
Working capital Management notes for MBA students to prepare for exam. The file contains ample theory and solved problems on working capital management
This document discusses factors that affect working capital. It defines working capital and circulating capital. It then lists and describes 12 key factors that can influence a company's working capital needs: 1) nature of business, 2) size of business, 3) production policy, 4) length of production cycle, 5) seasonal variations, 6) working capital cycle, 7) stock turnover rate, 8) credit policy, 9) business cycle, 10) growth rate of business, 11) earnings and dividend policy, and 12) price level changes. Each of these factors can increase or decrease the amount of funds required to operate the business on a day-to-day basis.
Working capital capital management and finance ianita rani
Working capital refers to the capital required to finance short-term assets like cash, inventory, and accounts receivable. It is needed to ensure a company has enough liquidity to operate day-to-day and take advantage of opportunities. There are two main concepts of working capital - the balance sheet approach looks at it as current assets minus current liabilities, while the operating cycle approach sees it revolving as assets are purchased, produced as inventory, and sold to generate receivables. Proper management of working capital is important, as too much can be unprofitable while too little can threaten solvency. Forecasting working capital needs considers factors like production costs, credit terms, and cash requirements.
This document discusses working capital management. It defines working capital as the current assets of a company, such as cash, inventory, and receivables. It also discusses current liabilities. The key points made are:
- Working capital refers to the capital required to meet short-term expenses like salaries and supplier payments. Proper management is important for business liquidity and efficiency.
- The three main approaches to financing working capital are: matching short-term assets with short-term debt (hedging approach), financing all working capital with long-term debt (conservative approach), and maximizing short-term debt usage (aggressive approach).
- Working capital management aims to balance liquidity, risk exposure
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
3174 fm lecture 6 - working capital managementisaacsuiyu
Working capital refers to a company's short-term assets and liabilities related to day-to-day operations. It includes current assets like inventory, receivables, and cash, as well as current liabilities like payables. Managing working capital involves setting policies for maintaining optimal levels of current assets and financing them appropriately through short-term debt or long-term sources. The objective is to ensure sufficient liquidity while maximizing returns through efficient management of components like inventory, receivables, and payables.
The document discusses working capital management. It defines working capital as the difference between current assets and current liabilities, and how it represents a company's liquidity and short-term financial health. It discusses various metrics for measuring working capital, such as current ratio and quick ratio, and how companies can manage their working capital through policies that balance liquidity, profitability and risk. The document also covers financing of current assets, cash management, and methods for dealing with cash shortages or surpluses.
The main components of working capital are cash, receivables, and inventory. Cash is the most liquid current asset and includes funds held in bank accounts. Firms hold cash for transactional, precautionary, and speculative motives. The objectives of cash management are to maintain an optimal cash balance to meet payment obligations while minimizing costs. Common cash management strategies involve maintaining minimum cash levels, controlling cash inflows and outflows, and investing cash surpluses. Proper inventory management also aims to balance holding sufficient stock without excessive investment.
Working capital Management notes for MBA students to prepare for exam. The file contains ample theory and solved problems on working capital management
This document discusses factors that affect working capital. It defines working capital and circulating capital. It then lists and describes 12 key factors that can influence a company's working capital needs: 1) nature of business, 2) size of business, 3) production policy, 4) length of production cycle, 5) seasonal variations, 6) working capital cycle, 7) stock turnover rate, 8) credit policy, 9) business cycle, 10) growth rate of business, 11) earnings and dividend policy, and 12) price level changes. Each of these factors can increase or decrease the amount of funds required to operate the business on a day-to-day basis.
Working capital capital management and finance ianita rani
Working capital refers to the capital required to finance short-term assets like cash, inventory, and accounts receivable. It is needed to ensure a company has enough liquidity to operate day-to-day and take advantage of opportunities. There are two main concepts of working capital - the balance sheet approach looks at it as current assets minus current liabilities, while the operating cycle approach sees it revolving as assets are purchased, produced as inventory, and sold to generate receivables. Proper management of working capital is important, as too much can be unprofitable while too little can threaten solvency. Forecasting working capital needs considers factors like production costs, credit terms, and cash requirements.
The document provides an overview of working capital, including definitions, concepts, and management. It defines working capital as the capital required for financing short-term assets like cash, inventory, and receivables. There are two concepts of working capital - the balance sheet concept focuses on current assets and liabilities, while the operating cycle concept looks at cash flows through purchasing, production, and sales cycles. Proper management of working capital is important, as both excess and inadequate working capital can hurt a business. Factors like industry, sales, and inventory turnover affect working capital needs. Forecasting and estimating working capital requirements involves considering items like materials, production timelines, credit terms, and cash flows.
The document discusses working capital management. It covers topics such as the cash operating cycle, funding current assets, managing inventory, accounts receivable, accounts payable, and cash. The objectives of working capital management are to maximize profitability while maintaining adequate liquidity and financial stability. Effective working capital management requires balancing current assets, current liabilities, and sources of short-term and long-term financing.
The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities, representing the funds available to run day-to-day operations. It notes that working capital management involves managing current assets like cash, debtors, and inventory as well as current liabilities like creditors. Proper working capital management is important for business liquidity, profitability, and survival, especially in today's competitive environment. The key steps in working capital management include cash management, debtors management, inventory management, and creditors management.
1. Working capital refers to a company's current assets and current liabilities. It is important for day-to-day operations and affects risk, return, and share price.
2. There are two types of working capital: permanent working capital for minimum needs and temporary working capital that varies seasonally.
3. Managing working capital properly balances liquidity, profitability, and risk, with different strategies taking different approaches in financing current assets.
