1 Concept of short term financial management

Short term financial management covers all decisions of an

organization involving cash flows in the short run with emphasis on the
management of investment in current assets and their financing. It
focuses on coordinated control of the firms CA and CL.
2. Concept of Net Working Capital (NWC)
NWC is the difference between the firms CA and CL.
3. The operating cycle and cash cycle
The time duration required to convert raw materials into finished goods
and hen realize cash by selling them is called operating cycle. Or
working capital cycle.
Operating cycle= ICP+RCP (days)
Where, ICP= inventory conversion period [ the length of time required
for conversion of raw materials into finished goods and sales]=
days∈ year
inventory
cost of goods sold per day
OR Inventory
turn [ITR=COGS÷Avg inventory]
ratio

RCP= receivable conversion period[also called days sales outstanding

(DSO) or average collection period(ACP) and it is the length of time
required for the collection of accounts receivable from credit customers
average receivables
after products have been sold off.= RCP= credit sales per day =OR=
days ∈ year
turn [RTR=credit sales ÷ account receivable]
receivable
ratio

4. Cash conversion cycle (CCC) it represents the net time intervals in

days between actual cash expenditure of the firm and ultimate recovery
of cash.
CCC= ICP+RCP-PDP where,
PDP= payable deferral period=the average length of time required for
average payable
payment of credit purchases and accruals. = PDP= cost of goods sold per day
account payable
OR credit purchase per day

5. Shortening the Cash Conversion Cycle( CCC)

 By reducing inventory conversion period (ICP) resulted from
quick conversion of raw materials and quick sale of finished
goods.
 By reducing receivable conversion period (RCP) resulted from
speeding up the collections.
 By increasing the payable deferral period (PDP) resulted from
slowing down the payments.
6. Calculation of amount of financing to support CCC
Amount of required financing= daily cash required or investment or
COGS per day × CCC
Or = daily investment in operating cycle ×CCC
COGS∨sales
7. Investment in account receivables= 360
× RCP

COGS∨sales yearly (qtyxcostxdays∈ year )

8. Working capital turnover = working capital financing