W_orking C_apital m_anagement Flashcards
What is working capital management?
Working capital management is a practise to quickly
a) increase the business profitability and
b) free money that is stuck in the cash cycle for expansion esimerkiksi.
What profitability really is?
Profitability = Return on sales * Asset turnover
Profitability is profit over capital employed! (Katso Return on Salesin ja Asset turnover kaavat! –> Sales sievenee osoittajasta ja nimittäjästä)
Eli, yhtiö A voi tehdä profitia enemmän, kun B. MUTTA jos capital employed A:llaon paljon suurempi, niin B:n voi nähdä jopa olevan more profitable.
-> jos käyttää perkeleesti rahaa, niin sillon pitäisi saada myös perkeleesti profitia.
Return on sales ja Asset turnover kaavat?
Return on sales = Profit / Sales
Asset Turnover = Sales / Capital Employed
ELI
–> Profitability = Profit/Capital Employed
How to improve profitability?
Decrease costs (nostaa profitia)
TAI
Decrease working capital (alentaa capital employed) –> No to minimise it, but to optimise it!
What Asset turnover tells?
Asset turnover helps investors understand how effectively companies are using their assets to generate sales.
Mitä Capital Employed sisältää?
Fixed capital + Working capital
Mitä Capital Employed sisältää?
Fixed capital + Working capital
Eli tarkemmin
Working capital = +inventory +accounts receivables -accounts payables +cash +advanced paid -advances received
Mitä Balance sheetin puoliskot kertovat?
Assets = How are the resources spend?
Equity and Liabilities = How are the assets financed?
Mitä Balance sheetin osioioita Working capital sisältää?
Working capital = +inventory
+accounts receivables -accounts payables
+cash
+advances paid -advances received
What is the purpose of working capital?
It reduces cash-to-cash cycle to maximise profitability.
So we RELEASE capital that is tied to day-to-day operations
- > ELI MITEN:
a) increase the time payment is made to suppliers
b) decrease the time material spends in inventory
c) decrease the time payment is maid from our customers
FROM where NO money is tied to products or services TO where money IS tied to products and services.
Accounts Payable Turnover laskukaava?
Accounts Payable Turnover
= Total supply purchases /((BAP+EAP)/2)
BAP = Beginning Accounts Payable EAP = Ending Accounts Payable
What accounts payable turnover tells us?
How many times the company pays its accounts payable during given period.
It focuses on full period such as a year.
Accounts payable days
It shows the accounts payable turnover in days!
Accounts payable days
= 365 / Accounts payable turnover
Accounts Receivable Turnover laskukaava?
Accounts Receivable Turnover
= Net credit sales/((BAR+EAR)/2)
BAR = Beginning Accounts Receivable EAP = Ending Accounts Receivable
((BAP+EAP)/2)
(BAR+EAR)/2
Average accounts payable
Average accounts receivable
What accounts receivable turnover tells us?
It describes
a) how effectively company collects is receivables
b) money owned by clients
What HIGH accounts receivable turnover tells us?
It can tell us that
a) the company collects receivables efficiently
b) company has lots of high-quality customers that pay their debts
Accounts receivable days
It shows the accounts receivable turnover in days!
Accounts receivable days
= 365 / Accounts receivable turnover
What Accounts receivable days tells us?
It tells the average number of days it takes for the company to collect payment after the sale has been made.
Companies aim the Accounts receivable days to be as LOW as possible! Low number indicates that the company gets its money quickly.
Inventory turnover -tunnusluvun laskukaava?
Inventory turnover
= Sales / ((BI + EI)/2)
BI = beginning inventory EI = ending inventory
What Inventory turnover tells us?
It shows how many times company has sold and replaced inventory during a certain period.
Mitä hyötyä on Inventory turnover -tunnusluvusta?
It helps companies in making decision regarding:
a) pricing
b) manufacturing
c) marketing
d) purchasing inventory
PMMP
What LOW and HIGH inventory turnover tells us?
Low inventory turnover could tell:
a) weak sales
b) excess inventory
High inventory turnover could tell:
a) high sales
b) insufficient inventory
True or false?
“Companies aim at HIGHEST possible Inventory turnover rate”?.
TRUE
–> Companies aim at the HIGHEST possible Inventory turnover rate.