Okay, let me calculate the working capital requirement step-by-step:
1) Raw Material for 60000 units
= 60000 * 60% of Rs. 5 = Rs. 18,00,000
2) Work in Progress for 60000 units
= 60000 * 10% of Rs. 5 = Rs. 3,00,000
3) Finished Goods for 60000 units
= 60000 * 20% of Rs. 5 = Rs. 6,00,000
4) Debtors for 60000 units at selling price of Rs. 5 per unit
= 60000 * Rs. 5 = Rs. 3,00,000
5) Creditors for 2
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.
Working capital refers to a company's short-term assets and liabilities related to day-to-day operations. It measures a company's ability to pay off current liabilities with its current assets. There are several approaches to determining a company's working capital needs, including industry norms, economic modeling, and strategic choices. Key determinants of working capital needs include the nature of the business, production and business cycles, credit and production policies, growth plans, profit levels, and operating efficiency. Proper management of working capital is important for ensuring sufficient liquidity and continuity of operations.
The study investigates the relationship between aggressive and conservative working capital policies and firm profitability and risk. It analyzes 208 public companies over 1998-2005 and finds:
1) A conservative working capital policy, with more permanent financing of current assets, is associated with lower risk but also lower profitability.
2) An aggressive policy, with extensive short-term financing of both current and fixed assets, is riskier but more profitable.
3) Firms' stock prices are influenced by their working capital management approach, with aggressive policies viewed favorably by investors.
- Working capital refers to short-term funds used for day-to-day operations, including current assets like inventory, accounts receivable, cash. It allows a company to operate smoothly by financing current assets.
- The goal of working capital management is to maintain sufficient liquidity to meet operating needs while avoiding excess or inadequate working capital levels, which are both problematic.
- Key concepts include gross working capital (total current assets), net working capital (current assets - current liabilities), and operating cycle (time from purchasing inventory to collecting cash from sales).
Chapter 15 The Management Of Working CapitalAlamgir Alwani
The document discusses key concepts related to working capital management. It defines working capital as the assets and liabilities used for day-to-day operations, including cash, receivables, inventory, payables, and accruals. The objective is to manage working capital efficiently with minimal funds tied up in short-term assets while balancing operational needs. Short-term financing options are also reviewed, including spontaneous financing from payables/accruals, bank loans, commercial paper, and asset-based lending secured by receivables or inventory. Cash and receivables management techniques aim to accelerate cash inflows and outflows.
This document discusses working capital management. It covers elements of working capital like current assets and current liabilities. The objectives of working capital management are maintaining liquidity and maximizing profitability. It also discusses shortening the working capital cycle by reducing inventory holding periods and collection periods. The document defines overtrading and provides indicators and solutions. Finally, it discusses various working capital ratios like current ratio, quick ratio, inventory turnover ratio, debtor days, and creditor days that are used to analyze working capital.
The matter includes concept and types of Working Capital. Further it explains Optimum Level of Current Assets, Various Approaches to Working Capital Financing. Then Operating Cycle, Cash Cycle and Working Capital Estimation Techniques are discussed.
Working capital management ppt @ bec doms mba financeBabasab Patil
The document discusses working capital management, including definitions of key terms, analysis of SKI Inc.'s working capital ratios compared to industry averages, cash conversion cycle calculation, cash budgeting, inventory and accounts receivable management strategies, and financing policies for working capital. It finds that SKI has excessive working capital levels and could improve profitability by reducing inventory holdings and accounts receivable collection periods.
The document defines the cost of capital as the rate of return a company must pay to its various sources of funding. There is variation in cost of capital due to different levels of risk associated with different types of investments. It is used to evaluate investment projects by comparing projected returns to required returns. The cost of capital consists of the costs of different sources of funding like equity, debt, preferred stock, and retained earnings. It is an important consideration in capital budgeting and structure decisions. Methods for calculating the specific costs of different sources are also provided.
Working capital refers to the capital required for financing short-term assets such as cash, inventory, and accounts receivable. It is also known as revolving or circulating capital. There are different types of working capital like gross working capital, net working capital, permanent working capital, and temporary working capital. Management of working capital involves maintaining optimal levels of current assets and current liabilities to ensure sufficient liquidity and an efficient balance between risk and profitability.
Working capital management involves maintaining a balance between short-term assets and liabilities to ensure business continuity and ability to meet obligations. Key aspects include:
1) Determining optimal levels of current assets like inventory and receivables by balancing liquidity, profitability and risk. Higher current assets increase liquidity but reduce profits, while lower assets increase risk.
2) Financing current asset levels through a combination of short and long-term financing. A conservative approach uses more long-term financing for less risk, while an aggressive approach uses more short-term financing for higher potential profits but more risk.
3) Current asset and financing decisions are interdependent - higher current asset levels allow more short-term financing
Working capital refers to the funds used by a company to finance day-to-day business operations. It includes short-term assets like cash, inventory, and receivables, as well as short-term liabilities like payables. Effective working capital management is important for business profitability and liquidity by balancing current assets and liabilities. Companies must forecast cash flows and implement strategies to accelerate cash inflows and delay cash outflows to efficiently manage working capital.
Management of Working Capital- Britannia Industries Ltd.Nikita Jangid
The document discusses working capital and its management. It defines working capital as the capital required for financing day-to-day business operations. Shortage of working capital can cause business failures while sufficient working capital is important for business success and liquidity. The document also discusses different types of working capital like permanent working capital and temporary working capital. It outlines the goals of working capital management as ensuring sufficient cash flow and balancing current assets and liabilities. Key factors that determine working capital requirements include the nature of industry, sales volume, inventory and receivables turnover, and the production cycle.
