1. Cash is KING!!! How do companies boost cash?
Some CEOs frequently see borrowing and raising equity as the only way to boost cash flow.
When faced with a cash crunch, these management teams pursue rampant cost cutting and restructuring that may later aggravate problems.

2. recognized early that a good way to bolster shareholder value was to notch up working capital management.
The company's world-class supply-chain management system ensures that Debtors are collected quickly.
Inventory is sold faster
Thus, increases cash flow,
eliminating liquidity risk,
leaving Dell with more cash on the balance sheet to distribute to shareholders or fund growth plans.

3. Value of Company

4. Working Capital Management1 1 1 1 1 1 1 1 1

5. LEARNING OBJECTIVES
After working through this chapter, you should be able to:
Explain the terms working capital, net working capital, working capital policy and working capital management.
Calculate the working capital cycle in days.
Describe the impact of inflation on working capital.
Outline the various working capital policies and their respective impact on risk and return.
Outline the various working capital financing policies and their respective impact on risk and return.
Calculate working capital funding requirements using the percentage of sales method.
Identify the factors that will influence expected sales.

6. Working Capital Definitions
Net working capital
Working capital policy
Working capital management

7. What is Working Capital?
Working capital comprises of investment in the following current assets;
Inventories
Accounts receivable
Operating cash

8. What is Net Working Capital?
Net working capital is operating current assets less current liabilities.
Current liabilities comprise mainly of trade creditors (accounts payable) and other accruals.
Trade creditors are a source of interest free financing
Net working capital will often be financed with interest bearing short-term debt.

9. Working Capital Management
Working capital policy = decisions on the optimal level of investment in and optimal level of finance of current assets
Working capital management = administration, within policy guidelines of :
Current assets and
Current liabilities.

10. Working Capital Policy
What is the optimal level of working capital required for a company to operate efficiently?
Which problems arise if a company invests in too little inventory, does not offer credit to its customers or does not hold onto minimum levels of operating cash?
Which problems arise if the company holds onto very high levels of inventory, is too lax about its credit terms to its customers or holds onto high levels of cash?

11. Working Capital Policy Trade-offs
Debtors/Receivables: Increase in Sales vs. Bad Debts and amount outstanding.
Inventory: Increase in Sales vs. Investment & Holding costs.
Cash: Liquidity vs. opportunity cost.
Short-term credit: Risk vs. lower borrowing costs: Cost of trade creditors. Cost of short term finance.

12. NB Inventory days = (Inventory balance / Purchases) x 365
Inventory turnover = Purchases/ Inventory balance
Debtors Days/Collection period = (Accounts Receivable / Sales) x 365
Creditors Days = (Accounts Payable / Purchases) x 365
Working Capital Cycle = Inventory days + Debtors Days – Creditors days = Operating Cycle – Creditors days = Cash conversion cycle

13. Working Capital Cycle
What is the Working Capital Cycle?

14. Optimising Working Capital Cycle
Objective: Shorten the working capital cycle without impacting on operations. How?
Reduce the time raw materials spends in inventory
Reduce time to convert raw materials into production of finished goods
Reduce time to sell finished goods
Reduce time to collect cash from debtors
Lengthen the time taken to pay creditors
Any reduction in investment will increase the return on investment
Reduction in the cycle results in increasing risk of losing sales
Principle: while marginal cost of shortening cycle < marginal cost of external financing; then incur cost to shorten cycle

15. Changes in Sales & Working Capital Policy
Changes in sales will cause changes in the level of working capital required. This will affect the level of short-term financing required. There are seasonality effects.
Current assets needed for seasonal sales
Current assets needed for expected sales

16. Working Capital Policies
Involves two decisions:
The appropriate level of current asset investment
How to finance this investment in current assets
The greater the level of working capital the lower the level of risk of losing sales and experiencing disruption in production.
What is the effect of working capital levels on the return on investment (ROI)?

17. What is the Effect of Working Capital on Rates of Return?
Assume that a reduction in current assets will not result in a fall in sales or EBIT. Ignore the effects of current liabilities.
Note how Return on Net Assets increases as the Working Capital Policy becomes more aggressive. What is the price of this increase?

18. Working Capital What are the risks of an aggressive policy?
Lower sales
Lower liquidity and difficulty in paying accounts payable and other short-term liabilities.
Poor credit ratings and increase in the cost of finance

19. Optimal Level of Working Capital
ROI vs investment in working capital.
ROI = Earnings/Assets
ROI
Decreased
sales
Increased
total assets
Level of working capital
Optimal level

20. Optimal policy Management should reduce current assets as long as
Marginal benefit > expected loss
Optimal point is when
Marginal benefit = expected loss

21. Working Capital Financing Policies
Seasonal and cyclical fluctuations
Time of year
State of the economy – strong economy and higher sales levels will require higher levels of inventory and debtors
Maturity matching: match the term of the financing with the term of the underlying investment
Plant and equipment is financed with long term debt or leases
Non-permanent current assets are financed with short-term finance

22. Working Capital Financing Policies: Moderate

23. Working Capital Financing Policies: Aggressive

24. Working Capital Financing Policies: Conservative

25. Forecasting Working Capital Requirements – Percentage of Sales
Percentage of Sales method expresses current assets as a percentage of sales. Once we determine future expected sales, we can determine the working capital requirements.

26. Forecasting Working Capital Requirements – Percentage of Sales
If sales are expected to grow to R150m, then this would result in an increase of R12.5m in net working capital. Ex. Inventory at 20% of sales would increase by R10m.

27. Working Capital Financing
Increase in net working capital will be financed from;
Retained earnings
Short-term debt, such as a bank overdraft