How to OPTIMISE working capital?
- INCREASE accounts payable (–> Can be done by postponing payments)
- DECREASE accounts receivable (and increasing payments -> Can be done by shortening inbound payment times -> cooperation with customer is key!)
- Optimise inventory leves
What are 4 ways to optimise accounts payable?
- Negotiate payment terms
- Stricter policies
- Manage outbounds (=lähtevä)
- Managing payment schedules
- backloading of payments (=lykkääminen)
How to negotiate payment terms?
A) Renegotiate payment term extensions with current suppliers and
B) require long terms from new suppliers.
Stricter policies and accounts payable?
A) Establish strict policies
B) Establish strict policy compliance follow-up processes
C) set clear responsibilities also to indirect purchases
How to manage outbounds?
A) Do not pay anything before due dates
B) do not pay invoices every day
How to manage payment schedules?
Manage prepayments and payment schedules by:
A) avoiding prepayment or invoicing prior to deliver
B) pay most at the end of the schedule if applicable
Accounts payable ON OIKEASTI MIKÄ?
Accounts payable = FREE LOAN
What are 4 ways to optimise accounts receivable?
- Stricter policies
- Robust collection process (= jämäkkä/luja)
- Negotiate shorter payment terms
- Frontloading of payments
Stricter policies and account receivable optimising?
Stricter policies is the most obvious way to optimise accounts receivable. It can be done by:
A) Establish strict credit policy with clear cross-functional roles and responsibilities.
B) Create policy compliance follow-up processes.
How to have Robust collection process?
A) Create robust collection process to make sure you receive the money when you re supposed to.
B) Make sure customers understand the terms.
C) Track customers to avoid problem customer in the future.
How to negotiate shorter payment terms?
Negotiate shorter payment terms with current customers (where possible).
Be ready to explain why!
Always remember!
Your accounts receivable is someone else’s accounts payable.
Eli kun sä yrität saada mahdollisimman nopeesti niiltä rahaa, ne taas yrittää pitkittää maksua!
How to frontload payments?
Aim for prepayments and “front heavy” payment schedules.
–> Aim for large payments in the beginning!
Why do we need inventories?
Inventories are required to cope with uncertainty and customer demands.
TRUE OR FALSE?
Inventory management is harder than other working capital management procedures?
TRUE!
Inventory management is harder than other working capital management procedures!
Because:
a) there is no one solution fits all
b) external factors are to be considered
c) also internal factors
What is the first step of inventory management?
Classify inventory by types.
Two ways to look at the inventory:
- from the worki-in-progress status.
- Purpose
What are the 4 statuses of Work-in-progress status?
A. Raw materials
B. Work in progress inventory
C. Finished goods inventory
D. Maintenance, repair and operations goods
Classifying inventory by purpose?
a) current demand stock
b) transit inventory
c) anticipation stock
d) safety/buffer stock
What is the purpose of inventory optimisation?
The aim is to
- improve inventory flow so that the money is tied to products that have demand.
- the inventory is in the right location fulfil the demand.
Common misconception regarding inventory?
Ihmiset luulee virheellisesti usein, että
“inventory is NECESSARY to keep the customer happy”
–> EI OLE TOTTA! Koska the inventory levels can be brought down while actually improving availability and service levels.
When is Turn-Earn index good?
Turn-earn index is a powerful tool in a setting where most of the inventory is in finished goods. Such as in retail or wholesale companies. And when selling goods that have been manufactured by sub-contractors.
Turn-Earn index calculation?
Turn-Earn index = Product margin * Inventory Turn
- Product margin = (sales-costs) / sales
- Inventory turnover = cost of sales / average inventory
Mitä hyötyä on Turn-Earn indexistä?
By comparing different products’ Turn-Earn indexes we can determine which products are most valuable to have in stock.
Problem with Turn-Earn index?
Turn-Earn index is NOT an absolute metric.
–> It does not say that index 100 to product A is better than 98 on product B.
–>
We do not require as high Turn-Earn index from products that have lower inventory risk such as canned food or power cord.
Kun esimerkiksi maito ja kukat menee perkeleesti nopeemmin vanhaksi, niin niillä on higher inventory risk.
What is Turn-Earn index good for?
Turn-Earn index is good for comparing SIMILAR KIND of products or product groups.
