Short-term Financial

Management Decisions:
Working Capital Management

AE 321: Strategic Business Analysis

Overall Working Capital
Management
Cash Conversion Cycle
•The time it takes to convert purchases to cash LESS time
to settle the payables
•Time it takes to convert purchases to cash (Operating Cycle)
• Purchases/Inventory ⇨ Sales/Receivables ⇨ Cash
Average Age of Average Age of
Inventory Receivables
•Time to settle the payables
• Purchases/Accounts Payable ⇨ Cash
Average Age of
Payables
 Cash Conversion Cycle
Illustration:
The following are information from ABC
Corporation’s financial statements. Cost of sales P 2,400,000
Average inventory P 100,000 Divided by: Average inventories 100,000
Average receivables 300,000 Inventory Turnover 24
Average payables 200,000
Sales for the year 3,000,000 Days in a year 360
Cost of sales for the year 2,400,000 Divided by: Inventory Turnover 24
Required: Using 360 days in a year, Average age of receivables in days 15
compute the following In days:
1. Average age of inventories = 15
2. Average age of receivables
3. Operating Cycle
 Cash Conversion Cycle
Illustration:
The following are information from ABC
Corporation’s financial statements. Sales P 3,000,000
Average inventory P 100,000 Divided by: Average receivables 300,000
Average receivables 300,000 Receivable Turnover 10
Average payables 200,000
Sales for the year 3,000,000 Days in a year 360
Cost of sales for the year 2,400,000 Divided by: Receivable Turnover 10
Required: Using 360 days in a year, Average age of receivables in days 36
compute the following In days:
1. Average age of inventories = 15
2. Average age of receivables = 36
3. Operating Cycle
 Cash Conversion Cycle
Illustration:
The following are information from ABC
Corporation’s financial statements. Average age of inventories in days 15
Average inventory P 100,000 Average age of receivables in days 36
Average receivables 300,000 Operating Cycle in days 51
Average payables 200,000
Sales for the year 3,000,000
Cost of sales for the year 2,400,000
Required: Using 360 days in a year,
compute the following In days:
1. Average age of inventories = 15
2. Average age of receivables = 36
3. Operating Cycle = 51
 Cash Conversion Cycle
Illustration:
The following are information from ABC
Corporation’s financial statements. Cost of sales P 2,400,000
Average inventory P 100,000 Divided by: Average payables 200,000
Average receivables 300,000 Payable Turnover 12
Average payables 200,000
Sales for the year 3,000,000 Days in a year 360
Cost of sales for the year 2,400,000 Divided by: Payable Turnover 12
Required: Using 360 days in a year, Average age of payables in days 30
compute the following In days:
4. Average age of payables = 30
5. Cash conversion cycle
 Cash Conversion Cycle
Illustration:
The following are information from ABC
Corporation’s financial statements. Operating cycle in days (Gross) 51.
Average inventory P 100,000 Average age of payables in days (30)
Average receivables 300,000 Cash conversion cycle in days 21
Average payables 200,000
Sales for the year 3,000,000
Cost of sales for the year 2,400,000
Required: Using 360 days in a year,
compute the following In days:
4. Average age of payables = 30
5. Cash conversion cycle = 21
 Cash Conversion Cycle
Illustration:
The following are information from ABC
Corporation’s financial statements. Operating cycle in days (Gross) 51.
Average inventory P 100,000 Average age of payables in days (30)
Average receivables 300,000 Cash conversion cycle in days 21
Average payables 200,000
Sales for the year 3,000,000 Graphical Illustration:
Cost of sales for the year 2,400,000
Required: Using 360 days in a year,
compute the following In days:
4. Average age of payables = 30
5. Cash conversion cycle = 21
 Cash Conversion Cycle
Illustration:
The following are information from ABC
Corporation’s financial statements. Operating cycle in days (Gross) 51.
Average inventory P 100,000 Average age of payables in days (30)
Average receivables 300,000 Cash conversion cycle in days 21
Average payables 200,000
Sales for the year 3,000,000 How to interpret:
Cost of sales for the year 2,400,000 It takes an average of 21 more days to convert purchases into
Required: Using 360 days in a year, cash receipts than into cash disbursements. There may be cash
compute the following In days: flow problems. It can be further supported in other financial
4. Average age of payables ratios such as return on sales.
= 30
What is the ideal cash conversion cycle?
5. Cash conversion cycle = 21
Close to ZERO ⇨ Operating cash inflows MATCH the timing of
the operating cash outflows.
Topic Takeaways
1. Improve planning and forecasting of balances.
2. Keep the current asset balances as low as possible.
• Cash – transfer excess to income-generating investments while
considering transaction costs.
• Inventory – purchase at amounts that will reduce holding costs
while considering ordering costs.
• Receivables – make collections as quickly as possible by reducing
the float.
Topic Takeaways
3. Eliminate or avoid current liabilities with the highest
effective costs.
• Usually trade payables with cash discounts are more expensive.
• The last days of the cash discount or of the credit term are the ideal
payment dates.
• Take advantage of paying with checks and play with the
disbursement float.
• The cost of short-term loans increase as more charges are taken
from the face amount of the loan.
4. Match timing of collections and disbursements.
Overall Working Capital
Management

- End of Topic-