Working Capital Management

Instructor:
Dr. Samia Kamel
Presented By: Pioneers Group
Mohamed Fahmy Hadeer Arafa
Ahmed Mohy e
Nihal Younes

Working Capital Management

1. Definition
2. Why the working capital is being
managed ?
3. The importance of working capital
4. Cash conversion cycle
5. Inventory Management
6. Accounts receivable management
7. Accounts payable management

Working
Capital

What is Working Capital?

Working Capital is defined as the total amount

of Current Assets.

?Why is Working Capital Managed

In order not to carry excessive Current Assets

(assets that generate low profit) &/or not being

able to pay outstanding short term liabilities (to
be insolvent).
Therefore, Net Working Capital is defined as
the difference between Current Assets and
Current Liabilities
Net Working Capital = Total Current Assets Total
Current Liabilities

Importance of Working Capital

Management
Defines projected Sales
Covers short term liabilities
Provides liquidity necessary for

operation
Minimize period between cash
outflow till receipt of cash inflow

Cash Conversion
Cycle

Cash Conversion Cycle

The cash conversion cycle (CCC)

measures the length of time (number of

days) required for a company to convert
cash invested in its operations to cash
received as a result of its operations.
Cash conversion cycle is a short term
concept that shows the need of extra
short term financing to finance
operations.

Cash Conversion Cycle

CCC = (A/R T.O. in days + Inventory T.O. in
days ) A/P T.O. in days

Cash Conversion Cycle

CCC shows the number of days external

source of finance is needed:

If the conversion period in days of
inventory and receivables to cash is shorter
than paying period of debts in days, there is
no need for extra financing tools.
If the conversion period in days of
inventory and receivables to cash is longer
than paying period of debts in days, there is
a need for short term financing tool.

Cash Conversion Cycle

Testing Cash Conversion Cycle
CCC can be tested using Liquidity Ratios:
Current Ratio
Indicates company's ability to payshorttermandlong-termobligations.
Quick Ratio
Indicates the company's ability to convert
assets to cash

Cash Conversion Cycle

Policies of Managing Cash Conversion
Cycle :
Turnover inventory as quick as possible

with no stock out

Collection of accounts Receivable as
quick as possible
Pay Accounts Payable as slow as
possible (without harming companys reputation or
bearing additional cost)

Inventory
Management

Inventory Management
The purpose of Inventory Management is
to turn over inventory as quick as possible
without losing sales from stock.
Inventory Management Techniques:
ABC System
Economic Order Quantity
Just in Time
Material Requirement Planning MRP

Inventory Management
Just In Time
Definition
Aninventory strategy companies
employ to increase efficiency and
decrease waste by receiving goods
only as they are needed in the
production process, thereby
reducing inventory costs.

Inventory Management
Just In Time
The just-in-time (JIT) system is used to

minimize inventory investment.

Materials should arrive at exactly the time
they are needed for production.
JIT system uses no (or very little) safety
stock.
Failure of materials to arrive on time results
in a shutdown of the production line until
the materials arrive

Inventory Management
Just In Time Advantages
This method is suitable for companies of

short / standard production products with

framed market and for trades of quick
expired products.
Minimal amounts of inventory obsolescence
The company is investing far less cash in its
inventory, since fewer inventories is needed.

Inventory Management
Just In Time Dis-advantages
A supplier delay in delivering material
could seriously impact the production
process.
Failure to immediately meet the
requirements of a massive and
unexpected order due to few or no
stocks of finished goods.

Inventory Management
Inventory Management Testing

Inventory is tested through Inventory

Turn Over
Inventory Turn Over = Sales / Inventory
Indication : how many times Inventory is
converted to sales
Inventory Turn Over in day = 365 / Inventory
turn over
Indication : number of days in which
Inventory is converted to sales

Accounts Receivables
Management

Accounts Receivables Management

The Objective of Accounts Receivables

Management is to collect receivables as quick

as possible without losing sales from high
level collection techniques.
Accounts receivables management includes
establishing a credit and collections policy for
your credit accounts, including aging accounts
receivables and whether to sell on credit at
all.
Small businesses does not grant credit.
Instead they make sales on a cash basis.

Accounts Receivables
Management
Policies of A/R Management :
Credit Selection
Credit Terms
Credit Monitoring

Accounts Receivables
Management

Credit Monitoring
It is the company's
management follow up on the
collection of its debts against
customers resulting from credit
sales.

Accounts Receivables Management

Credit Monitoring
Advantage of Credit Monitoring
Alerting management to problems of

receivables collection.
it helps in avoiding extra cost resulting from
slow collection

Accounts Receivables Management

Credit Monitoring

Monitoring Techniques
1- Average Collection
Period
Average collection period =
Accounts receivable /
Average sales per day
2- Aging of Accounts
Receivables
breaks down accounts
receivable into groups on
the basis of their time of
origin.

Popular Collection Techniques

12345-

Letters
Telephone Calls
Personal visits
Collection Agencies
Legal Action

Accounts Receivables
Management
Accounts Receivables Testing:

Accounts receivables are tested through ratio of

Days of Sales Outstanding or what is known
as receivables turn over in days.
DSO = Accounts Receivables
Annual Sales / 365
Indication : Number of days the company can
collect receivables from customers among
credit sales.

Accounts Payable
Management


Accounts Payables
Management
Accounts Payables
Management is to pay accounts
payables as slow as possible to
provide sufficient cash for
operation activities without
affecting suppliers' delivery
process.

Accounts Payables
Management
There are Six Techniques to free up cash

and strengthen Working Capital.

Vendor Selection
Supplier's master data set up process
Contractual review process
Procurement Process
Invoicing process
Accounting and reporting process.

Accounts Payables
Management
Invoicing process
It is a process to improve liquidity and manage
payment to suppliers as slow as possible
Some of the strategies used to manage invoicing
:process are
Set up a centralized processing office to ensure a
standardized and consistent approach
Refuse to pay inaccurate invoices (e.g. errors in
quantities, amounts, address, etc.). These should be
sent back to the supplier
Process invoices on a timely basis and include a
date stamp.

Accounts Payables
Management
Accounts Payables Testing
Accounts Payables is tested using A/P turn over
ratio
A/P turn over = Total Purchases
Average Accounts Payable
Indication : number of times company could pay to
suppliers

A/P turn over in days = 365 / A/P turn over

Indication : Number of days company can pay its
debts to supplier

Thank
you