WORKING

CAPITAL
MANAGEMENT
THE FORMULA FOR WORKING CAPITAL

To calculate the working capital, compare a company's current assets to its

current liabilities. Current assets listed on a company's balance sheet include
cash, accounts receivable, inventory and other assets that are expected to be
liquidated or turned into cash in less than one year. Current liabilities include
accounts payable, wages, taxes payable, and the current portion of long-term
debt. Current assets are available within 12 months. Current liabilities are due
within 12 months.
Things to Remember :

• A company has negative working capital If the ratio of current assets to

liabilities is less than one.
• High working capital isn't always a good thing. It might indicate that the
business has too much inventory or is not investing its excess cash.
THE CASH CONVERSION CYCLE
CASH CONVERSION CYCLE

• The cash conversion cycle (CCC) is a metric that expresses the length of time
(in days) that it takes for a company to convert its investments in inventory and
other resources into cash flows from sales.
• This metric takes into account the time needed to sell its inventory, the time
required to collect receivables, and the time the company is allowed to pay its
bills without incurring any penalties.
• CCC will differ by industry sector based on the nature of business operations.
CASH CONVERSION CYCLE
MODEL
1. INVENTORY CONVERSION PERIOD

• It is the average time required to convert finished goods and then to sell those
goods.
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Formula: Inventory Conversion Period =
𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝐷𝑎𝑦

Example: If average inventories are $2Million and sales are $10 million, then
the inventory conversion period is 73 days
2. RECEIVABLE COLLECTION PERIOD

• The average length of time required to convert the firm’s receivable into cash,
that is to collect cash following a sale.
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
Formula: Receivables Collection Period =
𝑆𝑎𝑙𝑒𝑠

Example: If receivables are $675,534 and sales are $10 million, the receivable
collection period will be 24 days
3. PAYABLES DEFERRAL PERIOD

• It is the average length of time between the purchase of materials and labor
and the payment of cash for them.
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Formula: Payables deferral period =
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑒𝑟 𝑑𝑎𝑦

Example: If accounts payable is $657,000 and its cost of good sold is $8

million per year, payables deferral period is 30 days
4. CASH CONVERSION CYCLE

• The average length of time a peso is tied up win current assets.\

• It nets out the three periods just defined and which therefore equal the length
of time between the firm’s actual cash expenditure to pay for productive
resources (material and labor) and its own cash receipts from the sale of
product (that is, the length of time between paying for labor and materials
and collecting on receivables,
FORMULA OF CASH CONVERSION CYCLE

• CCC = Inventory Conversion Period + Receivable Conversion Period – Payables

Deferral Period

CCC = 73 days + 24 days – 30 days

CCC = 67 days
CASH MANAGEMENT
CASH

• Demand deposit plus currency

• It is also known as nonearning asset.
• It is needed to pay labor and raw materials, to buy fixed assets, to pay
taxes, to service debt, to pay dividends and so on.
CASH MANAGEMENT

• Cash management is the corporate process of collecting and managing cash, as well
as using it for short-term investing. It is a key component of a company's financial
stability and solvency. Corporate treasurers or business managers are frequently
responsible for overall cash management and related responsibilities to remain
solvent.
• Cash managers’ goal is to minimize the amount of cash the firms must hold for use in
conducting its business operation yet at the same time, to have sufficient cash (1) to
take trade discounts, (2) to maintain its credit rating and (3) to meet unexpected cash
needs
REASON FOR HOLDING CASH

1. Transactions. Cash balances are necessary in business operations. Payment must

be made in cash and receipts are deposited in the cash account. Cash balances
are associated with routine payments and collections are known as transaction
balances.
2. Compensation to banks for providing loans and services. A bank make money
by lending out funds that have been deposited with it, so the larger its deposits, the
better the bank’s profit position. Banks may require borrowers to hold deposit at
the bank. This type of deposit is defined as compensating balance.
3. Precautionary Motive. To meet the future contingencies such as floods, unexpected slow down
in collection of receivables, sharp increase in raw materials and cancellation of some order of
goods as the customer is not satisfied.
4. Speculative Motive. To enable the firm to take advantage of bargain purchase that might
arise. For Example:
• An opportunity to purchase raw materials at a reduced price on payment of immediate cash.
• A change in speculate on interest rate movements in buying securities when interest rates are
expected to decline.
• Make purchase at favorable price
CASH MANAGEMENT TECHNIQUES

1. CASH FLOW SYNCHRONIZATION.

A situation wherein inflows coincide with outflows, thereby permitting a firm to
hold low transactions balances.
2. CLEARING CHECKS.
The process of converting a check that has been writtem and mailed into cash
in the payee’s account.
3. FLOAT.
The amount of money tied up in checks that have been written but yet to be
collected and encashed.
Type of Floats
a. Disbursement Float. The value of checks that have been written but are still
being processed and thus have not been deducted from our account balance by
the bank
b. Collection Float. The amount of checks that we have received but that have
not yet been credited to our account.
c. Net Float. The difference between our checkbook balance and the balance
shown on the balance of bank’s book.
4. LOCK BOX SYSTEM.
• It is a post office box number to which some or all the firm’s customers are
instructed to send their checks. The firm grants permission to its bank to take
these checks and immediately deposit it to their account through clearing
process.
5. AUTOMATIC DEBIT.
• Funds are deducted from one account and added to another (Example: Online
Banking)
MARKETABLE SECURITIES
MARKETABLE SECURITIES

• Marketable securities are liquid financial instruments that can be quickly

converted into cash at a reasonable price. The liquidity of marketable
securities comes from the fact that the maturities tend to be less than one year,
and that the rates at which they can be bought or sold have little effect on
prices.
FEATURES

• These are highly liquid, meaning one can easily buy and sell these securities.
• Are easily transferable on a stock exchange or otherwise.
• Offer a lower rate of return.
• These are highly marketable as there are active marketplaces where they can
be bought or sold.
TYPES OF MARKETABLE
SECURITIES
STOCKS AS SECURITIES

• Stock represents an equity investment because shareholders maintain partial

ownership in the company in which they have invested. The company can use
shareholder investment as equity capital to fund the company's operations
and expansion.
BONDS AS SECURITIES

• Bonds are the most common form of marketable debt security and are a
useful source of capital to businesses that are looking to grow. A bond is a
security issued by a company or government that allows it to borrow money
from investors. Much a like a bank loan, a bond guarantees a fixed rate of
return, called the coupon rate, in exchange for use of the invested funds.
INDIRECT INVESTMENTS

• Indirect investments include hedge funds and unit trusts. These instruments
represent ownership in investment companies. Most market participants have
little or no exposure to these types of instruments, but they are common
among accredited or institutional investors.
INVENTORY
INVENTORY

• Inventory is the term for the goods available for sale and raw materials used
to produce goods available for sale. Inventory represents one of the most
important assets of a business because the turnover of inventory represents
one of the primary sources of revenue generation and subsequent earnings
for the company's shareholders.
• It may be classified as (1) supplies, (2) raw materials, (3) work-in-process and
(4) finished goods which are an essential part on all business operations
ACCOUNT RECEIVABLES
ACCOUNTS RECEIVABLES

• Accounts receivable is the balance of money due to a firm for goods or

services delivered or used but not yet paid for by customers. Said another
way, account receivable are amounts of money owed by customers to another
entity for goods or services delivered or used on credit but not yet paid for
by clients.