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• Working capital represents the difference between a firm’s

current assets and current liabilities. Working capital, also called net
working capital, is the amount of money a company has available to
pay its short-term expenses.1
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• Positive working capital is when a company has more current assets

than current liabilities, meaning that the company can fully cover its
short-term liabilities as they come due in the next 12 months.
Positive working capital is a sign of financial strength. However,
having an excessive amount of working capital for a long time might
indicate that the company is not managing its assets effectively.
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• Negative working capital is when the current liabilities exceed the

current assets, and the working capital is negative. Working capital
could be temporarily negative if the company had a large cash
outlay as a result of a large purchase of products and services from
its vendors.
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• However, if the working capital is negative for an extended period of

time, it may be a cause for concern for certain types of companies,
indicating that they are struggling to make ends meet and have to
rely on borrowing or stock issuances to finance their working
capital.
Cash Flow is the net amount of cash and cash-equivalents being transferred in and out
of a company.2
Positive cash flow indicates that a company's liquid assets are increasing, enabling it to
settle debts, reinvest in its business, return money to shareholders, pay expenses, and
provide a buffer against future financial challenges.
Negative cash flow can occur if operating activities don't generate enough cash to stay
liquid. This can happen if profits are tied up in accounts receivable and inventory, or if a
company spends too much on capital expenditures.
• Capital expenditures (CapEx) are funds used by a company to
acquire, upgrade, and maintain physical assets such as property,
plants, buildings, technology, or equipment. CapEx is often used to
undertake new projects or investments by a company. Making
capital expenditures on fixed assets can include repairing a roof (if
the useful life of the roof is extended), purchasing a piece of
equipment, or building a new factory. This type of financial outlay is
made by companies to increase the scope of their operations or add
some future economic benefit to the operation.
•Unlike CapEx, operating expenses (OpEx) are shorter-term expenses used for the day-to-day
operations of a business.
•Examples of CapEx include the purchase of land, vehicles, buildings, or heavy machinery
Understanding the cash flow statement, which reports operating cash flow,
investing cash flow, and financing cash flow is essential for assessing a
company’s liquidity, flexibility, and overall financial performance.
Changes in working capital are reflected in a firm’s cash flow
statement. Here are some examples of how cash and working
capital can be impacted.
If a transaction increases current assets and current liabilities
by the same amount, there would be no change in working
capital. For example, if a company received cash from short-
term debt to be paid in 60 days, there would be an increase in
the cash flow statement. However, there would be no increase
in working capital, because the proceeds from the loan would
be a current asset or cash, and the note payable would be a
current liability since it's a short-term loan.
• If a company purchased a fixed asset such as a building, the
company's cash flow would decrease. The company's working capital
would also decrease since the cash portion of current assets would be
reduced, but current liabilities would remain unchanged because it
would be long-term debt.
• Conversely, selling a fixed asset would boost cash flow and
working capital.
• If a company purchased inventory with cash, there would be no
change in working capital because inventory and cash are both
current assets. However, cash flow would be reduced by inventory
purchases.
• Below is Exxon Mobil's (XOM) balance sheet from the company's 10K statement
for 2017. We can see current assets of $47.1 billion and current liabilities of $57.7
billion.3
• Highlighted in blue is cash of $3.1 billion, and materials and supplies of
$4.1 billion.3
• If Exxon decided to spend an additional $3 billion to purchase inventory, cash
would be reduced by $3 billion, but materials and supplies would be increased
by $3 billion to $7.1 billion.
• There would be no change in working capital, but operating cash flow would
decrease by $3 billion.
 Reducing working capital improves EVA and ROCE Besides Net Operating Profit After
Tax (NOPAT), the optimization of asset management is an important driver of Economic
Value Added (EVA) and capital efficiency (ROCE). Asset Management consists of two
pillars: • Fixed Asset Management • OWC management Fixed Asset Management takes a
long-term and strategic perspective. OWC management is about the operational assets
and liabilities that are involved in any business process. The main components are trade
receivables, inventories (including Cost in Excess), trade payables and advance payments
received / Billings in Excess. OWC management differentiates between three core
processes: Order-to-Cash, Total Supply Chain, and Purchase-to-Pay.
Economic value added (EVA), also known as economic profit, is a measure of a
company's or project's financial success based on residual wealth, calculated as
subtracting the cost of capital from operating profits. The purpose of EVA is to
determine the value a company generates from the capital invested into it with
the overall goal of improving the returns generated for shareholders.
•Economic value added (EVA) is a measure of a company's financial success determined
by comparing its returns on invested capital to the cost of capital. It shows a company's
economic profit.
•A positive EVA indicates a company is generating wealth for shareholders whereas a
negative EVA indicates that a company is not generating returns above its cost of capital.
•To improve its EVA, a company can increase revenues by increasing the price for its
goods or services or it can sell more goods.
•A company can also increase its EVA by reducing its capital costs by improving efficiency
and reaching economies of scale.
Return on capital employed (ROCE) is a good baseline measure of a company's
performance. ROCE is a financial ratio that shows if a company is doing a good job of
generating profits from its capital. Companies have various financial resources they use to
build and grow their businesses.
This capital creates wealth through investment and can include such things as a company's
marketable securities, production machinery, land, software, patents, and brand names.
Asset optimization is the process of finding the best use of assets for a
company. Asset optimization seeks to find the balance between efficiency and
reliability.

For instance, what if instead of running one piece of equipment at 100% capacity and
keeping a duplicate in storage, both pieces of equipment ran at 60%? Will that increase or
reduce downtime in the long run?

