Question 5

a) What is Working Capital management?

b) Explain the components of Working Capital management
c) What is Cash Conversion Cycle? How CCC can be calculated and what is the indication.
Answer 5
a) Working capital management is a business strategy designed to ensure that a company
operates efficiently by monitoring and using its current assets and current liabilities to their
most effective use. The efficiency of working capital management can be quantified using
Ratio analysis.

b)

 Working capital management requires monitoring a company's assets and liabilities to

maintain sufficient cash flow to meet its short-term operating costs and short-term debt
obligations. In this regard emphasis is for items in Current Assets and Current Liabilities.
 Working capital management involves tracking various ratios, including the Current ratio
(Working capital ratio), collection ratio (Debtors Turnover), payment ratio (Creditors
Turnover) and the inventory ratio.
 Working capital management can improve a company's cash flow management and earnings
quality by using its resources efficiently.

c) Cash Conversion Cycle (CCC) is the minimum amount of time required to convert net current
assets and liabilities into cash. In other words, it is the sum of Debtors Turnover and
Inventory Turnover less Creditors Turnover.
CCC can be calculated by the following formula

Average Trade Receivables / Credit Sales *365 + Average Inventory / Cost of sales *365 -
Average Trade Creditors / Purchases *365.

The above give X days meaning you need funds for so many days tied up in Working capital
and the funds = Current Asset $ - Less Current Liabilities $