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
The document provides an overview of working capital, including definitions, concepts, and management. It defines working capital as the capital required for financing short-term assets like cash, inventory, and receivables. There are two concepts of working capital - the balance sheet concept focuses on current assets and liabilities, while the operating cycle concept looks at cash flows through purchasing, production, and sales cycles. Proper management of working capital is important, as both excess and inadequate working capital can hurt a business. Factors like industry, sales, and inventory turnover affect working capital needs. Forecasting and estimating working capital requirements involves considering items like materials, production timelines, credit terms, and cash flows.
The document discusses working capital management. It covers topics such as the cash operating cycle, funding current assets, managing inventory, accounts receivable, accounts payable, and cash. The objectives of working capital management are to maximize profitability while maintaining adequate liquidity and financial stability. Effective working capital management requires balancing current assets, current liabilities, and sources of short-term and long-term financing.
The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities, representing the funds available to run day-to-day operations. It notes that working capital management involves managing current assets like cash, debtors, and inventory as well as current liabilities like creditors. Proper working capital management is important for business liquidity, profitability, and survival, especially in today's competitive environment. The key steps in working capital management include cash management, debtors management, inventory management, and creditors management.
1. Working capital refers to a company's current assets and current liabilities. It is important for day-to-day operations and affects risk, return, and share price.
2. There are two types of working capital: permanent working capital for minimum needs and temporary working capital that varies seasonally.
3. Managing working capital properly balances liquidity, profitability, and risk, with different strategies taking different approaches in financing current assets.
Okay, let me calculate the working capital requirement step-by-step:
1) Raw Material for 60000 units
= 60000 * 60% of Rs. 5 = Rs. 18,00,000
2) Work in Progress for 60000 units
= 60000 * 10% of Rs. 5 = Rs. 3,00,000
3) Finished Goods for 60000 units
= 60000 * 20% of Rs. 5 = Rs. 6,00,000
4) Debtors for 60000 units at selling price of Rs. 5 per unit
= 60000 * Rs. 5 = Rs. 3,00,000
5) Creditors for 2
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.
Working capital refers to a company's short-term assets and liabilities related to day-to-day operations. It measures a company's ability to pay off current liabilities with its current assets. There are several approaches to determining a company's working capital needs, including industry norms, economic modeling, and strategic choices. Key determinants of working capital needs include the nature of the business, production and business cycles, credit and production policies, growth plans, profit levels, and operating efficiency. Proper management of working capital is important for ensuring sufficient liquidity and continuity of operations.
The study investigates the relationship between aggressive and conservative working capital policies and firm profitability and risk. It analyzes 208 public companies over 1998-2005 and finds:
1) A conservative working capital policy, with more permanent financing of current assets, is associated with lower risk but also lower profitability.
2) An aggressive policy, with extensive short-term financing of both current and fixed assets, is riskier but more profitable.
3) Firms' stock prices are influenced by their working capital management approach, with aggressive policies viewed favorably by investors.
- Working capital refers to short-term funds used for day-to-day operations, including current assets like inventory, accounts receivable, cash. It allows a company to operate smoothly by financing current assets.
- The goal of working capital management is to maintain sufficient liquidity to meet operating needs while avoiding excess or inadequate working capital levels, which are both problematic.
- Key concepts include gross working capital (total current assets), net working capital (current assets - current liabilities), and operating cycle (time from purchasing inventory to collecting cash from sales).
Chapter 15 The Management Of Working CapitalAlamgir Alwani
The document discusses key concepts related to working capital management. It defines working capital as the assets and liabilities used for day-to-day operations, including cash, receivables, inventory, payables, and accruals. The objective is to manage working capital efficiently with minimal funds tied up in short-term assets while balancing operational needs. Short-term financing options are also reviewed, including spontaneous financing from payables/accruals, bank loans, commercial paper, and asset-based lending secured by receivables or inventory. Cash and receivables management techniques aim to accelerate cash inflows and outflows.
This document discusses working capital management. It covers elements of working capital like current assets and current liabilities. The objectives of working capital management are maintaining liquidity and maximizing profitability. It also discusses shortening the working capital cycle by reducing inventory holding periods and collection periods. The document defines overtrading and provides indicators and solutions. Finally, it discusses various working capital ratios like current ratio, quick ratio, inventory turnover ratio, debtor days, and creditor days that are used to analyze working capital.
The matter includes concept and types of Working Capital. Further it explains Optimum Level of Current Assets, Various Approaches to Working Capital Financing. Then Operating Cycle, Cash Cycle and Working Capital Estimation Techniques are discussed.
Working capital management ppt @ bec doms mba financeBabasab Patil
The document discusses working capital management, including definitions of key terms, analysis of SKI Inc.'s working capital ratios compared to industry averages, cash conversion cycle calculation, cash budgeting, inventory and accounts receivable management strategies, and financing policies for working capital. It finds that SKI has excessive working capital levels and could improve profitability by reducing inventory holdings and accounts receivable collection periods.
The document defines the cost of capital as the rate of return a company must pay to its various sources of funding. There is variation in cost of capital due to different levels of risk associated with different types of investments. It is used to evaluate investment projects by comparing projected returns to required returns. The cost of capital consists of the costs of different sources of funding like equity, debt, preferred stock, and retained earnings. It is an important consideration in capital budgeting and structure decisions. Methods for calculating the specific costs of different sources are also provided.
Working capital refers to the capital required for financing short-term assets such as cash, inventory, and accounts receivable. It is also known as revolving or circulating capital. There are different types of working capital like gross working capital, net working capital, permanent working capital, and temporary working capital. Management of working capital involves maintaining optimal levels of current assets and current liabilities to ensure sufficient liquidity and an efficient balance between risk and profitability.
