Professional Documents
Culture Documents
WORKING CAPITAL
MANAGEMENT
CHARACTERISTICS OF CURRENT ASSETS
• Short life span
• Swift transformation into other asset forms
Finished
goods
Accounts Work-in-
receivable process
Wages, salaries,
factory overheads
Raw materials
Cash Suppliers
FACTORS INFLUENCING WORKING
CAPITAL REQUIREMENTS
• Nature of Business
• Seasonality of Operations
• Production Policy
• Market Conditions
• Conditions of Supply
WORKING CAPITAL POLICY
assets?
Capital
requirements
A
C Permanent current
asset-requirement
Fixed asset
requirement
Time
CURRENT ASSETS FINANCING
POLICY
Accounts
payable period
Cash cycle
Average inventory
Inventory period =
Average COGS / 365
Average accounts receivable
Accounts receivable period =
Annual sales / 365
Average accounts payable
Average payable period =
Average COGS / 365
ILLUSTRATION
Financial Information for Horizon Limited
Balance Sheet Data
Profit and Loss Beginning of End of
Account Data 20X0 20X0
Sales 800 Inventory 96 102
Cost of goods 720 Accounts receivable 86 90
Sold Accounts payable 56 60
(96 + 102) / 2
Inventory period = = 50.1 days
720 / 365
(86 + 90) / 2
Accounts receivable period = = 40.2 days
800 / 365
(56 + 60) / 2
Accounts payable period = = 29.4 days
720 / 365
Operating cycle = 50.1 + 40.2 = 90.3 days
Inventory Accounts
period receivable
period