Asset and facility optimization is making the most out of assets or facilities. When an asset
is being used optimally, it is providing all of the value possible to an organization. This
may mean adjusting usage to reflect market conditions; reducing output when the price for
a product is lower may be more optimal than simply producing as much as possible at all
times.
What is an asset management plan?
An asset management plan is a complete strategy for an asset that projects how an
organization will use a capital investment. It includes the acquisition, use, and liquidation
or disposal of an asset.
Asset optimization is the process of finding the best use of assets for a company. Asset optimization seeks to find the balance between efficiency and reliability.

For instance, what if instead of running one piece of equipment at 100% capacity and keeping a duplicate in storage, both pieces of equipment ran at 60%? Will that increase or
reduce downtime in the long run?

Asset and facility optimization is making the most out of assets or facilities. When an asset is being used optimally, it is providing all of the value possible to an organization. This may
mean adjusting usage to reflect market conditions; reducing output when the price for a product is lower may be more optimal than simply producing as much as possible at all times.
What is an asset management plan?
An asset management plan is a complete strategy for an asset that projects how an organization will use a capital investment. It includes the acquisition, use, and liquidation or disposal of
an asset.
The order to cash cycle, often known as the O2C or OTC cycle,
describes how your company receives, processes, manages, and
completes customer orders. This includes handling all aspects of
the transaction, such as shipping the merchandise, receiving
money, making invoices, and reporting. Optimizing the O2C
process is crucial as they influence your bottom line and shape
your customer relationships. These, in turn, impact your
revenue, business growth, and customer retention rates.
• Many contractors bill customers before the job is complete to
cover costs. Billings in excess is the amount a contractor
owes to a customer for what's left to complete on a project
A write-off is an accounting action that reduces the
value of an asset while simultaneously debiting a
liabilities account. It is primarily used in its most literal
sense by businesses seeking to account for unpaid loan
obligations, unpaid receivables, or losses on stored
inventory.

A write-off is an elimination of an uncollectible accounts

receivable recorded on the general ledger. An accounts
receivable balance represents an amount due
What is scrap in inventory?
Scrap is the excess unusable material that is left over
after a product has been manufactured. This residual
amount has minimal value, and is usually sold off for its
material content
Scrap value is the worth of a physical asset's
individual components when the asset itself is
deemed no longer usable. After a long-term asset—such
as machinery, vehicle, or furniture—has gone through its
useful life, it may be disposed of. Scrap value is also
known as residual value, salvage value, or break-up
value.
 Days payable outstanding (DPO) is a financial ratio that
indicates the average time (in days) that a company
takes to pay its bills and invoices to its trade
creditors, which may include suppliers, vendors, or
financiers.

Days inventory outstanding (DIO) is a working capital

management ratio that measures the average number
of days that a company holds inventory for before
turning it into sales. The lower the figure, the shorter the
period that cash is tied up in inventory and the lower the
risk that stock will become obsolete.

Days sales outstanding (DSO) is a measure of the

average number of days that it takes for a company to
collect payment after a sale has been made.
 A complete ERP suite also includes
enterprise performance management, software that helps plan,
budget, predict, and report on an organization’s financial results.

Cash Conversion Cycle* Formula Definition The Cash

Conversion Cycle tells us how many days it takes on average to
turn over our OWC. It measures the length of time resource
inputs are tied up in operational assets before they are
converted into cash through sales to customers. Days Sales
Outstanding (DSO) = Days Inventories Outstanding (DIO) Days
Payables Outstanding (DPO)
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Trade receivables is the amount that customers owe a business for the goods
or services provided. It is the same as accounts receivable and comes under the
current asset category on a balance sheet

Advance payment is a type of payment made

ahead of its normal schedule such as paying for a good or
service before you actually receive it.

Billings in excess is the amount a contractor owes to a

customer for what's left to complete on a project.
When underbilled, billings in excess is work that's already
completed but not yet billed.Muh. 6, 1442 AH
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Trade payables are any expenses incurred from vendors, suppliers or other third
parties for goods or services provided in bringing their products to the customer.

Trade payables are a combination of the creditor/s and the bills payable for
goods purchased or services rendered.

In simple terms, having billings in excess of costs on a balance sheet simply means that the company has billed
customers for work that hasn’t been completed yet. This should produce a net positive in cash flow, where the
company has more working capital on hand than expenses.

The opposite situation is called costs in excess of billings. When this happens, it means work has been completed
but not yet billed. This can produce a negative effect on cash flow, leaving the business without the money
needed to pay suppliers, sub-contractors or employees.
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Financial key performance indicators (KPIs) are select metrics that help managers and financial specialists
analyze the business and measure progress toward strategic goals. A wide variety of financial KPIs are used by
different businesses to help monitor their success and drive growth. For each company, it’s essential to identify
KPIs that are the most meaningful to its business.

•The accounts receivable turnover ratio is an accounting measure used to quantify how efficiently a
company is in collecting receivables from its clients.

The accounts receivables turnover ratio measures the number of times a company collects its average accounts
receivable balance. It is a quantification of a company's effectiveness in collecting outstanding balances from clients and
managing its line of credit process.
An efficient company has a higher accounts receivable turnover ratio while an inefficient company has a lower ratio. This
metric is commonly used to compare companies within the same industry to gauge whether they are on par with their
competitors.
Inventory turnover ratio measures how many times inventory is sold or used in a given time
period.

Working capital turnover is a ratio that measures how efficiently a company is using its working capital to support sales
and growth. Also known as net sales to working capital, working capital turnover measures the relationship between
the funds used to finance a company's operations and the revenues a company generates to continue operations and
turn a profit.

•A higher working capital turnover ratio is better, and indicates that a company is able to generate a larger
amount of sales.

The Cash Conversion Ratio (CCR), also known as cash conversion rate, is a financial management
tool used to determine the ratio of a company’s cash flows to its net profit. In other words, it is a
comparison of how much cash flow a company generates compared to its accounting profit.