...MINIMIZING WORKING CAPITAL In the finance world, all successful firms efficiently manage their own working capital in many different ways. The term working capital originated with an old Yankee peddler who would load up his wagon and go off to peddle his merchandise (wares) for sale. This merchandise was called working capital because it was what he actually sold or turned a profit on to produce his profits. The wagon and the horse used are considered his fixed assets. He generally owned the horse and wagon, so those were always considered financed with equity capital, but his merchandise was always bought on credit, which was just like borrowing from the bank (his supplier). The more trips this peddler made each year, the faster his working capital grew. This was the start of working capital and is the main reason why a business places importance and finds many challenges pertaining to minimizing working capital. (Brigham & Houston, 2013, pg 535) Working capital is a financial metric which represents operating liquidity available to a business, organization or other equity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered part of operating capital. Gross working capital equals to current assets. Net working capital (NWC) is calculated as current assets minus current liabilities. It is a deviation of working capital, which is commonly used in valuation techniques such as DCFs (Discounted cash flows)...
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...already taken action to reduce capital spending across the board, while others are gearing up to do so. Well-capitalized companies are positioned not only to survive the financial crisis today, but also to emerge victorious and thrive when skies turn blue again. Establishing and adhering to tight working capital standards enables a firm to continue its operations with sufficient funds to both satisfy maturing short-term debt and meet upcoming operational expenses. Cash Management Reducing working capital levels Laura Greenberg Cash Liberating Copyright ©200 9 by the Association for Financial Professionals. All rights reserved in all countries. 50 I AFP Exchange April 2009 2008B CTPs & CTPAs Working Capital Management (WCM)—front and center The current financial crisis has elevated decision-making related to working capital and short-term financing to top-of-mind for today’s executives. Although working capital is a simple concept, managing it is made difficult by the complexity of the business around it. A focus on short-term earnings without concurrent discipline on cash and working capital has deflected the attention of many companies from the basics, where “cash is king.” As a result of the global nature of large organizations— along with the diversity of systems, processes, organizations and measures of performance—many companies are surprised to find that they are holding excessive levels of working capital. Since free cash flow is a...
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...Minimizing working capital is essential for a company in today’s economy. There are many reasons why minimizing working capital is important. With its importance, though, there are many challenges. The most important reason to minimize working capital is to maximize shareholder wealth. Nicholas Havoutis states, “Proactive working capital management is fundamental to a company’s ability to adapt in a challenging economy, because it’s a discipline firmly within an organization’s control that can be practiced independent of the current macroeconomic environment,” (2003). He goes on to say, “Cash management activities, once seen as managing cash inflows and outflows, are increasingly viewed as fundamental to enhancing shareholder value,” (2003). Another importance of minimizing working capital is “to ensure that the organization is able to find the difference between short-term assets and short-term liabilities,” (Capital Eyes). When minimizing working capital we are basically managing short-term assets and liabilities. This means cash, receivables, and payables. Successful cash management means increasing cash surplus to cover debt. There are three ways a company can increase their cash surplus in an effort to cover their debt. First, collect receivables faster. Second, get better credit terms from suppliers. Third, move inventory faster, (Capcut). “Good capital management practices can lead to the optimal management of short-term assets and...
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...Minimizing Working Capital Minimizing working capital is essential for a company in today’s economy. There are many reasons why minimizing working capital is important. With its importance, though, there are many challenges. The most important reason to minimize working capital is to maximize shareholder wealth. Nicholas Havoutis states, “Proactive working capital management is fundamental to a company’s ability to adapt in a challenging economy, because it’s a discipline firmly within an organization’s control that can be practiced independent of the current macroeconomic environment,” (2003). He goes on to say, “Cash management activities, once seen as managing cash inflows and outflows, are increasingly viewed as fundamental to enhancing shareholder value,” (2003). Another importance of minimizing working capital is “to ensure that the organization is able to find the difference between short-term assets and short-term liabilities,” (Capital Eyes). When minimizing working capital we are basically managing short-term assets and liabilities. This means cash, receivables, and payables. Successful cash management means increasing cash surplus to cover debt. There are three ways a company can increase their cash surplus in an effort to cover their debt. First, collect receivables faster. Second, get better credit terms from suppliers. Third, move inventory faster, (Capcut). “Good capital management practices can lead to the optimal...
