1. 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

2. 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

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

4. 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

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

6. Patterns of stock movements over time
Stock level
Time

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

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

9. 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

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

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