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MN50180 Working Capital
MN50180 Working Capital
MANAGEMENT
AGENDA
2
Working Capital
Working Capital – All the items in the short
term part of the balance sheet
e.g. cash, short term debt, investments,
inventory, debtors (receivables), payables
(creditors) etc
Net Working Capital is the difference between
Current Assets and Current Liabilities
Cash Management, Liquidity Management
Interconnected terms.
3
CORPORATE DEFINITION OF
CASH MANAGEMENT
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CASH MANAGEMENT
ENVIRONMENT
BANKER’S PERSPECTIVE
COLLECT DISBURSE
FUNDS FUNDS
CUSTOMER
ACCOUNT
MANAGE
TRACK FUNDS
TRANSACTIONS EXCESS/
& BALANCES SHORTFALL
5
BANK DEFINITION OF CASH
MANAGEMENT
7
WORKING CAPITAL
Managing Liquidity
Cash is unproductive
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NEED FOR LIQUIDITY
Day to day transactions
Precautionary balances
Compensating balances
Obtaining discounts
Acid tests
Favourable opportunities
Overall avoiding bankruptcy!
10
THE CASH GENERATOR / ABSORBER
£40
Stock
£20
Purchases
£80
Sales
£20
PROFIT?
CASH BALANCE?
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Operating Cycle
Purchase Resources Pay Sell on Credit Receive Cash
Inventory Conversion Receivables Conversion
Operating Cycle
12
The Various Cycles
Inventory Conversion
Inventory x 365
Cost of Goods Sold
Payables Conversion
Payables/Creditors x 365
Cost of Goods Sold
Receivables Conversion
Receivables/Debtors x 365
Turnover
13
Balance Sheet
Short Term Items
Current assets
Inventories 1,910 1,903
Trade and other receivables 1,713 1,625
Current tax assets 13 -
Other financial assets 43 78
Cash and short term assets 733 917
4,412 4,523
Current liabilities
Short term borrowings 355 555
Trade and other payables 1,690 1,735
Current tax liabilities 121 44
Other financial liabilities 119 13
Short term provisions 82 130
1,367 2,477
Turnover 9,577
Cost of goods sold 8,943
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Operating Cycle
Purchase Resources Pay Sell on Credit Receive Cash
Inventory Conversion 78 days Receivables Conversion
65 days
Payables Period Cash Conversion Cycle
69 days 74 days
Operating Cycle
143
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Cash Conversion
We need to consider control in all areas of
working capital to maximise return, reduce
cost.
Some areas are not controlled by the Finance
Function – Stock/inventory
Some areas have shared control – payables
and receivables
Some areas are controlled by the Finance
Function – short term borrowing and
investment
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Float
Any delay in the process of converting
materials and labour to receipt of
payment involves cost, float cost.
Similarly, any delay in making payments
will also give rise to float but this time to
our advantage
What is float?
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FLOAT
Cost of Float
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WHY DOES FLOAT OCCUR?
Deliberately
Inefficiency
Logistical situations
Compensation mechanism
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STAGES OF FLOAT
Function Float Responsibility
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Controlling Float
We need to look at controlling /
influencing float in three areas
* Ourselves
* Our Customers
* Our Banks
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HOW TO
REDUCE/CONTROL FLOAT
Your Own Actions
• Change own systems
• Educate customers
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RECEIVABLES AND PAYABLES
MANAGEMENT
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RECEIVABLES IMPACT
Important because of costs arising from
Float
Bad debts
Management time
Legal fees
And
Impact on analysts and creditors
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RECEIVABLES MANAGEMENT 1
Clear instructions
Method of payment
Documentation
Account structures
Terms of Trade
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Controlling Float
Payment Methods
Payment methods are important
because of
- Cost
- Risk
- Value Dating
- Finality
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INTERNATIONAL TRADE
PAYMENTS
Terms of trade
Settlement
• Open account
• Clean collection
• Documentary collection
Against payment
Against acceptance
• Revocable documentary letter of credit
• Irrevocable documentary letter of credit
Unconfirmed
Confirmed
• Advance payment
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RECEIVABLES MANAGEMENT 2
Penalties
Post dated cheques
Legal process
Internal process
Stop supply
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FINALITY
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DOMESTIC PAYMENT
INSTRUMENTS
Paper-based
• Cash
• Cheques
• Postal giros
• Bills of exchange
• Promissory notes
• Banker’s drafts
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DOMESTIC PAYMENT
INSTRUMENTS
Electronic
• Funds transfer
Urgent wires
Standard EFT
• Automated clearing house payments
• Standing order
• Direct Debit
• Electronic bills of exchange
• Plastic (credit, charge, cheque guarantee, cash
dispenser, debit)
• Financial EDI
Look up ‘Voca’ on the internet, used to be BACS
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CROSS-BORDER PAYMENTS
Paper-based
• Foreign currency cheques
• Banker’s drafts
• Giros (Credit transfer)
• Documentary collections
• Cheque negotiations
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CROSS-BORDER PAYMENTS
Electronic
• Using correspondent banks
• Using a global or pan-regional bank
• Cross-border systems
- TARGET
- EBA EURO 1
- EBA Step 1
• Credit cards
• Direct debits
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Clearing House Automated Transfer
System
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Controlling Float
Bank Services
• Lockbox
• Intervention accounts
• Remote disbursement
• Controlled disbursement
• Direct collections
• Efficient collections structure
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PAYABLES
Critical questions:
• What is due?
• When is it due?
• Where should the payment be sent?
• How should the payment be sent?
• Are there funds to cover the
payment?
• Is the payment properly authorized?
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PAYABLES MANAGEMENT
The flip side of the coin
So
Hang on to it
Consider float versus control
Account structures
Discounts
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INVESTMENT GUIDELINES
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FACTORS IN CHOOSING
INVESTMENTS
42
HOW RATES ARE QUOTED
43
SHORT-TERM INVESTMENTS
44
SHORT-TERM BORROWING
45
FACTORS AFFECTING
BORROWING
46
SHORT-TERM FUNDING
INSTRUMENTS
47
FACTORS IN CHOOSING
FUNDING INSTRUMENTS
48
INVESTMENT DECISION PROCESS
Monitor cash flow forecasts
annually / quarterly / monthly / weekly / daily
Identify surpluses
Determine:
Amount / currency { Now and at
Duration / location { period end
Investment action
Confirmation
Liquidation
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THE FINANCING DECISION
PROCESS
Monitor cash flow forecasts
annually / quarterly / monthly / weekly / daily
Identify deficits
Determine:
Amount / currency
Duration / location
Financing action
Documentation
Liquidation
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U.S. SHORT-TERM INVESTMENTS
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INTERNATIONAL SHORT-TERM
INVESTMENTS
Banker’s Acceptances
Commercial paper
• Euro
• GBP
Treasury bills
Certificates of deposit
• GBP
• Eurodollar
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BILLS OF EXCHANGE
Foreign currency
Commercial
GBP
• Eligible
• Ineligible
• Trade bills
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FACTORS IN CHOOSING
FUNDING
54
OTHER SOURCES OF
FUNDING
Factoring
Invoice discounting
Trade bills
Acceptance credits
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