Working Capital Flashcards
The capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
Working Capital
What does managing the balance sheet allow you to do?
- improve performance without > sales or < costs
- more efficient converting inputs into cash
- speeds up the “cash conversion cycle”
- more independent from raising money, you have more $$
What is the formula for Working Capital ?
Current Assets - Current Liabilities
What are all the current assets ?
Cash
Equivalents
Inventory
Accounts Receivable (AR)
What are all the current liabilities ?
Accounts Payable
Accrued Expenses
Current Maturities of LT debt
The process of how the cash into the company is flowing in and out to create company value
Production Cycle
Production Cycle process for making plastic cups. Money comes into the company. What is the flow?
- Goes OUT to buy RAW materials
- Raw moves to WIP, Cash for LABOR
- WIP moves to FGs, Cash for Labor
- FGs move to Sales
- Sales become AR
What are the Working Capital Accounts that you and your employees can affect on a daily basis?
- Accounts Receivable
- Inventory
- Accounts Payable
What are the the 3 levers to Increase Working Capital ?
- DSO (Low)
- Managing Inventory (any)
- DPO (High)
What is a DSO ?
Days Sales Outstanding
What is the calculation for DSO and what does it tell you?
Ending Accounts Receivable / (Revenue / day)
- If it goes up either the Ending Accounts receivable increased or the revenue decreased
What is credit line with a consumer ?
The amount of credit extended to a borrower (line of credit)
What is DIT ?
Days Inventory is tied up
How do you calculate DIT ?
Average Inventory / (Cost of Goods / Day)
What are some causes of inventory increasing?
- more customers
- salesmen promises
- engineers continually tweaking product improvements
What does inventory do to your cash? And tell you?
- The more inventory you have the more cash you have because you can sell at lower price you need to
- How long your cash is tied up in inventory
What is the key ratio for inventory ?
DII (Days in Inventory)
What is DPO?
Days Payable Outstanding
How do you calculate DPO?
Ending Accounts Payable / (cost of goods/ day)
What is the cash conversion cycle ?
- Another way to understand WC.
- How effectively your company’s activities turn in to cash
- It’s a combination of several ratios
- Track your company over time
- Compare to competitors
What is the formula for Cash Conversion Cycle?
DSO + (DII – DPO) = # of day
