Working cap management Flashcards
Describe working capital
Working capital is the capital available for conducting the day to day operations of an organisation. It is normally the excess of current assets over current liabilities
What is the key trade off consideration when thinking about working cap?
The trade off between liquidity and profitability
Describe the working capital cycle
Cash - payment of suppliers - raw materials - WIP - FG - Receivables - cash
What is the formula for calculating the working capital cycle (AKA - cash operating cycle)?
Raw materials holding period X
Less payables payment period
(X) Add WiP holding period
X
Add finished goods holding period
X
Add receivables collection period
X
= Working capital cycle
X no of days
HINT - everything gets added together apart from payables payment period which is deducted
What are some of the key indicators of overtrading?
A rapid increase in turnover, which in turn gives rise to a rapid increase in the volume of current assets.
Most of the increase in assets being financed by credit
A dramatic drop in liquidity ratios
What is the formula for raw material holding period?
Average raw material inventory held
———————— x365
Material usage
What is the formula for WIP holding period?
Average WIP
—————— x 365
Production cost/COGS
What is the formula for finished goods holding period?
Average finished goods inventory held
—————— x 365
COGS
What is the formula for payables days?
Average payables
——————– x 365
Credit purchases
What is the formula for debtor days?
Average receivables
———————- x 365
Credit sales
What is the formula for current ratio?
current liabilities
What is the formula for quick ratio?
Current assets - inv
Current liabilities
