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Working Capital Management(1)

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18 views22 pages

Working Capital Management(1)

Uploaded by

aarushi.ms24gf012
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Why is working capital important??

Working capital fianlly adds to the business revenue and hence the pro

Terms in Working Capital


The Operating Cycle
It is the time period when we acquire the inventory to the time w

This cycle has two distinct components. The first part is the tim
1

The second part is the time it takes to collect on the sale. This

Operating Cycle= Inventory Period + Accounts Receiv

2 Accounts Payable Period


It is the time period from the receipt of inventory to the time it is pa

3 Cash Cycle
It is the time period between cash disbursement and cash collection

Cash cycle = Operating cycle − Accounts payable period

Example:
0 day
30 days
60 days
105 days

The Operating Cycle =105 days


Cash conversion cycle= 105-30 days=75 days

Calculating the Operating and Cash Cycles from Financial Statements


Inventory conversion period

Inventory turnover=

Receivables Turnover ratio

Receivable period/Average
Colelction Period
It is the time period we took to receive our payments

Operating Cycle

Payable Turnover

Payable Period
It is the time period we took to pay our bills

Cash Cycle

Question You have collected the following information for the Slowpay
Credit sales for the year just ended were $50,000, and cost of goods s
does it take Slowpay to collect on its receivables? How long does mer
it is sold? How long does Slowpay take to pay its bills?

Question Consider the following financial statement information for the Glory Road Company:

Calculate the Operating and Cash Cycles

Approaches to financing assets

1 matching principle

2 Aggresive financing

3 Conservative financing
revenue and hence the profit is impacted by working capital

e inventory to the time we collect the cash.

. The first part is the time it takes to acquire and sell the inventory. That is calle

ollect on the sale. This is called the accounts receivable period, or the rece

riod + Accounts Receiveable Period

ventory to the time it is paid for.

ement and cash collection

counts payable period


Inventory come in
You pay for the inventory
finished good is ready and sold
You receive money for goods sold

ays=75 days

cles from Financial Statements


Net sales 11500
COGS 8200

Inventory/Cost of good sold per day. OR 365/Inventory turnover

COGS/Average Inventory 3.28

Credit sales/Average accounts Receivable

365/ Receivable Turnover 57.1304347826087


k to receive our payments

???

COGS/Average Payable 9.37142857142857

365/Payable turnover 38.9481707317073


k to pay our bills

????

formation for the Slowpay Company:


sales 50000
cogs 30000
e $50,000, and cost of goods sold was $30,000. How long
eivables? How long does merchandise stay around before
to pay its bills?

or the Glory Road Company:

Current assets should be financed thru short term debt and FA by LTD
CA=Permanent CA+Fluctuating CA
PCA-LTD and FCA-STD
In aggressive many companies finance FA+half of regular CA thru LTD and rem

FA+CA+Some part of Fluctuating is financed thru LTD and just a part of CA are
entory. That is called the inventory period

period, or the receivables period.


2500
1800
875
111.28049
dio 111.28049
Inventory turnover 3.28
dpo 6.3888889
6.3888889

dio 111
dpo 39
dso 57
oc = DIO + DSO 168
ccc = DIO + DSO - DPO 129

Inventory conversion 5

DIO 73
DPO 45.625
DSO 14.6
times formula
inventory conversion 5 =J75
receivables 25 =G77/AVERAGE(1600,2400)
payables conversion ratio 8 =G78/AVERAGE(2700,4800)

ccc 41.975

d FA by LTD

CA thru LTD and remaining thru STD

just a part of CA are financed


=J65+J67
=J68-J66
days formula
73 =365/J83
14.6 =365/J84
45.625 =365/J85
Chastain Corporation is trying to determine the effect of its inven
cash conversion cycle. Chastain’s 2016 sales (all on credit) were $
earned a net profit of 2%, or $2,420. It turned over its inventory 7
Question 1. had fixed assets totaling $42,000. Chastain’s payables deferral pe

a Calculate Chastain’s cash conversion cycle.

b Assuming Chastain holds negligible amounts of cash and marketa

Suppose Chastain’s managers believe that the inventory turnover


c conversion cycle, total assets turnover, and ROA have been if the
e the effect of its inventory turnover ratio and days sales outstanding (DSO) on its
s (all on credit) were $121,000; its cost of goods sold is 80% of sales; and it
ned over its inventory 7 times during the year,and its DSO was 37 days. The firm
’s payables deferral period is 35 days.

ts of cash and marketable securities, calculate its total assets turnover and ROA.

the inventory turnover can be raised to 9.9 times. What would Chastain’s cash
d ROA have been if the inventory turnover had been 9.9 for 2016?

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