Working capital management involves maintaining a balance between short-term assets and liabilities to ensure business continuity and ability to meet obligations. Key aspects include:
1) Determining optimal levels of current assets like inventory and receivables by balancing liquidity, profitability and risk. Higher current assets increase liquidity but reduce profits, while lower assets increase risk.
2) Financing current asset levels through a combination of short and long-term financing. A conservative approach uses more long-term financing for less risk, while an aggressive approach uses more short-term financing for higher potential profits but more risk.
3) Current asset and financing decisions are interdependent - higher current asset levels allow more short-term financing
Working capital refers to the funds used by a company to finance day-to-day business operations. It includes short-term assets like cash, inventory, and receivables, as well as short-term liabilities like payables. Effective working capital management is important for business profitability and liquidity by balancing current assets and liabilities. Companies must forecast cash flows and implement strategies to accelerate cash inflows and delay cash outflows to efficiently manage working capital.
Management of Working Capital- Britannia Industries Ltd.Nikita Jangid
The document discusses working capital and its management. It defines working capital as the capital required for financing day-to-day business operations. Shortage of working capital can cause business failures while sufficient working capital is important for business success and liquidity. The document also discusses different types of working capital like permanent working capital and temporary working capital. It outlines the goals of working capital management as ensuring sufficient cash flow and balancing current assets and liabilities. Key factors that determine working capital requirements include the nature of industry, sales volume, inventory and receivables turnover, and the production cycle.
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
PROJECT ON WORKING CAPITAL MANAGEMENT
Efficient management of working Capital is one of the pre-conditions for the success of an enterprise. To reach optimal working capital management firm manager should control the trade-off between profitability and liquidity accurately. The purpose of this study is to investigate the relationship between working capital management and firm’s profitability.
In this study, we have selected a sample of 5 top notch Electricals firms and taken their financial data for a period of 6 years from 2008 – 2013 and studied the effect of different variables of working capital management including the Cash conversion cycle and Current ratio on the profitability of the firms.
The study shows that there is a negative significant relationship between cash conversion cycle & firm’s profitability and positive relationship between Current Ratio & profitability of firms. This reveals that reducing cash conversion period and increasing the current ratio results into profitability increase. Thus, in purpose to create shareholder value, firm manager should concern on shorten of cash conversion cycle till accomplish optimal level.
Topic 1 nature elements of working capitalRAJKAMAL282
Working capital refers to a firm's short-term assets and liabilities. It includes current assets like cash, inventory, and accounts receivable, as well as current liabilities like accounts payable. Effective working capital management balances liquidity and profitability by ensuring the business has enough cash flow to meet daily operations while maximizing returns. It is crucial for business success as mismanaging working capital can lead to insolvency or inability to take advantage of business opportunities.
The document provides an introduction to working capital management. It defines working capital as "capital invested in current assets" which are assets that can be converted to cash within a short time. It then discusses key concepts like gross working capital, net working capital, and the operating cycle. The importance of working capital management and determining adequate working capital requirements is emphasized. Techniques for managing current assets like cash, receivables, and inventory are also summarized.
1. Cash Flow statement
2. Permanent & Temporary Working Capital
3. Cash Flow and Common Size Statement
4. EOQ & Safety Stock
5. Return on Equity & Return on Capital Employed
Working capital refers to a company's short-term assets and liabilities related to day-to-day operations. This document discusses various concepts and determinants of working capital management. It defines gross and net working capital and explains the differences between permanent and temporary working capital. The key determinants of working capital requirements discussed are the size, nature of business, storage period, credit period, seasonality, growth potential, price changes, dividend policy, working capital cycle, and operational efficiency. Other factors like government policies, depreciation policy, and inventory policy also impact working capital needs.
Working capital represents a company's liquidity and is calculated as current assets minus current liabilities. It reflects a company's ability to pay off short-term debt obligations and covers operational expenses. Positive working capital is needed to ensure companies can continue operating without issues. The management of working capital involves managing inventory levels, accounts receivable, accounts payable, and cash to optimize current assets and liabilities and free up cash flow. Companies aim to reduce their working capital cycle by collecting from customers quicker or stretching out payments to suppliers in order to free up more cash.
The document discusses working capital management. It defines working capital as current assets minus current liabilities, and explains that it measures a company's liquid assets available to operate its business. The management of working capital involves managing inventory, accounts receivable, accounts payable, and cash. The goal is to ensure the company can continue operations and meet short-term debts and expenses.
Working capital management ppt @ bec doms bagalkot mbaBabasab Patil
This document discusses working capital, which is defined as current assets minus current liabilities. It measures a company's liquid assets available to operate its business. The document outlines different components of working capital like inventory, accounts receivable, cash, and current liabilities like accounts payable. It also discusses the importance of managing working capital to ensure sufficient cash flow and meeting short-term obligations. Different approaches to determining a firm's working capital needs are discussed, including industry norms, economic modeling, and strategic choices based on a firm's specific business practices and goals.
The document provides an introduction to working capital, which is defined as a financial metric representing operating liquidity available to a business. It is calculated as current assets minus current liabilities. The objective of the study and importance of studying working capital management are discussed. Methodology including type of research, data collection techniques, and data analysis tools are explained. Key aspects of working capital including components, management, and kinds are outlined. Decision criteria for working capital management and how it is guided are also summarized.
This document provides an introduction and overview of working capital. It defines working capital as the difference between current assets and current liabilities, and represents the funds available for day-to-day operations. The document discusses the need for working capital, components of working capital like cash, receivables and inventory, and factors that influence working capital requirements like the nature of the business, credit terms, seasonality and growth. It also outlines sources of working capital including equity, debt, bank loans and trade credit, and emphasizes the importance of effective working capital management.
