Working Capital Managment

• What is Working Capital?

  Working Capital Management (Balance Sheet) refers to the management of current assets and current liabilities to ensure capability to pay short term debt (liquidity). Insufficient WC means there are cash shortages, which forces debt, selling non current assets.
• Causes of Poor Working Capital?

  • Poor control of Inventories(stock):

  Storage costs

  Handling costs

  Security costs

  Obsolescence

  Theft

  • Poor Control of Accounts Receivable (trade debtors)

  Poor credit controls

  Poor invoicing

  Inefficient collection

  • Ineffective Use of Accounts Payable (trade creditors)
  • Poor Cash Flow Forecasting
  • Unexpected events
• Control of Current Assets - Cash?

  Ensuring that the optimal level of cash is reserved, to deal with day to day expenses or unexpected expenses

  Strategies:

  • Factoring
  • Cash Distribution
  • Selling of unwanted assets
  • Improve Receivables efficiency
• Control of Current Assets -Receivables?

  Improving the turnover rate of accounts receivable, so that cash is acquired faster.

  (Accounts receivable turnover)

  Strategies:

  • Payment Incentives (Discount for early payments, Punishment for Late payments) 
  • Factoring
• Control Of Current Assets - Inventories

  Ensuring Inventory management systems minimise cost and maintain stock value

  Strategies:

  •  J.I.T management (Just In Time) to ensure minimum inventory, as well as minimum cost for inventory
• Control of Current Liabilities - Payables

  Payables/accounts payable/creditors is the money the business owes to its suppliers.

  Days relies on reputation

  Strategies:

  • Stretch Accounts Payable:  the business pays its invoices on the last day they are due. Therefore, the business can keep as much cash in the business as possible to pay more urgent liabilities.(stays liquid for longer)
• Control of Current Liabilities - Loans

  Interest needs to be paid by due dates to be able to fund equipment and property

  Strategies:

  • Leasing Non Current Assets: Frees up cash payments by lower repayments
• Control of Current Liabilities - Overdraft

  Short term finance to fund short term needs

  Strategies:

  • Immediate Repayment: paying overdraft as soon as other cash is received
• Strategies - Leasing

  Hiring assets from another owner who owns assets.

  
  

  Leasing assets will not use up the cash available as there is no deposit required. Due to repayments, the assets expense will be spread across a period of time.

  
  

  For capital goods, lease would allow for upgrades when a new model releases, increasing productivity and cash flow
• Strategies - Lease and Sale Back

  Selling a non current asset will provide a cash injection into the business, thus improving working capital. The business can then lease back the asset sold at a monthly repayment