CHAPTER 9:

WORKING CAPITAL
MANAGEMENT AND
MARKET SECURITIES
 WORKING CAPITAL (WC)

 Working capital management refers to the strategic management of a company's short-term

assets and liabilities to ensure its operational efficiency and financial stability.
CURRENT ASSET – CURRENT LIABILITIES = WORKING CAPITAL

 WC purpose to measure the amount available for the business to meet its short-term
obligations.

 Goal of working capital management is to maintain an optimal balance between these current
assets and liabilities
 WORKING CAPITAL (WC)

 Working capital management, covers several basic relationships:

(a) Sales impact - Must determine the appropriate levels of receivables and
inventories to maintain.

(b) Liquidity - Must choose the levels of cash and marketable securities to maintain.

(c) Relation with stakeholders - Firms also concerns about its suppliers. A firm’s
reputation depends on its ability to efficiently manage its current assets and
current liabilities.
 IMPORTANCE OFWORKING CAPITAL
(WC)

a. Maintain firm’s liquidity

 When working capital is positive, it means firm’s current asset are higher or more than
their liabilities. Thus, it shows that firm’s liquidity are high.
b. Ability to settle short term obligations.
 When the firm liquidity is high, it means firm’s higher ability to pay their commitment
and expenses. Example interest expenses, utilities bills, employee’s salary and etc.
c. Reduce the number of obligation.
 By reducing the number of obligation, it will increase more liquidity and extra cash for
the firm’s.
 IMPORTANCE OFWORKING CAPITAL
(WC)

d. Smooth the business operation.

 Business that has higher liquidity able to run the operation smoothly as their doesn’t
have any challenges in term of cash level. Any payment can be made without any
obstacle.
e. WC is benchmark for efficiency, liquidity and overall health of a company.
 When working capital is high, it resulting high liquidity for the business. If the
business has high liquidity level, it indicate that the ‘business health’ are in good shape.
 CASH MANAGEMENT

 In finance cash can be define as coins or currencies plus any demand deposit
accounts that are able to meet immediate payments.

 In simple word, cash is the ready money in the bank or in the business.

 Firm must balance all his funds with buying a lot of fixed asset (profit) or holding a lot
of cash (liquidity).
 REASON HOLDING A CASH
 The main reason cash management is crucial in business because to avoid the firm
become a failure.
 High spent in liabilities is like a ‘time-bomb’ for a firm in the future.

 There are 3 reason why firm must hold a cash :

a) Transaction purposes – to pay all the every day payment in the business.
b) Precautionary - To pay unexpected needs and unforeseen expenses.
c) Speculative – Take advantage in profit-making opportunities.
 CASH CONVERSION CYCLE

 Cash conversion cycle (net operating cycle) length of time from paying the working
capital until collecting cash from the sales of working capital.
 Represents the time duration between the expenditure of cash for the production of
goods and the receipt of cash from the sale of those goods.
 CASH CONVERSION CYCLE

 Inventory conversion period (ICP) is the average time between purchasing

stocks and selling the goods.
Inventory
Inventory conversion period = X 365 days
Cost of goods sold
Example 1
a.) Find the inventory conversion period if the total inventory is RM 5,000 and the COGS is RM
80,000.

b.) Apex Inc. annual revenue is RM 250,000 and COGS is 75% from annual sales. Find the inventory
conversion period if Apex Inc. beginning and closing inventory is RM 55,000 and 58,000
respectively.
 CASH CONVERSION CYCLE

Inventory
Inventory conversion period
= X 365 days
Cost of goods sold
Example 1
a.) Find the inventory conversion period if the total inventory is RM 5,000 and the COGS is RM 80,000.
ICP = [5000/80000] x 365 days = 22.81 days or 23 days.

b.) Apex Inc. annual revenue is RM 250,000 and COGS is 75% from annual sales. Find the inventory
conversion period if Apex Inc. beginning and closing inventory is RM 55,000 and 58,000 respectively.
ICP = [((55000+58000)/2) / (0.75x250000)] x 365 days
= [56,500 / 187,500] x 365 days = 109.99 days @ 110 days.
 CASH CONVERSION CYCLE

 Debtors’ collection period (DCP) is the number of days for debtors to pay
from the time of sale:

Receivables
Debtors' collection period = X 365 days
Credit Sales
Example 2
a.) Compute debtors collection period if annual sales is RM 420,000 and the debtors is RM 46,530.
b.) Apex Inc. annual revenue is RM 250,000 and credit sales is 30% from annual sales. Find the debtor’s
collection period if Apex Inc. beginning and closing debtors amounted RM 20,000 and 18,000
respectively.
 CASH CONVERSION CYCLE

Receivables
Debtors' collection period = X 365 days
Credit Sales
Example 2
a.) Compute debtors collection period if annual sales is RM 420,000 and the debtors is RM 46,530.
DCP = [46530 / 420000] x 365 days = 40.43 days @ 41 days.

b.) Apex Inc. annual revenue is RM 250,000 and credit sales is 30% from annual sales. Find the debtor’s collection
period if Apex Inc. beginning and closing debtors amounted RM 20,000 and 18,000 respectively.
DCP = [((20000+18000) / 2) / (0.3 x 250000)] x 365 days
DCP = [19000/ 75000] x 365 days
DCP = 0.253 x 365 days = 92.35 days @ 93 days
 CASH CONVERSION CYCLE

 Payable credit period (PCP) is the number of days from the time of purchase
of materials and labor for goods and the time of payment.
Accounts payable
Payables credit period = X 365 days
Cost of goods sold
Example 3
a.) Compute payable collection period if COGS is RM 175,000 and the creditors amount is RM
22,340.
b.) Apex Inc. annual revenue is RM 250,000 and COGS is 75% from annual sales. Find the
payable credit period if Apex Inc. opening and closing payable account amounted RM 23,000 and
35,000 respectively.
 CASH CONVERSION CYCLE

Accounts payable
Payables credit period = X 365 days
Cost of goods sold
Example 3
a.) Compute payable collection period if COGS is RM 175,000 and the creditors amount is RM 22,340.
PCP = 22340/175,000 = 46.59 days @ 47 days

b.) Apex Inc. annual revenue is RM 250,000 and COGS is 75% from annual sales. Find the payable
credit period if Apex Inc. opening and closing payable account amounted RM 23,000 and 35,000
respectively.
PCP = [((23000+35000) / 2) / (0.75 x 250,000)] x 365 days
PCP = [ 29,000 / 187,500] x 365 days = 56.45 days @ 57 days.
 CASH CONVERSION CYCLE

 Cash conversion cycle = ICP + DCP – PCP

Example 4
Based the answer from example 1b to 3b, find the cash conversion cycle for Apex Inc.
CCC = ICP + DCP - PCP
CCC = 110 days + 93 days - 57 days = 146 days.
Based on answer, the period for cash conversion cycle Apex Inc. is 146 days. It takes Apex
Inc. approximately 146 days to turn its initial cash investment in inventory back into cash.
 CASH CONVERSION CYCLE

Cash Conversion Cycle

 MARKETABLE SECURITIES

 Marketable securities are short term investments. The period for marketable
securities is less than 1 years.

 This form of investment can preserve firm cash and also as substitute for
cash.

 Cash build up for the firm and can be sold as securities when firm need a
cash.
 MARKETABLE SECURITIES

 Before a firm want to invest in marketable securities, there are few selection criteria
need to evaluate :
a. Financial risk – scenario where a party unable to make the required payments.
b. Interest rate risk – High interest risk will reduce the value of the security.
c. Inflation risk – purchasing power risk where the cash flows from the investment
is not worth as it value.
d. Liquidity – The criteria which the asset couldn’t be sold or bought quickly as it
can.
e. Yields/rate of return – The profit earn in the investment.
 MARKETABLE SECURITIES

 Malaysian Government raises short-term financing by issuing marketable debt

instruments.

 Forms of Government securities that are available in Malaysia are:

(a) Malaysian Government Securities (MGS)
(b) Malaysian Treasury Bills (MTB)
(c) Government Investment Issues (GII)
(d) Malaysian Islamic Treasury Bills (MITB)
 MARKETABLE SECURITIES

Repurchase Agreements

Banks sell market instruments to investors and buy back those instruments
later.

Firms can invest in these securities for short periods, ranging from one day to
one year.
 MARKETABLE SECURITIES

Negotiable Certificate of Deposits

Receipts certifying that monies have been deposited in a bank issuing the certificate.

Represent high quality financial asset; fetches higher yield than the comparable time deposit and
treasury bills.

Banker’s Acceptance
Short-term credit investments created by other firms and guaranteed by a bank.

Commercial Paper
Short-term unsecured debts issued by firms.