This document discusses working capital management. It defines working capital as short-term financing used for daily business operations. It notes that working capital involves managing current assets like cash, accounts receivable, and inventory, as well as current liabilities like accounts payable. The document outlines different types of working capital, factors that influence working capital needs, sources of working capital, and the operating cycle from procuring materials to collecting from debtors. The overall goal of working capital management is to optimize current assets and meet daily expenses while minimizing costs.
This document discusses working capital management. It defines working capital as the excess of current assets over current liabilities. It notes that working capital management deals with managing a firm's current assets, current liabilities, and the relationship between them. The goal is to maintain an optimal level of working capital to ensure the firm can pay its short-term debts. The document also discusses the need for working capital, types of working capital (permanent and temporary), and factors that influence the amount of working capital a firm requires such as its industry, production cycle, size, business cycle, purchasing/sales terms, profitability, and operating efficiency.
Working capital refers to the funds that a company uses to finance its day-to-day business operations involving current assets such as inventory, cash, and receivables. There are two types: permanent/fixed working capital that is continuously invested in current assets, and temporary/variable working capital needed to meet seasonal demands. Working capital management aims to balance adequate liquidity, risk minimization, and profit maximization by making decisions around investment in current assets and sources of financing like equity, debt, trade credit, etc. The key is determining the optimal working capital level for a given business.
Mba iii-advanced financial management [10 mbafm321]-notesAnita Nadagouda
The document discusses the topics of working capital management over 8 modules. Module 1 defines working capital and discusses determining optimal levels of current assets and sources of working capital financing. It describes the need for adequate working capital management and concepts like gross and net working capital. Module 2 covers cash management strategies like cash forecasting. Module 3 discusses receivables management through credit policies and evaluation. Module 4 covers inventory management techniques. Later modules discuss capital structure, dividend policy, hybrid financing, corporate financial modeling, and financial management of sick companies.
This document provides information about cash flow statements, including how they are prepared and their importance. It discusses:
- Cash flow statements show cash receipts, payments, and changes in cash balance over a period of time, usually quarterly or annually. They show how a company generates and uses cash.
- The key difference between a cash flow statement and funds flow statement is that cash flow statements only consider cash, while funds flow statements use a broader definition of funds that includes current assets and liabilities.
- Cash flow statements are important for short-term financial planning as they show if a company will have enough cash to pay debts, dividends, and maintain operations. They also allow comparison of a company's
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.
Capital structure refers to the specific mix of debt and equity used to finance a company’s assets and operations. From a corporate perspective, equity represents a more expensive, permanent source of capital with greater financial flexibility. Financial flexibility allows a company to raise capital on reasonable terms when capital is needed. Conversely, debt represents a cheaper, finite-to-maturity capital source that legally obligates a company to make promised cash outflows on a fixed schedule with the need to refinance at some future date at an unknown cost.
As we will show, debt is an important component in the “optimal” capital structure. The trade-off theory of capital structure tells us that managers should seek an optimal mix of equity and debt that minimizes the firm’s weighted average cost of capital, which in turn maximizes company value. That optimal capital structure represents a trade-off between the cost-effectiveness of borrowing relative to the higher cost of equity and the costs of financial distress.
In reality, many practical considerations affect capital structure and the use of leverage by companies, leading to wide variation in capital structures even among otherwise-similar companies. Practical considerations affecting capital structure include the following:
business characteristics: features associated with a company’s business model, operations, or maturity;
capital structure policies and leverage targets: guidelines set by management and the board that seek to establish sensible borrowing limits for the company based on the company’s risk appetite and ability to support debt; and
market conditions: current share price levels and market interest rates for a company’s debt. The prevalence of low interest rates increases the debt-carrying capacity of businesses and the use of debt by companies.
Because we are considering how a company minimizes its overall cost of capital, the focus is on the market values of debt and equity. Therefore, capital structure is also affected by changes in the market value of a company’s securities over time.
We tend to think of capital structure as the result of a conscious decision by management, but it is not that simple. For example, unmanageable debt, or financial distress, can arise because a company’s capital structure policy was too aggressive, but it also can occur because operating results or prospects deteriorate unexpectedly.
Finally, in seeking to maximize shareholder value, company management may make capital structure decisions that are not in the interests of other stakeholders, such as debtholders, suppliers, customers, or employees.
Learning Outcomes
The member should be able to:
explain factors affecting capital structure;
describe how a company’s capital structure may change over its life cycle;
explain the Modigliani–Miller propositions regarding capital structure;
describe the use of target capital structure in estimating WACC, and calculate and interpret targe
The role of events in simulation modelingWeibull AS
The need for assessing the impact of events with binaryi outcomes, like loan defaults, occurrence of
recessions, passage of a special legislation, etc., or events that can be treated like binary events like
paradigm shifts in consumer habits, changes in competitor behavior or new innovations, arises often
in economics and other areas of decision making.
By using analogies from intervention analysis a number of interesting and important issues can be
analyzed:
If two events affects one response variable will the combined effect be less or greater than the sum of both?
Will one event affecting more than one response variable increase the effect dramatically?
Is there a risk of calculating the same cost twice?
If an event occurs at the end of a project, will it be prolonged? And what will the costs be?
Questions like this can never be analyzed when using a ‘second layer lump sum’ approach. Even
more important is possibility to incorporate the responses to exogenous events inside the simulation
model, thus having the responses at the correct point on the time line and by that a correct net
present value for costs, revenues and company or project value.
What we do; predictive and prescriptive analyticsWeibull AS
Prescriptive Analytics goes beyond descriptive, diagnostic and predictive analytics; by being able to recommend specific courses of action and show the likely outcome of each decision.
Predictive analytics will tell what probably will happen, but will leave it up to the client to figure out what to do with it.
Prescriptive analytics will also tell what probably will happen, but in addition: when it probably will happen and why it likely will happen, thus how to take advantage of this predictive future. Since there are always more than one course of action prescriptive analytics have to include: predicted consequences of actions, assessment of the value of the consequences and suggestions of the actions giving highest equity value for the company.
Performing Strategic Risk Management with simulation modelsWeibull AS
“How can you be better than us to understand our business risk?"
This is a question we often hear and the simple answer is that we don’t! But by using our methods and models we can utilize your knowledge in such a way that it can be systematically measured and accumulated throughout the business and be presented in easy to understand graphs to the management and board.
The main reason for this lies in how we can treat uncertainties 1 in the variables and in the ability to handle uncertainties stemming from variables from different departments simultaneously.
The evils of a single point estimate.
Traditionally, when estimating costs, project value, equity value or budgeting, one number is
generated – a single point estimate. There are many problems with this approach. In budget
work this point is too often given as the best the management can expect, but in some cases
budgets are set artificially low generating bonuses for later performance beyond budget
Public works projects.
In public works and large scale construction or engineering projects – where uncertainty mostly (only) concerns cost, a simplified scenario analysis is often used.
M&A analytics: When two plus two is five or three or .Weibull AS
Mergerrs & Acquisitions (M&A) is a way f or companiies to expannd rapidly a nd much faaster than or ganic growtth – that is coming fromm existing bbusinesses –– would havve allowed. M&A’s have foor decades bbeen a trillioon‐dollar buusiness, butt empirical sstudies repoorts that a significaant proporttion must bee considereed as failurees.
Budgeting with Monte Carlo simulation modelsWeibull AS
This document discusses using Monte Carlo simulation for budgeting. It notes that budgeting involves uncertainty about variables like sales, prices, wages, etc. It recommends building an EBITDA model to capture key cost and value drivers at a level where consolidation is easy. The model allows simulating probability distributions for budget forecasts using uncertainty assessments. Rolling forecasts can update as the year progresses. Managers provide uncertainty ranges for variables based on experience. Simulation outputs show probability distributions that identify overconfidence or underbudgeting tendencies.
i. Valuation under uncertainty uses simulation modeling to calculate the value of an entity, debt, and equity over time while accounting for uncertainty.
ii. Key inputs to the model include invested capital, excess marketable securities, capital charges, the net present value of translation gains/losses, forecasted earnings per share, and continuing value.
iii. The model provides probability distributions of the value of the entity, debt, and equity over time which help assess valuation risk under different scenarios.
Strategy@Risk provides strategic risk management software and services. Their models link enterprise strategy to risk management through probabilistic simulation of financial statements and valuation under uncertainty. This allows clients to evaluate risk across strategies, make informed decisions, and increase shareholder value through improved risk management.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
Seminar: Gender Board Diversity through Ownership NetworksGRAPE
Seminar on gender diversity spillovers through ownership networks at FAME|GRAPE. Presenting novel research. Studies in economics and management using econometrics methods.
The Rise of Generative AI in Finance: Reshaping the Industry with Synthetic DataChampak Jhagmag
In this presentation, we will explore the rise of generative AI in finance and its potential to reshape the industry. We will discuss how generative AI can be used to develop new products, combat fraud, and revolutionize risk management. Finally, we will address some of the ethical considerations and challenges associated with this powerful technology.
^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Duba...mayaclinic18
Whatsapp (+971581248768) Buy Abortion Pills In Dubai/ Qatar/Kuwait/Doha/Abu Dhabi/Alain/RAK City/Satwa/Al Ain/Abortion Pills For Sale In Qatar, Doha. Abu az Zuluf. Abu Thaylah. Ad Dawhah al Jadidah. Al Arish, Al Bida ash Sharqiyah, Al Ghanim, Al Ghuwariyah, Qatari, Abu Dhabi, Dubai.. WHATSAPP +971)581248768 Abortion Pills / Cytotec Tablets Available in Dubai, Sharjah, Abudhabi, Ajman, Alain, Fujeira, Ras Al Khaima, Umm Al Quwain., UAE, buy cytotec in Dubai– Where I can buy abortion pills in Dubai,+971582071918where I can buy abortion pills in Abudhabi +971)581248768 , where I can buy abortion pills in Sharjah,+97158207191 8where I can buy abortion pills in Ajman, +971)581248768 where I can buy abortion pills in Umm al Quwain +971)581248768 , where I can buy abortion pills in Fujairah +971)581248768 , where I can buy abortion pills in Ras al Khaimah +971)581248768 , where I can buy abortion pills in Alain+971)581248768 , where I can buy abortion pills in UAE +971)581248768 we are providing cytotec 200mg abortion pill in dubai, uae.Medication abortion offers an alternative to Surgical Abortion for women in the early weeks of pregnancy. Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman Fujairah Ras Al Khaimah%^^%$Zone1:+971)581248768’][* Legit & Safe #Abortion #Pills #For #Sale In #Dubai Abu Dhabi Sharjah Deira Ajman
5 Tips for Creating Standard Financial ReportsEasyReports
Well-crafted financial reports serve as vital tools for decision-making and transparency within an organization. By following the undermentioned tips, you can create standardized financial reports that effectively communicate your company's financial health and performance to stakeholders.
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
BONKMILLON Unleashes Its Bonkers Potential on Solana.pdfcoingabbar
Introducing BONKMILLON - The Most Bonkers Meme Coin Yet
Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
1. See All Posts by S@R
Working Capital Strategy
2010 • Related • Filed Under
Passion is inversely proportional to the amount of real information available. See Benford’s
law of controversy.
The annual “REL1 /CFO Working Capital Survey” made its debut in 1997 in the CFO Magazine.
The magazine identifies working capital management as one of the key issues facing financial
executives in the 21st century (Filbeck, Krueger, & Preece, 2007).
The 2010 Working Capital scorecard (Katz, 2010) and its accompanying data2 gives us an
opportunity to look at working capital management3; that is the effect of working capital
management on the return on capital employed (ROCE):
or,
From the last formula we can see that – all else kept constant – a reduction in net operating
working capital should imply an increased return on capital employed.
Gross and Net Operating Working Capital
A firm’s gross working capital comprises its total current assets. One part of it will consist of
financial current assets held for various reasons other than operational, and the other part of
receivables from operations and the inventory and cash necessary to run these operations. It is
this last part that interests us.
The firm’s operations will have been long term financed by equity from owners and by loans
from lenders. Firms usually also have short term financing from banks (short term credit +
overdraft facilities/ credit lines) and most always from suppliers by trade credit. The rest of the
current liabilities; current tax and dividends will not be considered as parts of operating current
liabilities, since they comprises only non recurrent payments.
Net working capital is defined as the difference between current assets and current liabilities (see
figure below). It can be both positive and negative depending on the firm’s strategic position in
the market.
1
2. However usually a positive net working capital is required to ensure that the firm is able to
continue its operations and that it has sufficient funds to satisfy both maturing short-term debt
and upcoming operational expenses. In the following we assume that any positive net working
capital is held as cash and that all excess cash is held as marketable securities.
By removing from both current assets and liabilities all items not directly related to and
necessary for the operations, we arrive at net operating working capital as the difference between
operating current assets and operating current liabilities:
Net operating working capital = Operating current assets – Operating current liabilities
Since the needed amount of working capital will differ between industries and be dependent on
company size it will be easier to base comparisons on the cash conversion cycle.
Working Capital Management
Working capital management is the administration of current assets as well as current liabilities.
It is the main part of a firm’s short-term financial planning since it involves the management of
cash, inventory and accounts receivable. Therefore, working capital management will reflect the
firm’s short-term financial performance.
2
3. Current assets often account for more than half of a company’s total assets and hence, represent a
major investment for small firms as they can not be avoided in the same way as investments in
fixed assets can – by renting or leasing. A large inventory will tie up capital but it prevents the
company from lost sales or production stoppages due to stock-out. A high level of current assets
hence means less risk to the company but also lower earnings due to higher capital tie-up – the
risk-return tradeoffs (Weston & Copeland, 1986).
Since the needed amount of working capital will differ between industries and also will be
dependent on company size it will be easier to base comparisons of working capital management
between companies and industries on their cash conversion cycle (CCC).
The Cash Conversion Cycle
The term “cash conversion cycle” (CCC) refers to the time span between a firm’s disbursing and
collecting cash and will thus be ‘unrelated’ to the firm’s size, but be dependent on the firm’s type
of business (see figure below).
Companies that have high inventory turnover and do business on a cash basis – usually have a
low or negative CCC and hence needs very little working capital.
For companies that make investment products the situation is a completely different. As these
types of businesses are selling expensive items on a long-term payment basis, they will tend to
have a high CCC and must keep enough working capital on hand to get through any unforeseen
difficulties.
The CCC cannot be directly observed in the cash flows, because these are also influenced by
investment and financing activities and must be derived from the firm’s balance sheet:
+ Inventory conversion period (DSI)
+ Receivables conversion period (DSO)
- Payable conversion period (DPO)
= Cash Conversion Cycle (days)
Where:
DSI = Days sales of inventory, DSO = Days sales outstanding, DPO = Days payable
outstanding, WIP = Work in progress, Period = Accounting period and COGS = Cost of goods
sold4 or:
+ Average inventory+WIP / [COGS/days in period]
+ Average Accounts Receivable / [Revenue / days in period]
+ Average Accounts Payable / [(Inventory increase + COGS)/ days in period]
= Cash Conversion Cycle (days)
3
4. The Observations
Even if not all of the working capital is determined by the cash conversion cycle, there should be
a tendency for higher return on operating capital with lower CCC. However the data from the
annual survey (Katz, 2010) does not support this5:
The scatter graph shows no direct relation between return on operating capital and the cash
conversion cycle. A closer inspection of the data for the surveys different industries confirms
this.
Since the total amount of capital invested in the CCC is:
and is thus a function of sales. The company size will then certainly play a role when we only
look at the yearly data. The survey however also gives the change from 2008 to 2009 for all the
4
5. companies so we are able to remove the size effect by looking at the changes (%) in ROCE by a
change in CCC:
The graph still shows no obvious relation between change (%) in CCC and change (%) in
ROCE. Now, we know that the shorter this cycle, the fewer resources the company needs to
lock-up; reduced debtor levels (DSO), decreased inventory levels (DSI) and/or increased creditor
levels (DPO) must have an effect on the ROCE – but will it be lost in the clutter of all the other
company operations effects on the ROCE?
Cash Management
Net operating working capital is the cash plus cash equivalents needed to pay for the day-to-day
operation of the business. This will include; demand deposits, money market accounts, currency
holdings and highly liquid short-term investments such as marketable securities6; portfolios of
highly liquid, near-cash assets which serves as a backup to the cash account.
