WORKING CAPITAL MANAGEMENT FIN3N

AND FINANCIAL FORECASTING

WORKING CAPITAL MANAGEMENT
Includes both establishing working capital policy and the day-to-day control of cash,
inventories, receivables, accruals, and accounts payable
FORMULAS
 Working Capital
Total current assets
 Net Working Capital
Current assets – Current liabilities
 Net Operating Working Capital
= Current assets – (Current liabilities – Notes Payable)
 ROE = Profit Margin x Total Assets Turnover x Equity Multiplier
= (Net Income / Sales) x (Sales / Assets) x (Assets / Equity)
RELAXED INVESTMENT POLICY
- relatively large amounts of cash, marketable securities, and inventories are carried,
and a liberal credit policy results in a high level of receivables.
- lower turnover, lower ROE
RESTRICTED INVESTMENT POLICY
- holdings of cash, marketable securities, inventories, and receivables are
constrained.
- lower level of assets, high total assets turnover ratio, high ROE
- exposes the firm to risks because shortages can lead to work stoppages, uhappy
customers, and serious long-run problems
MODERATE INVESTMENT POLICY
- an investment policy that is between the relaxed and restricted policies.
CURRENT ASSET FINANCING POLICIES
-2 TYPES OF CURRENT ASSETS
O Permanent Current Assets

– current assets that a firm must carry even at trough of its cycles.

O Temporary Currents Assets

– current assets that fluctuate with seasonal or cyclical variations in
sales.
CURRENT ASSET FINANCING POLICIES
o Moderate Approach
o Relatively Aggressive Approach
o Conservative Approach
THE CASH CONVERSION CYCLE (CCC)
The length of time funds are tied up in working capital, or the
length of time between paying for working capital and collecting
cash from the sale of the working capital.
THE CASH CONVERSION CYCLE (CCC)
Inventory Conversion Period
The average time required to convert raw materials into
finished goods and to sell them.
Average Collection Period (ACP or DSO)
The average length of time required to convert the firm’s
receivables into cash, that is, to collect cash following a sale.
Payables Deferral Period
The average length of time between the purchase of
materials and labor and the payment of cash for them.
E.G.

ICP + ACP – PDP = CCC

60 + 60 - 40 = 80 days
 Annual Sales P1,216,666
COGS P1,013,889
FORMULAS: Inventory
Accounts Receivable
P250,000
P300,000
Accounts Payable P150,000

Inventory conversion period = Inventory/Sales per day

Receivables Collection Period (DSO) = Receivables/Sales/365

Payables Deferral Period = Payables/Cost of Goods Sold/365

INSERT IRIS PPT HERE

The Cash Budget

BANK
LOANS