Summary Working Capital Management
Introduction
To operate a company, it does not only need fixed assets but also cash to pay for its day-to-day
operations
- cash remains tied up in inventories when products are produced but not yet sold
- cash remains tied up in AR when customers get credit
- no immediate cash is required in AP when firm also get credit of its suppliers
- no immediate cash is required in Accrued Expenses when firm not yet paid
Cash = cash is tied up in a bank account instead of being invested
Inventories = cash is tied up to raw materials, work in process, finished goods
Accounts Receivable = cash is tied up to our clients
Prepaid Expenses = cash is tied up services suppliers
Accounts Payable account / Suppliers = free source of funds
Accrued Expenses = no immediate cash required
Working Capital = The cash required to operate the day-to-day business
Cash Forecasting planning future cash requirement to avoid crisis of liquidity, avoid insolvency
when there is no cash // is a statement of the firm’s planned inflows and outflows of cash which is
used to estimate short-term cash requirements with particular attention to anticipated cash
surpluses (must be invested) and shortfalls (must be funded) monthly covering a one-year period
(the more seasonal and uncertain a firm’s cash flows, the greater the number of intervals)
+ forewarns / + helps manager/owner prepare for them / + shows bad debt collection issues
5 Steps Cash Forecasting 1) create Cash Receipts Schedule (Sales/Repayments) 2) Create Cash
Disbursement Schedule (Purchases/Utility bills, wages, rent) 3) Cash In – Cash Out 4) adjust balances
by adding or subtracting cash flows > short-term investment/financing strategy 5) at end month
compare reality with forecast
Step 4) depends on interest rate
(increase/decrease?)
Uncertainty in the Cash Budget: several
forecasted scenarios (pessimistic, most likely,
optimistic)
The Financial Planning Process: Short-Term Financial Plans
Short-term (operating) financial plans specify short-term financial actions and the anticipated impact
of those actions (input: sales forecast and other operating and financial data / output: operating
budget, cash budget, pro forma financial statements)
, Sales forecast: a prediction of the sales activity during a given period (external and internal data)
used as a basis for estimating the monthly cash flows
external forecast: based on relationships observed between the firm’s sales and certain key
external economic indicators
internal forecast: based on a buildup or consensus of sales forecasts through the firm’s own
sales channels
Cash Flow Management
Cash is King without cash, profits are meaningless (n good cash management might end up in
bankruptcy)
How to minimize costs having an efficient process (cash manager!)?
Cash Manager
Liquidity Management
Cash Balances Management: day-to-day management of current accounts
Funds Management: management of cash positions that exist for longer period
Cash Flow Management
Financial Logistics: managing payment processes and reducing transaction costs (less number
etc.)
Managing Cash-Flows, optimize interest: monitoring incoming, outgoing and intra-company
payments, synchronize them at the right time and place at minimum costs
Options to reduce transaction costs:
Cost saving within existing cash flow structure (negotiating lower transaction fees and bank
charges; reducing bank float and value dating; select less expensive payment methods)
Changing the cash flow structure (cross-border payments: off-shore account; intra-company
cash flows)
Changing the internal organization (payment and collection factory
Intra-Company cash flows (internal current account or Netting)
Netting: administrative off-setting of reciprocal cash flows (only net cash-flows are settled between
companies
Bilateral netting between 2 parties
Multilateral netting between larger number of parties (with a netting centre)
+ reduce transaction costs / interest cost of float and value dating / forex costs / administrative
workload
+ less tangible benefit
Operating costs of Netting
Management costs: In-House or Outsourcing
System costs: spreadsheets, ERP System, Web-based netting systems
Working Capital Management ensure that a firm is able to continue its operations and that is has
sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses
(managing inventories, accounts receivable, accounts payable and cash)
Objectives: ensure not more cash than required is invested in working capital accounts (AR,
Inventory, AP) / improve liquidity and profitability, minimize risk
Operating a company is a dynamic process in which cash is continuously flowing in and out of
company
Gross Working Capital = Current Assets
Net Working Capital = Current Assets – Current Liabilities (Chapter 15.1)
Operating Working Capital (Working Capital Requirements) = Current Assets (except Cash & Market
Securities) – Current Liabilities (except Notes Payable & Current Maturities eg. Bank credit)
These items are related to financial decisions and not driven by operations
