Slide 12.1 Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 9...

1

Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 9th edition © Pearson Education Limited 2015

Chapter 12 MANAGING WORKING

CAPITAL

2


LEARNING OUTCOMES

You should be able to:

Discuss the purpose of working capital and the nature of the working capital cycle

Identify the main elements of working capital

Explain the factors that have to be taken into account when managing each element of working

capital

Explain the importance of establishing policies for the control of working capital

3


The nature and purpose of working capital

Major elements Major element

Inventories

Trade receivables

Cash (in hand and at bank)

Trade payables

lessequals

Current liabilitiesWorking capital

Current assets

4


The working capital cycle

Trade payables

Trade receivables

Finished goods

Cash/bank

overdraft

Work in progress

Raw materials

Cash sales

Credit sales Cash

Figure 12.1 The working capital cycle

5


Working capital opportunity assessment

€800B

Total working capital opportunity

€700B

€600B

€500B

€400B

€300B

€200B

€100B

Trade receivablesopportunity

Inventoriesopportunity

Trade payablesopportunity

€890B

€293B €296B €300B

€900B

Figure 12.2 Working capital opportunity assessment

6


Inventories financing cost

Business Type of operations

Cost of

capital

Average inventories

held

Financing cost of holding

inventories

Operating profit/ (loss)

Financing cost as % of

operating profit/(loss)

(a) (b) (a) × (b)

% %

Associated British Foods

Food producer

11.4 £1,540m £176m £1,093m 16.1

SIG Group Builders

merchants

8.2 £224m £18m £58m 31.0

J Sainsbury Supermarket 10.0 £962m £96m £887m 10.8

Babcock Int. Engineering 7.5 £78m £6m £235m 2.6

Source: Annual Reports for years ending in 2012 and 2013

7


Managing inventories

Budgeting future demand

Financial ratios

Recording and reordering systems

Inventory management models

Materials requirements planning (MRP) system

Levels of control

Just-in-time (JIT) stock management

Procedures and techniques that can be used to ensure the proper management of inventories

8


Financial ratios

Average inventories turnover period

Average inventories held × 365 Cost of sales =

9


ABC method of analysing and controlling inventories

Cumulative value of

inventories items(%)

Volume of inventories items held (%)

A B C 100

100

Figure 12.3 ABC method of analysing and controlling inventories

10


Inve

nto

ries

leve

l

Time

Patterns of inventories movements over time

Figure 12.4 Patterns of inventories movements over time

11


Inventories holding and order costs

Annual costs

(£)

Average inventories level (units)

E

Total costs

Holding costs

0

Ordering costs

Figure 12.5 Inventories holding and order costs

12


The economic order quantity (EOQ) model

Where:

D = the annual demand for the inventories item (expressed in units of the inventory item);

C = the cost of placing an order;

H = the cost of holding one unit of the inventories item for one year.

EOQ = 2DC

H

13


Just-in-time inventories management

May result in hidden costs (taking advantage of cheap sources of supply)

Requires close relationship with suppliers

May require re-engineering production process

Can be seen as part of TQM approach

14


Managing trade receivables

Which customers should receive credit

Questions to ask

How much credit should be offered

What length of credit it is prepared to offer

Whether discounts will be offered for prompt payment

What collection policies should be adopted

How the risk of non-payment can be reduced

15


The five Cs of credit

Capital

Capacity

Collateral

Conditions

Character

Which customers should receive credit?

16


Sources of credit information

Bank references

Published financial statements

Trade references

Credit agencies

Register of County Court Judgements

The customer

17


Length of credit period

The typical credit terms operating within the industry

The degree of competition within the industry

The bargaining power of particular customers

The risk of non-payment

The capacity of the business to offer credit

The marketing strategy of the business

May be influenced by:

18


Ageing schedule of trade receivables at 31 December

Customer Days outstanding Total

1 to 30days

31 to 60days

61 to 90 days

More than 90 days

£ £ £ £ £

A Ltd 12,000 13,000 14,000 18,000 57,000

B Ltd 20,000 10,000 – – 30,000

C Ltd – 24,000 – – 24,000

Total 32,000 47,000 14,000 18,000 111,000

19


Collection policies

Publicise credit terms

Issue invoices promptly

Develop customer relationships

Produce an ageing schedule of receivables

Answer queries quickly

Monitor outstanding debts

Deal with slow payers

20


Comparison of actual and expected (budgeted) receipts over time

%

Time

10

20

30

40

June July August September

Actual

Budgeted

Figure 12.6 Comparison of actual and expected (target) receipts over time forExample 12.5

21


Why hold cash?

There are three reasons:

To meet day-to-day commitments

To deal with uncertain cash flows

To exploit profitable opportunities

22


Factors influencing the amount of cash held

The opportunity cost of holding cash

The level of inflation

The nature of the business

The cost of borrowing

Economic conditions

The availability of near-liquid assets

Relationships with suppliers

Possible factors may include:

23


Main techniques

Preparing cash budgets

Controlling the cash balance

Managing the operating cash cycle

Managing cash

24


Purchase of goods on credit

Payment for

goods

Sale of goods on

credit

Cash received

from credit customer

Inventories holding period

Operating cash cycle

The operating cash cycle

Figure 12.7 The operating cash cycle

25


Calculating the operating cash cycle

equals

minus

plus

Operating cash cycle

Average settlement period for payables

Average settlement period for receivables

Average inventories holding period

Figure 12.8 Calculating the operating cash cycle

26


Working capital performance for the US and Europe 2002-2012

200520042003 2006

36

38

40

42

44

46

48

50

2002 2007 2008 2009 2010 20122011

US

EuropeOCC

Figure 12.9 Working capital performance of large European and US businessesover timeSource: All Tied Up: Working Capital Management Survey 2013, Ernst and Young, p. 6 , www.ey.com.

Slide 12.1 Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 9...

Documents

Transcript of Slide 12.1 Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 9...