Working Capital Management

Operating Cycle - length of time it takes a companys

investment in inventory to be collected in cash from
customers. JEWEL
Cash Conversion Cycle length of time funds are tied up
in working capital. ARABELLA
- measures the time between the
outlay of cash and the cash recovery.
Working Capital financial metric which represents
operating liquidity available to a business. ALLYSON
- a measure of both a company's
efficiency and its short-term financial health.

Goals of working capital management:

Adequate cash flow for operations
Most productive use of resources.

Mismanagement can lead to:

Inability to meet bills as they fall due.
Bankruptcy
Overstocking

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Components of Cash Conversion Cycle

Inventory Conversion Period average time required to
convert raw materials into finished goods and then sell to
them. VINESY
Average Collection Period (ACP) - average length of
time required to convert the firms receivables into cash,
that is, to collect cash following a sale. KENNEDY
Payables Deferral Period average length of time
between the purchase of materials & labor & the payment
of cash for them. KRISTINE

Calculating the CCC:

Annual Sales

P1,216,666

Cost of goods sold

1,013,889

Inventories

250,000

Accounts receivable

300,000

Accounts payable
Inventory Conversion Period =

150,000

Inventory
___________________

Cost of goods sold/day

=

P250,000

___________________

90 days

P1,013,889/365days

Average Collection Period=

Receivables

_______________
Sales/day
=

P300,000
_______________

P1,216,666/365
Payables Deferral Period =

Payables

_______________
Cost of goods sold/day
=

P150,000

________________
P1,013,889/365

= 54 days

= 90 days

Cash Conversion Cycle

Inventory

Average

Conversion

Period

90 days

Payables

Collection

Period

90 days

Deferral

CCC

Period

54 days

= 126 days

Alternative Current Asset

Investment Policies
Relaxed Current Asset Investment/ fat cat Policy
relatively large amount of cash, marketable securities, and
inventories are carried, & a liberal credit policy results in a high
level of receivables.
Restricted Current Asset Investment/ lean and mean
Policy Holdings of cash, marketable securities, inventories, &
receivables are constrained.
Moderate Current Asset Investment Policy lies between
the relaxed and restricted policies.

Strategies/Approaches of Financing Working Capital

Maturity Matching or Self-Liquidating Approach
- a financing policy that matches asset and liability maturities.
- defined as a moderate current asset financing policy.

Aggressive Approach
- a policy that use short-term financing to finance permanent
assets.
- really quite risky.

Conservative Approach
- a policy indicating that long-term capital is used to finance all the
permanent assets & also to meet some of the seasonal needs.
- a very safe, conservative financing policy.

CASH BUDGET
- An estimation of the cash inflows & outflows for a
business or individual for a specific period of time.
- This budget is used to ascertain whether
company operations and other activities will provide
a sufficient amount of cash to meet projected cash
requirements.

Four Components: JEAN

Cash Management

Inventory Management
Accounts Receivable Management
Accounts Payable Management

CASH MANAGEMENT
Is an important part of any business efforts to thrive financially.
Cash is needed for performing all the activities of a firm.
cash as reported on balance sheets, generally includes short-term
securities, which are also called cash equivalents.

Ready cash
Near cash

Reasons for holding cash Luigi, and cite an example each

Transactions motive
Speculative motive
Precautionary motive

MARKETABLE SECURITIES
represent highly liquid investments that are considered to
be current assets and, therefore, are included in the
working capital calculations.
Short-term, interest-earning, money market instruments
used by the firm to obtain a return on temporarily idle
fund.
Four factors that influence the choice of marketable
securities: risks, maturity, yield, and liquidity.
Examples are banker's acceptance, Treasury bills (T-bills),
commercial papers, certificates of deposit (CDs) and other
instruments.

DEMAND DEPOSITS
an account with a bank or other financial institution that
allows the depositor to withdraw his or her funds from
the account without warning or with less than seven
days' notice.
Techniques to optimize demand deposit
holdings:
Hold marketable securities rather than
demand deposits.
Forecast payments and receipts better.