Managing working capital OBJECTIVES You should be able to: Discuss the purpose of working capital and the nature of the working capital cycle Identify the main elements of working capital Explain the factors that have to be taken into account when managing each element of working capital Explain the importance of establishing policies for the control of working capital

The nature of working capital Major elements Major element Stocks Trade debtors Cash (in hand and at bank) Trade creditors less equals Current liabilities Working capital Current assets

The working capital cycle Cash sales Trade creditors Trade debtors Finished goods Cash/ bank overdraft Work in progress Raw materials

The management of stocks Procedures and techniques Budgeting future demand Financial ratios Recording and reordering systems Levels of control Stock management models Materials requirements planning (MRP) systems Just-in-time (JIT) stock management

ABC method of analysing and controlling stock Cumulative value of stock items (%) Volume of stock items held (%) A B C

Patterns of stock movements over time Stock level Time

Stockholding and stock order costs Annual costs (£) Stock level (units) E Total costs Holding costs Ordering costs

Which customers should receive credit? The five Cs of credit Capital Capacity Collateral Conditions Character

Controlling the cash balance Inner limit Outer limit Target cash balance Cash balance (£) Time (days) 2 8 6 4 9 5 3 1 7 11 12 10

The operating cash cycle Purchase of goods on credit Payment for goods Sale of goods on credit Cash received from debtors Stockholding period Operating cash cycle

Calculating the operating cash cycle Average stockholding period Average settlement period for debtors Average payment period for creditors Operating cash cycle plus minus equals