Transcript Chapter 11
OHT 11.1 Managing working capital OBJECTIVES You should be able to: Identify the main elements of working capital Discuss the purpose of working capital and the nature of the working capital cycle Explain the importance of establishing policies for the control of working capital Explain the factors that have to be taken into account when managing each element of working capital © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 11.2 The nature of working capital Major elements Major element Stocks Trade creditors Trade debtors Cash (in hand and at bank) Current assets Working capital equals © Pearson Education Limited 2003 Current liabilities less Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 11.3 The working capital cycle Cash sales Finished goods Cash/ bank overdraft Trade debtors Work in progress © Pearson Education Limited 2003 Raw materials Trade creditors Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 11.4 The management of stocks Procedures and techniques Budgeting future demand Stock management models Financial ratios Materials requirements planning (MRP) systems Recording and reordering systems Just-in-time (JIT) stock management Levels of control © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 11.5 ABC method of analysing and controlling stock Cumulative value of stock items (%) A B C Volume of stock items held (%) © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 11.6 Patterns of stock movements over time Stock level Time © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 11.7 Stockholding and stock order costs Ordering costs Annual costs (£) Total costs Holding costs 0 © Pearson Education Limited 2003 E Stock level (units) Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 11.8 Which customers should receive credit? The five Cs of credit Capital Capacity Collateral Conditions Character © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition Controlling the cash balance OHT 11.9 Outer limit Cash balance (£) Inner limit Target cash balance Inner limit Outer limit 0 1 2 3 4 5 6 7 8 9 10 11 12 Time (days) © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition The operating cash cycle OHT 11.10 Purchase of goods on credit Payment for goods Sale of goods on credit Cash received from debtors Stockholding period Operating cash cycle © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 11.11 Calculating the operating cash cycle Average stockholding period plus Average settlement period for debtors minus Average payment period for creditors equals Operating cash cycle © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition