A general presentation about working capital. It gives an overview of the structure, management role, cash management. Solutions to manage working capital aspects.

1. Working Capital
General presentation

2. ▪ Introduction
▪ Objectives & Importance
▪ Working Capital Management Steps
▪ Cash Management
▪ Collection Management
▪ Inventory Management
▪ Creditors Management
▪ Efficiency
Content

3. Introduction
Working Capital:
Working capital means the amount required to do day to day business smoothly. It is the excess of current
assets over current liabilities.
Working Capital Management:
Working capital management refers to a company's managerial accounting strategy designed to monitor and utilize the
two components of working capital, current assets and current liabilities, to ensure the most financially efficient
operation of the company.
Current Assets & Current Liabilities:
• Current Assets: Are assets which can be converted into cash within one year. Current assets include: Cash,
Inventories, prepaid expenses and accounts receivable.
• Current Liabilities: Are liabilities that can be paid within one year. Current liabilities include: short-term debts,
Accounts payable and current portion of long term debt.

4. Objectives and impact of working capital management
Two key objectives of working capital management are:
• Ensure liquidity: The availability of cash and inventory for day to day operation.
• Profitability: A positive high return from the investments done in WC.
• Business Continuity: No interruptions, stock is available when needed.
• Minimize working capital facilities: Minimize the financial loans needed for WC.
There is a trade off between liquidity and profitability. In order to be more liquid, more investment must be pored into
WC. The more investment the more trapped cash is lowering the return on assets.
Importance of working capital management
• Managing working capital efficiently means better return on fixed assets.
• Cash, raw material inventories are important to meet day to day business needs.
• Adequate working capital determine the short term solvency of the firm.
• Adequate working capital enables firms to face business crisis emergencies such as depression.
Objectives & Impact

5. WC Management
Steps
Current Assets
Management
Current Liability
Management
Cash Management
Lenders
Management
Inventory
Management
Credit
Management
Other Short-term
Liability management
Working Capital Management Steps

6. Cash Planning & Management:
The pattern of cash inflows and outflows should be properly predicted in advance. Prioritizing, delaying or accelerating
certain payments are some of the methods that can be used in managing cash.
A business must always prepare at least a quarterly cash flow in order to manage any shortages or obligations.
Payments might be differed in case of shortages specially if it is an intercompany obligation.
Lenders are always on top of the priority list when it comes to payments since any delay in instalment payments will
result in either a penalty and/or an interest expense.
Cash flows prepared for the purpose of cash management should not be complicated. It is a part of management
reporting hence, there is no need to follow any accounting standards.
A simple cash flow can be composed of two sections. Receipts (Cash inflow) and payments (Cash outflows).
It is recommended that a company sets aside monthly cash for debt repayments specially if the company is in a bad
cash position.
Cash Management

7. Collection on Time: By enforcing payment terms.
Account Receivable Aging Report is recommended to keep track of due and over due invoices. It is also recommended
that a member outside the accounts receivable team keeps track of such report following the concept of segregation of
duties.
Collection Period: The shorter the collection period the better current asset is.
A positive gap between the payment terms and receivable terms is recommended when receivables terms are shorter
than payable terms it basically means that the company is operating with the supplier/vendors money as cash from sales
will be received prior to paying supplier/lender.
Enforcing Clear Credit Policy: clearly specify and enforce payment terms
Enforcing penalties and interest charges on customer’s late payments is an effective way to control cash and
demonstrate strength.
Provide Discount/Rebate: Discounts can be provided wither on early payments or on quantity purchase.
Collection Management

8. Maintenance of Inventory Records: By continuous reconciliation between ERP systems and physical inventory
records.
A periodical physical inventory Must be conducted in order to:
• Rectify any discrepancy with the ERP system
• Prevent any theft
• Report accurate financial positions.
Inventory Level: It is crucial to have an optimal inventory levels of raw materials and finished goods.
Dangers of High levels of inventory:
• Unnecessary tie-up of the firm’s cash and loss of profit – opportunity loss.
• Excessive carrying cost.
• Default of converting into cash.
• Physical deterioration.
• Price decline.
Inventory Management

9. Accounts Payable Management: increase the payment terms to suppliers beyond the receivables terms in order
to have a positive net variance of cash in VS cash out.
Payables are preferred to have longer terms than receivables in order to have a positive net. If payables terms is longer
it means that the company’s cash is trapped with suppliers/vendors.
Lenders principle & Interest: Extending payment terms, lower interest rates, interest hedging are all beneficial to
working capital.
Financing is an essential part of any business and managing those finances are extremely important. The process starts
even prior to borrowing, it starts from setting the ratio of debt to equity.
A balance should be in place between the loan settlement period and interest rates. The longer the period the higher the
interest rate and vise versa.
Creditors Management

10. Working Capital efficiency is measured by multiple rations among the most important are:
Current Ratio:
Measures the ability of a firm to pay for its current liabilities with its current assets.
Formula: Current Assets ÷ Current Liabilities
Collection ratio:
Measures the average number of days it takes the company to convert receivables into cash.
Formula: 365 ÷ Receivable Turnover ( Credit Sales ÷ Average AR )
Inventory turnover ratio:
Measures how effectively inventory is managed by comparing cost of goods sold with average inventory
for a period.
Formula: Cost of Goods Sold ÷ Average Inventory
Creditors Management

11. THANK YOU