There are many reasons why holding cash is important; to act as a buffer when daily cash flows
do not match cash out flows (Transaction motive), as a safety stock to face forecast errors and
unforeseen expenses (Precautionary motive) or to be able to react immediately when
opportunities can be taken (Speculative motive). If the cash level is too low and unexpected
outflows occurs, the firm will have to either borrow funds or in the case of an investment –
forego the opportunity.
Such short-term borrowing of funds can be costly as can a lost opportunity by the lost returns of
rejected investments. Holding cash however also induces opportunity costs due to loss of
interest.
Cash management therefore aim at optimizing cash availability and interest income on any idle
funds. Cash budgeting – as a part of the firm’s of short-term planning – constitutes the starting-
point for all cash management activities as it represents the forecast of cash in- and outflows and
therefore reflects the firm’s expected availability and need for cash.
Working Capital Strategy
5
6. We will in the following look closer at working capital management using balance simulation7.
The data is from a company with large fixed assets in infrastructure. The demand for its services
is highly seasonal as schematic depicted in the figure below:
A company like this will need a flexible working capital strategy with a low level of working
capital in the off-seasons and high levels in the high seasons. As the company wants to maximize
its equity value it is looking for working capital strategies that can do just that.
The company has been working on its cash conversion cycle, and succeeded in that with on
average of only 11,1 days 1M (standard deviation 0,2 days) (across seasons) for turning supplied
goods and services into cash:
All the same, even then a substantial amount, on average €4,1M (standard deviation €1,8M) of
the company’s resources, is invested in the cash conversion cycle:
6
7. In addition the company needs a fair amount of cash to meet its other obligations. Its first
strategy was to keep cash instead of using short term financing in the high seasons. In the off-
seasons this strategy gives a large portfolio of marketable securities – giving a low return and
thereby a low contribution to the ROCE. This strategy can be described as being close to the red
line in the seasonal graph above.
When we now plot the two hundred observed (simulated) values of working capital and the
corresponding ROE (from now we use return on equity (ROE) since this of more interest to the
owners), we get a picture as below:
This lax strategy shows little relation between the amount of working capital and the ROE and –
from just looking at the graph it would be easy to conclude that working capital management is a
waste of time and effort.
Now we turn to a stricter strategy: keeping a low level of cash through all seasons, using short
term financing in the high seasons and always have cash closely connected to expected sales.
Again plotting the two hundred observed values we get the graph below:
7
8. From this graph we can clearly see that if we can reduce the working capital we will increase the
ROE – even if we live in a stochastic environment. By removing some of the randomness in the
amount of working capital by keeping it close to what is absolutely needed – we get a much
clearer picture of the effect. This strategy is best described as being close to the green line in the
seasonal graph.
Since we use pseudorandom8 simulation we have replicated the first simulation (blue line), for
the stricter strategy (green line).
This means that the same events happened for both strategies; changes in sale, prices, costs,
interest and exchange rates etc. The effects for the amount of working capital are shown in the
graph below:
The lax strategy (blue line) will have an average working capital of €4,8M with a standard
deviation of €3.0M, while the strict strategy (green line) will have an average working capital of
€1,4M with a standard deviation of €3.3M.
Even if the stricter strategy seems to associate lower amounts of working capital with higher
return to equity (se figure) and that the amount of working capital always is lower than under the
laxer strategy, we have not yet established that it is a better strategy.
8
9. To do this we need to simulate the strategies over a number of years and compare the differences
in equity value under the two strategies. Doing this we get the probability distribution for
difference in equity value as shown below:
The expected value of the strict strategy over the lax strategy is €3,4 M width a standard
deviation of €6,1 M. The distribution is skewed to the right, so there is also a possible additional
upside.
From this we can conclude that the stricter strategy is stochastic dominant to the laxer strategy.
However there might be other strategies that can prove to be better.
This brings us to the question: does an optimal working capital strategy exist? What we do know
that there will be strategies that are stochastic dominant, but proving one to be optimal might be
difficult. Given the uncertainty in any firm’s future operations, you will probably first have to
establish a set of strategies that can be applied depending on the set of events that can be
experienced by the firm.
References
Filbeck, G, Krueger, T, & Preece, D. (2007). Cfo magazine’s “working capital survey”: do
selected firms work for shareholders?. Quarterly Journal of Business and Economics , (March),
Retrieved from http://www.allbusiness.com/company-activities-management/financial/5846250-
1.html
Katz, M.K. (2010). Working it out: The 2010 Working Capital Scorecard. CFO Magazine, June,
Retrieved from http://www.cfo.com/article.cfm/14499542
Weston, J. & Copeland, T. (1986). Managerial finance, Eighth Edition, Hinsdale, The Dryden
Press
Footnotes
1. REL Consultancy. (2010). Wikipedia. Retrieved October 10, 2010, from
http://en.wikipedia.org/wiki/REL Consultancy [↩]
2. http://www.cfo.com/media/201006/1006WCcompletev2.xls [↩]
9
10. 3. Data from 1,000 of the largest U.S. public companies [↩]
4. COGS = Opening inventory + Purchase of goods – Closing inventory [↩]
5. Twenty of the one thousand observations have been removed as outliers, to give a better
picture of the relation [↩]
6. Marketable securities with a maturity of less than three months are referred to as ‘cash
equivalents’ on the balance sheet, those with a longer maturity as ‘short-term
investments’ [↩]
7. In the Monte Carlo simulation we have used 200 runs, as that was sufficient to give a
good enough approximation of the distributions [↩]
8. Pseudorandom number generator (PRNG), also known as a deterministic random bit
generator, is an algorithm for generating a sequence of numbers that approximates the
properties of random numbers. The sequence is not truly random in that it is completely
determined by a set of initial values, called the seed number [↩]
10