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Working Capital Management - Coggle Diagram
Working Capital Management
Working Capital
Current assets e.g. AR or Stocks
Current liabilities e.g AP
Higher working capital => Relax policy; good liquidity
Cash conversion cycle = Inventory conversion + AR conversion - AP conversion
Inventory conversion period = Average Inventory / COGS
AR conversion period = Ave. AR / Sales
AP conversion period = Ave. AP / Purchases
Cash Management: Budget
Inflows: Sales Receipts / Assets disposals / fund raising
Outflows: Payment to suppliers, acquire new assets, Dividends
Cash Budget
Pitfalls:
accrual expenses are excluded
Inventory Management
Economic Order Quantity EOQ Model
Carrying or Holding costs e.g. storage, insurance, loss of goodwill
Ordering costs e.g transportation, inspection
EOQ Example
Receivables Management
Credit term A/B net C: Cost of paying late = A/(100-A) * 365 /(C - B)
Credit terms
Prepares: AR Turnover period and Aging schedule
Financing working capital
Financing policy: Aggressive/Conservative
Aggressive=> ST finance for LT assets
Conservative=> LT finance for ST assets
Short term Vs Long term
Spontaneous finance: AP