WORKING

CAPITAL
MANAGEMENT
GROUP 4
WORKING CAPITAL MANAGEMENT
• Is the company' s investment in current assets
such as cash, account receivable, and inventories.

WC=CA
NET WORKING CAPITAL MANAGEMENT
• is the difference between current assets
and current liabilities.

NWC=CA-CL
The Working Capital of a firm normally
consists of the following:
• Cash on hand in the
bank
• Cash and cash equivalent
• Account receivable
• Inventories and supplies
• Prepaid expenses
Main advantages of maintaining the
adequate amount of working capital:
• Regular supply of raw material
• Solvency and easy loan to the business
• Getting benefit of cash discount
• Ability to face unfavorable condition
• Regular payment of operational
expenses
Operating Cycle
• The sum of days of inventories( inventory conversion
period ) and days of receivable (Days of sales
Outstanding).

Date of inventory - ( inventory conversion period ) is the average number

of days to sell its inventory.
Days of receivable - ( Days of Sales of Outstanding) - is the average
time of the company to collect its receivable.
Cash Conversion Cycle
- is computed as the operating cycle less days of payable
outstanding.
- (Days of inventory + Days of Receivable) - Days of payable

Days of payable outstanding - is the average

number of days for the company's to pay it's creditor.
Cash conversion cycle = 100 days + 54 days - 37 days
= 117 days
Important Component of Working Capital
• Cash
• Receivable
• Inventory

Cash management
Main Objectives :
To keep the investment in cash as low as possible while still keeping
the firm
operating efficiently and effectively.

2 Goals in cash management

1.To make sure that there is sufficient cash in order to support the
operational needs of the firm.
2.To invest excess cash in order to maximize the profit-earning potential of
the firm
Reason for Holding Cash Balances
• Transaction Facilitation
• Precautionary Motive
• Compliance with Creditor's Covenant
• Investment Opportunities

Receivable Management
Main Objectives:
-To keep ensure that the firm's investment in account receivable is
appropriate and contributes to the wealthmaximization ofshareholders.
Inventory Management
Main Objectives:
- To maintain sufficient amount of inventory to ensure the smooth operation
of the firm' s productionand at the sametime avoid tying
up funds in excessive and slow-moving inventory
Cost associated with investment in inventories:
Carrying Cost - cost associated with the holding of inventory.
Cost of capital tied up
in inventory Storage
andhandling
cost Insurance
Property

Taxes
Obsolescence
Ordering Cost
Tools for Efficient Inventory Management
• Quantity Discount
• Investment in Inventory
• Carrying Cost
• Ordering Cost
• Economic Order Quantity (EOQ)
• Reorder Point
• ABC Warehousing and Inventory Control
• First in, First out Inventory Control (FIFO)
• Just in Time Inventory Management System
( JIT)