Working Capital

Certificate Level- Management Information (ch-7)

MD. SHAKHAWAT HOSSAIN ACA

12TH BATCH, SEC-D

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 Content to be covered

1. Introduction
2. Definition of working capital
3. Balancing liquidity and profitability
4. Balancing short term and long term finance for working capital
5. Cash operating cycle

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Content to be covered

6. Inventory management
7. trade payable management
8. Trade receivable management
9. Treasury management
10.Cash budget

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Working capital

Receivable + Inventory + Cash – Payable

Oil the wheels of Business

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Balancing liquidity and profitability
All business face a trade off between being Profitable and being
liquid, it is crucial for the business
• Cash: Hold cash, take advantage of cash discount and cash
support
• Receivable: Low receivable, customer may driven away
• Inventory: Holding inventory for instant delivery of goods, may
lapse investment opportunity elsewhere in more profit
• Payable: increase payable period, loss of discount opportunity and
good supplier.

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Balancing short term and long term finance
for working capital

• Short term Finance: Renewal Risk, Interest Rate Risk, Usually

low cost
• Long Term Finance: No renewal risk, Stable interest,
comparatively high cost.

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Financing Current Asset

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Cash operating cycle

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Cash operating cycle

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Cash operating cycle

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 Inventory management

• Why Hold Inventory?

• Cost Associated with holding inventory:
• Purchase price
• Holding cost
• Re-order Costs
• Shortage costs
• Inventory Control System: Re-order level, Periodic Review, Abc,
JIT, Perpetual, Outsource
• EOQ- page 157

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trade payable management
• Trade credit is generally cheap source of finance
• Cost of trade payable: loss of credit status, high price, los of
cash discount
• Advantage of Trade payable: Convenient & Informal

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 Trade receivable management

• Cost of extending credit to customers: Finance Cost,

Irrecoverable debts, administrative cost of credit control department
• Benefits of granting Credit: Increase sales
• Credit Rating: Ability of the customer, Assess FS, on going trading
experience
• Receivable are an asset and so can be sold like any other asset
• Receivable Aging for monitoring

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 Treasury management
• The risk of running out cash have to be balanced against the cost of
holding cash, just like with inventory
• Business have four motives for holding cash: Transactions,
Finance, Precautionary and investment motive
• Short term cash should be invested: Tbill, Deposit, Bonds,
Equities
• short term shortage cash need to be funded;
• Effective transmission of cash will improve the promptness with
which the business benefits from having cash i.e. clearing cheque

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Cash budget
A cash Budget is a statement in which estimated future cash
receipts and payment are tabulated in such way as to show the
forecast cash balance of a business at defined intervals.
Estimated Cash Receipt From:
• A/R, Cash Sales, disposal of asset etc
Estimated Cash Payment:
• A/P, Cash Purchase, purchase of asset, loan repayment, dividend
payment etc

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Any Question

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Let’s do it

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Answer

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 Questions

• The amount of working capital is most likely to increase when?

Options
A. WIP Fall
B. Sales price increase
C. Credit facility reduction
D. Supplier payment period increase

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Home Work

• Worked Example: p-149, 157, 167

• IQ: 6 (p-168)
• Self Test: 9 (p-172), 10 (p-173)

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Md. Shakhawat Hossain ACA
12th batch, Sec-D
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