Week 2 Working capital management new.pptx - Management Accounting and Business ACCT1060 Week – 2 Working Capital Management Objectives After

Week 2 Working capital management new.pptx - Management...

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Management Accounting and Business ACCT1060 Week – 2 Working Capital Management
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Objectives After completing this topic you should be able to: Short-term financial planning for businesses Describe the risk-return tradeoff involved in managing working capital. Describe the determinants of net working capital. Compute the firm’s cash conversion cycle. Estimate the cost of short-term credit. Identify the primary sources of short-term credit. Apply working capital management in organisational settings MAB Strategic Management Costs and Revenue 2
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Working Capital Management MAB Strategic Management Costs and Revenue 3
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Working Capital Gross working capital - The firm’s total investment in current assets. Net working capital - The difference between the firm’s current assets and its current liabilities. Current liabilities , i.e., all forms of financing that have maturities of 1 year or less. Two issues to consider : How much short-term financing should the firm use? What specific sources of short-term financing should the firm select? MAB Strategic Management Costs and Revenue 4
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Working Capital Management Working capital generally refers as a firm’s investment in current (short-term) assets (for example, cash, marketable securities, inventory and account receivable). Net working capital is calculated as Current Assets minus Currently Liabilities e.g. Inventory (Current Asset); Accounts Receivable (Current Asset); Accounts Payable (Current Liability) Net working capital represents the amount of current assets that is financed with long-term funds An increase (change) in working capital means the company has increased its receivables or other current assets or reduced its current liabilities (e.g. paid off short-term creditors) MAB Strategic Management Costs and Revenue 5
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Working Capital Management (cont…) Working capital management is the management of short-term assets (investments) and liabilities (financing sources) to ensure that the firm has ability to have sufficient cash (from current assets) to pay for the current liabilities when they fall due. Poor working capital management generally results in financial distress and bankruptcy Operating cycle—the time period between the acquisition of inventory and the collection of cash from receivables. Operating cycle = Inventory period + A/cs receivable period Cash cycle—the time period between the outlay of cash for purchases and the collection of cash from receivables. Cash cycle = Operating cycle – A/cs payable period MAB Strategic Management Costs and Revenue 6
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The Cash Conversion Cycle 1. Inventory Conversion Period (ICP) = = 2. Receivable Collection Period(DSO) = = 3. Payables Deferral Period(DPO) = = 4. Cash Conversion Cycle = ICP + DSO – DPO MAB Strategic Management Costs and Revenue 7
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The Cash Conversion Cycle MAB Strategic Management Costs and Revenue 8
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