10/5/2019

Working Capital and

Working Capital Policy
 Working capital
Working Capital  Firm’s investment in short-term assets, i.e.,
cash, marketable securities, account
Policy receivables and inventory.
 Net working capital
current asset – current liabilities
 Working capital management
 Management of short-term assets and
liabilities.

Working Capital and Need for Working Capital Management

Working Capital Policy
 Cash and cash equivalents needed to meet
day-to-day payment requirements.
 Working capital policy  So it is imperative to ensure the inflow of
 Firm’s basic policy (decisional guidelines) adequate funds.
regarding  Excess cash means idle money losing the
What levels of each category of current assets opportunity to invest them.
should maintained.
 Accounts receivable has to be managed to
 How current assets will be financed.
ensure they are collected and promptly.
 Inventory has to be managed to protect against
high cost, stock out, and wastage.

Relationships Among
Working Capital Accounts Cash Conversion Cycle (CCC)

 Length of time for which the company has

to mobilise cash for its operations.

 The cash Conversion Period

(CCC) = ICP + DSO - DPO

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Cash Conversion Cycle (CCC) Cash Conversion Cycle (CCC)

 Inventory Conversion Period (ICP)

 Time for converting raw materials into sales
 Choitee Company
 Sales Tk.1.50 million
 Days Sales Outstanding (DSO)  Cost of goods sold 1.22 million
 Time required collecting receivables
 Inventory 270 thousand
 Accounts receivable 180 thousand
 Payable Deferral Period (DPO)  Accounts payable 30 thousand
 Time taken for repaying payables

Sales can be used if the Cost-of-Goods-Sold information is not available

Cash Conversion Cycle (CCC)

Implications of Cash Conversion Cycle
 Overall, the speedier the process, the better for
the firm.
 Collect as quickly as feasible.
 Pay as slowly as feasible.
 Estimation of financing required
 Financing requirement = CCC X daily cost of
materials and labour.
 Ifaverage daily operating costs for manufacturing is
Tk.2,000
CCC = 79.67 days + 43.20 days – 8.85 days
 Cash needed for the cycle
= 114 days (rounded.)  114 days x Tk.2,000 = Tk.228,000.

Working Capital Investment Policies Working Capital Investment Policies

 Relaxed current asset investment policy
 Relatively large amount of cash and inventory
 Total current assets needed depends on the maintained
 Preferred under conditions of uncertainty
firm’s given level of sales.
 Restricted policy
 The firm has three alternative policies
 Cash and inventory at the minimum level.
 Relaxed (Fat cat) policy  Preferred under conditions of certainty,
 Restricted (lean and mean) policy
 Moderate policy
 Moderate policy
 Between the two extremes.
 Preferred under normal economic conditions

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