Introduction
To operate a company, it does not only need fixed assets but also cash to pay for its day-to-day
operations
- cash remains tied up in inventories when products are produced but not yet sold
- cash remains tied up in AR when customers get credit
- no immediate cash is required in AP when firm also get credit of its suppliers
- no immediate cash is required in Accrued Expenses when firm not yet paid
Cash = cash is tied up in a bank account instead of being invested
Inventories = cash is tied up to raw materials, work in process, finished goods
Accounts Receivable = cash is tied up to our clients
Prepaid Expenses = cash is tied up services suppliers
Accounts Payable account / Suppliers = free source of funds
Accrued Expenses = no immediate cash required
Working Capital = The cash required to operate the day-to-day business
Cash Forecasting planning future cash requirement to avoid crisis of liquidity, avoid insolvency
when there is no cash // is a statement of the firm’s planned inflows and outflows of cash which is
used to estimate short-term cash requirements with particular attention to anticipated cash
surpluses (must be invested) and shortfalls (must be funded) monthly covering a one-year period
(the more seasonal and uncertain a firm’s cash flows, the greater the number of intervals)
+ forewarns / + helps manager/owner prepare for them / + shows bad debt collection issues
5 Steps Cash Forecasting 1) create Cash Receipts Schedule (Sales/Repayments) 2) Create Cash
Disbursement Schedule (Purchases/Utility bills, wages, rent) 3) Cash In – Cash Out 4) adjust balances
by adding or subtracting cash flows > short-term investment/financing strategy 5) at end month
compare reality with forecast
Step 4) depends on interest rate
(increase/decrease?)
Uncertainty in the Cash Budget: several
forecasted scenarios (pessimistic, most likely,
optimistic)
The Financial Planning Process: Short-Term Financial Plans
Short-term (operating) financial plans specify short-term financial actions and the anticipated impact
of those actions (input: sales forecast and other operating and financial data / output: operating
budget, cash budget, pro forma financial statements)
, Sales forecast: a prediction of the sales activity during a given period (external and internal data)
used as a basis for estimating the monthly cash flows
external forecast: based on relationships observed between the firm’s sales and certain key
external economic indicators
internal forecast: based on a buildup or consensus of sales forecasts through the firm’s own
sales channels
Cash Flow Management
Cash is King without cash, profits are meaningless (n good cash management might end up in
bankruptcy)
How to minimize costs having an efficient process (cash manager!)?
Cash Manager
Liquidity Management
Cash Balances Management: day-to-day management of current accounts
Funds Management: management of cash positions that exist for longer period
Cash Flow Management
Financial Logistics: managing payment processes and reducing transaction costs (less number
etc.)
Managing Cash-Flows, optimize interest: monitoring incoming, outgoing and intra-company
payments, synchronize them at the right time and place at minimum costs
Options to reduce transaction costs:
Cost saving within existing cash flow structure (negotiating lower transaction fees and bank
charges; reducing bank float and value dating; select less expensive payment methods)
Changing the cash flow structure (cross-border payments: off-shore account; intra-company
cash flows)
Changing the internal organization (payment and collection factory
Intra-Company cash flows (internal current account or Netting)
Netting: administrative off-setting of reciprocal cash flows (only net cash-flows are settled between
companies
Bilateral netting between 2 parties
Multilateral netting between larger number of parties (with a netting centre)
+ reduce transaction costs / interest cost of float and value dating / forex costs / administrative
workload
+ less tangible benefit
Operating costs of Netting
Management costs: In-House or Outsourcing
System costs: spreadsheets, ERP System, Web-based netting systems
Working Capital Management ensure that a firm is able to continue its operations and that is has
sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses
(managing inventories, accounts receivable, accounts payable and cash)
Objectives: ensure not more cash than required is invested in working capital accounts (AR,
Inventory, AP) / improve liquidity and profitability, minimize risk
Operating a company is a dynamic process in which cash is continuously flowing in and out of
company
Gross Working Capital = Current Assets
Net Working Capital = Current Assets – Current Liabilities (Chapter 15.1)
Operating Working Capital (Working Capital Requirements) = Current Assets (except Cash & Market
Securities) – Current Liabilities (except Notes Payable & Current Maturities eg. Bank credit)
These items are related to financial decisions and not driven by operations
