working capital management

• TODO working capital management notes 🔼 📅 2024-03-29

• Working capital is :: the funds available for the short-term financial commitments of a business.

• Net working capital is :: the difference between current assets and current liabilities. (current assets - current liabilities)

• Working capital management is :: determining the best mix of current assets and current liabilities to achieve the objectives of a business.

  • Management must achieve a balance between using funds to create profits and holding sufficient funds to cover payments.

• ==Short-term liquidity== is critical to businesses:

  • allows them to take advantage of profit opportunities when they arise,
  • meet short-term debts,
  • meet payments on loans.

Control of current assets

• Current assets are :: assets that a business can expect to convert into cash within 12 months.

Cash

• is important as
  ?

• Cash ensures businesses can pay debts, loans, & accounts in the short-term

• By having cash in the business, you can also take advantage of investment opportunities.

  • (such as the short-term money market)

• strategies to manage cash include (‘cash’ as a current asset managed under working capital management):
  ?

• Budgets

• Cash flow statements

• Distribution of payments

Receivables

?

• Receivables are sums of money owed to a business from customers to whom it has supplied

• The quicker the business’ debtors pay, the better the cash position the business is in

  • indicated by the Accounts receivable (turnover) ratio

• needs to be managed carefully as factoring is very expensive

• Strategies to manage accounts receivables include:
  ?

• Discount for early payment

• Strict and tight credit policies

• Checking the credit ratings of customers

Inventories (current asset - working capital management)

?

• Inventories must be monitored so there are no insufficient levels of stock
• Too much inventory is a cost to a business if it remains unsold
  • becomes a liability over time (loses value)
• regular stocktaking and just-in-time inventory management can assist in managing stock

Control of current liabilities

• Current liabilities are (and the three to be controlled):
  ?
• liabilities that a business must repay within the short-term such as 12 months.
  • Payables
  • Loans
  • Overdraft

Payables

?

• Payables are sums of money owed by a business to other businesses.

• Monitoring payables will allow the business to maintain adequate cash resources

• Holding back accounts payable until their due date

  • allows for businesses to maintain liquidity as some suppliers offer interest free credit periods

• Strategies to manage accounts payables include:
  ?

• Discounts

• Interest free credit periods

• Extended terms for payments

Loans

• Funds may be required to cover
  • the sale and purchase of property,
  • unforeseen circumstances,
  • export and import commitments
• Businesses must (2 things):
  ?
• Businesses must compare costs and terms of a loan with other providers to increase savings
• Businesses should form positive relationships with financial institutions to ensure appropriate sources of finance are used.

Overdrafts

• SEE Overdraft
• a convenient form of borrowing as it allows businesses to have a negative account balance

Strategies for managing working capital

• the management of current assets & liabilities
  • the aim of managing each of the components is to ensure liquidity
• The two strategies to do this:
  ?
• Leasing
• Sale and lease back

Leasing

?

• SEE Leasing
• As leasing requires regular and fixed payments
  • financial management can plan payments to match the businesses’ cash flow.
• Additionally, leasing is attractive as it is a tax deductible expense

Sale and lease back

Sale and lease back is :
?

• the selling of an owned asset to a lessor and leasing the asset back through fixed payments for a specified period of time.
• businesses are able to increase funds available
  • to pay their debts
  • while improving their liquidity