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Working Capital Management - Cash Conversion Cycle

This document discusses working capital management. It defines key terms like net working capital, current assets, current liabilities, and cash conversion cycle. It then provides examples of how to calculate metrics like inventory conversion period, days sales outstanding, and payables deferral period using financial data from Staples. Finally, it outlines strategies for shortening a company's cash conversion cycle, such as reducing inventory costs, collecting receivables faster, and increasing payables.

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Rutvik Kalgutkar
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88 views

Working Capital Management - Cash Conversion Cycle

This document discusses working capital management. It defines key terms like net working capital, current assets, current liabilities, and cash conversion cycle. It then provides examples of how to calculate metrics like inventory conversion period, days sales outstanding, and payables deferral period using financial data from Staples. Finally, it outlines strategies for shortening a company's cash conversion cycle, such as reducing inventory costs, collecting receivables faster, and increasing payables.

Uploaded by

Rutvik Kalgutkar
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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WORKING CAPITAL MANAGEMENT

Working Capital current assets used in operations (i.e. cash, inventory, accounts
receivables).
Net Working Capital current assets current liabilities
Current Assets must be converted to cash within a year.
o Examples: cash, short-term investments, accounts receivables, and
inventories.
Current liabilities must be paid with a year. For example, when Staples
purchases supplies, it doesnt immediately pay the suppliers.
o xamples: accounts payable (!"#), short-term debt, and the current
portion o$ lon% term debt.
Net Operating Working Capital (NOWC) &peratin% 'urrent !ssets &peratin%
'urrent (iabilities
Operating Current Assets ) 'ash * !ccounts +eceivable * ,nventories
Operating Current Liabilities ) !ccounts #ayable * !ccruals
Working Capital Manageent:
-. .hat is the appropriate amount o$ wor/in% capital0
1. 2ow should wor/in% capital be $inanced0
!un"aental Tra"eo##:
2i%h .or/in% 'apital3 (ow &peratin% +is/ 4 (ow +eturn on ,nvested 'apital (+&,')
(ow .or/in% 'apital3 2i%h &peratin% +is/ 4 2i%h +eturn on ,nvested 'apital (+&,')
Cas$ Con%ersion C&'le ( the len%th o$ time between a companys payments and cash
in$lows.
Cash Inventory Receivables Payables
Conversion Conversion Collection Deferral
Cycle Period Period Period
= +
Staples1556 'ash 'onversion 'ycle ) 76.8678 * -9.:;1- :-.1-:7 ) )*+,-). "a&s
.or/in% 'apital <ana%ement -
/taples0 /ele'te" !inan'ial 1ata
Source: 'ompany -5=, <arch :, 1556 >,ncome Statement?
Source: 'ompany -5=, <arch :, 1556 >@alance Sheet?
-. In%entor& Con%ersion Perio" the avera%e time reAuired to convert materials
into $inished %oods and then to sell the $inished %oods.
Inventory
Inventory Conversion Period
Sales per day
=
1556
1, 597,-87
76.8678
-;, 7B1, 861 " 789
Inventory Conversion Period
Staples days = =
1. Re'ei%ables Colle'tion Perio" (a./.a. Cays Sales &utstandin%) the avera%e
len%th o$ time reAuired to convert the $irms receivables into cash post sale.
Receivables Receivables
Days Sales Outstanding
Average Sales Per Day Annual Sales!"#
= =
( )
1556
-9.:;1-
Days Sales Outstanding
$%%&%#'
Staples days
()&!*%&"$% !"#
= =
.or/in% 'apital <ana%ement 1
7. Pa&ables 1e#erral Perio" the avera%e len%th o$ time between the purchase o$
materials and labor and the payment o$ cash $or the materials and labor.
Payables
Payables Deferral Period
Purchases per day
=
1556
-, 985, B16
:-.1-:7
-7, 611, 5--" 789
Payables Deferral Period
Staples days = =
/trategies #or /$ortening t$e Cas$ Con%ersion C&'le0
-. +educe ,nventory 'osts
-
,mprove lo%istics and production processes >Dust-in-time inventory.?
1. +educe +eceivables 'ollection #eriod
@ill customers more $reAuently convert monthly receivables to bi-wee/ly
receivables.
EtiliFe a loc/box plan have chec/s sent to #.&. boxes located within the
customers re%ion where a local ban/ can deposit chec/s upon receipt.
!utomatic electronic trans$ers accept electronic wire trans$ers or automatic
electronic trans$ers.
7. ,ncrease #ayables
Ese trade credit pay suppliers slowly i$ the terms are acceptable.
,ncrease accruals i$ possible pay employees monthly. +ote: 'ompanies
%enerally have little control over accruals.
-
Gote: Hhe twin %oals o$ inventory mana%ement are -) to ensure available inventories needed to sustain
operations and 1) to reduce the costs o$ carryin% inventory. ,nventory costs include: stora%e and handelin%,
insurance, property taxes, spoila%e, and obsolescence.
.or/in% 'apital <ana%ement 7

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