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    Working Capital Management

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    raj_n22605287
    The document discusses working capital management, which involves managing a firm's short-term assets and liabilities. Key aspects of working capital management include inventory management, accounts receivable management, cash management, and short-term financing options. The goal is to ensure the firm has sufficient cash flow to meet operational expenses and maturing short-term debt. Management aims to optimize measures like return on capital and the cash conversion cycle, which represents the time between cash outlay for raw materials and cash receipt from customers.

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    Working Capital Management

    Uploaded by

    raj_n22605287
    75 views4 pages
    The document discusses working capital management, which involves managing a firm's short-term assets and liabilities. Key aspects of working capital management include inventory management, accounts receivable management, cash management, and short-term financing options. The goal is to ensure the firm has sufficient cash flow to meet operational expenses and maturing short-term debt. Management aims to optimize measures like return on capital and the cash conversion cycle, which represents the time between cash outlay for raw materials and cash receipt from customers.

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    The document discusses working capital management, which involves managing a firm's short-term assets and liabilities. Key aspects of working capital management include inventory management, accounts receivable management, cash management, and short-term financing options. The goal is to ensure the firm has sufficient cash flow to meet operational expenses and maturing short-term debt. Management aims to optimize measures like return on capital and the cash conversion cycle, which represents the time between cash outlay for raw materials and cash receipt from customers.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    75 views4 pages

    Working Capital Management

    Uploaded by

    raj_n22605287
    The document discusses working capital management, which involves managing a firm's short-term assets and liabilities. Key aspects of working capital management include inventory management, accounts receivable management, cash management, and short-term financing options. The goal is to ensure the firm has sufficient cash flow to meet operational expenses and maturing short-term debt. Management aims to optimize measures like return on capital and the cash conversion cycle, which represents the time between cash outlay for raw materials and cash receipt from customers.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Calculation

    Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:

    accounts receivable (current asset) inventory (current assets), and accounts payable (current liability)

    The current portion of debt (payable within 12 months) is critical, because it represents a shortterm claim to current assets and is often secured by long term assets. Common types of shortterm debt are bank loans and lines of credit. An increase in working capital indicates that the business has either increased current assets (that is has increased its receivables, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors. Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to: Current Assets Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances. Cash balance items often attract a one-for-one purchase price adjustment.

    [edit] Working capital management


    Corporate finance

    Working capital

    Cash conversion cycle Return on capital Economic Value Added

    Just-in-time

    Economic order quantity Discounts and allowances

    Factoring

    Capital budgeting

    Capital investment decisions The investment decision The financing decision

    Sections

    Managerial finance Financial accounting Management accounting Mergers and acquisitions Balance sheet analysis

    Business plan Corporate action

    Societal components

    Financial market Corporate finance Personal finance Public finance Banks and banking Financial regulation

    Financial market participants

    Clawback

    v t e

    Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

    [edit] Decision criteria


    By definition, working capital management entails short term decisions - generally, relating to the next one year period - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.

    One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See Economic value added (EVA). Credit policy of the firm: Another factor affecting working capital management is credit policy of the firm. It includes buying of raw material and selling of finished goods either in cash or on credit. This affects the cash conversion cycle.

    [edit] Management of working capital


    Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. The policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.

    Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be

    kept on as low level as possible to avoid over production - see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances. Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

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