FIN2004 JAN17 Tutorial 10 Working Capital Management.pdf - FIN 2004 Finance Tutorial 10 Working Capital Management Conducted by Mr Chong Lock Kuah CFA 1

FIN2004 JAN17 Tutorial 10 Working Capital Management.pdf -...

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1 FIN 2004 Finance Tutorial 10 : Working Capital Management Conducted by : Mr Chong Lock Kuah, CFA
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2 Key Concepts Working capital management decides the level of each type of current asset to hold and how to finance them. Operating cycle : time between acquiring the inventory and collecting the cash. Operating cycle = inventory period + accounts receivable period Inventory period : time required to acquire and sell the inventory. Accounts receivable period (DSO or ACP) : time required to collect on credit sales. Cash Conversion Cycle : time between firm’s payment for inventory and collection on its sales. cash conversion cycle or cash cycle = operating cycle accounts payable period = inventory period + account receivable period accounts payable period
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3 The Operating Cycle turnover s receivable 365 Sales/365 s Receivable turnover COGS/365 Inventory or Sales/365 Inventory inventory 365
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4 Key Concepts A cash budget is a weekly, monthly, or quarterly forecast of cash inflows and outflows. The budget indicates deficient or excessive cash balances, and financing plans are formulated based on it. Float is difference between cash balance in the bank and the cash balance recorded in the books Float = Bank balance Book balance Disbursement float is generated when a firm writes cheques Bank balance > book balance Disbursement Float > 0 Collection float occurs when the firm receives cheque Bank balance< book balance Collection Float < 0
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