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...cycle to a high extent, thus minimizing the need for costly working capital. In past years, Dell has mainly financed its operations internally and secondly through the issuance of shareholder equity and small amounts of long term debt. Statement of Problem Being more flexible and responsive to market demands, Dell will bring new, superior products to market quicker than its competitors. This has created an expectation for large, double-digit growth in the upcoming year. Dell needs a plan for financing the large potential growth. Recommendations Dell has working capital advantages over its competitors which it should continue to pursue. Dell funded its FY 1996 growth both from internal and external funds. It was wise to seek external funding to support Dell’s healthy growth. If Dell were to grow by 50% in FY 1997, it is recommended to seek external funding for the amount not funded internally. Dell should issue debt and continue to take advantage of its strong internal cash conversion cycle to fund its continued growth. Dell should not reduce its external funding as it will limit its growth. Methods of analysis & Discussion (Q1) Dell’s advantageous working capital policy enabled the corporation to face its current growth. The Just-In-Time inventory system and Sales built to order allowed, reduced the cash conversion cycle and minimized the amount of capital Dell needed to finance its business. Compared to competitors, Dell working capital policy gave Dell the following...
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...changes have sparked an interest in our management to overhaul the current financial policies. Therefore, this financial team was created and asked to help Bob Knight analyze three working capital policies: aggressive, conservative, and moderate. A decision must be made to determine which policy will be the most beneficial for the future of Office Mates. Each policy has its own unique pros and cons, and changes that come with estimating different economic outlooks. * Aggressive policy * Minimizing the amount of cash and inventories * Use only short-term debt * Would result in the smallest investment in net working capital * Minimize accounts receivables * Moderate policy * Falls between the aggressive and conservative policies * Conservative policy * Holding large amounts of cash and inventories * Use only long-term debt * Maximize accounts receivables After analyzing each policy and comparing them with the needs of Office Mates, it has been concluded that Office Mates should use the conservative policy. This will put Office Mates in the working capital structure with the highest ROE at the lowest risk. We also have come to the conclusion that with the potential change in short term interest rates, the conservative working capital structure will not be affected. Summary of Facts Office Mates is a medium-sized manufacturer of metal file cabinets for home and office use. Due to the slowing of paper storage...
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...Chapter 14 Working Capital and Current Assets Management LearningGoals 1. 2. 3. 4. 5. 6. Understand short-term financial management, net working capital, and the related tradeoff between profitability and risk. Describe the cash conversion cycle, its funding requirements, and the key strategies for managing it. Discuss inventory management: differing views, common techniques, and international concerns. Explain the credit selection process and the quantitative procedure for evaluating changes in credit standards. Review the procedures for quantitatively considering cash discount changes, other aspects of credit terms, and credit monitoring. Understand the management of receipts and disbursements, including floats, speeding collections, slowing payments, cash concentration, zero-balance accounts, and investing in marketable securities. True/False 1. A firm that is unable to pay its bills as they come due is technically insolvent. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Basics of Short-Term Financial Management 2. The short-term financial management is concerned with management of the firm’s current assets and current liabilities. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Basics of Short-Term Financial Management 45 Gitman • Principles of Finance, Eleventh Edition 3. In the short-term financial management, the goal is to manage each of the firm’s current assets and current liabilities in order to achieve a balance between...
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...EXECUTIVE SUMMARY This paper aims to discuss and analyze the possible alternatives of Dell Computer Corporation in funding its future growth and expansion from the point of view of its top management. Given the company’s financial statements, projected growth in sales, and its working capital financial ratios, this paper forecasted Dell’s balance sheet and income statement for 1997 to trace the external fund needed, if any, and which type of funding is most optimal to fund its future operations and growth. The forecast used a set of assumptions based on the company’s historical data and company policies. After experiencing its first loss late 1993, the company dedicated itself to bringing back its efficient operations to keep up with the fast growing computer industry, minimizing middlemen retailers and shifting the company’s focus to the growth of their liquidity, profitability, and overall growth. The company eventually recovered through its new and improved internal systems of inventory control and vendor certification, ensuring that its products are always of the highest quality. Ensuring its foothold in the market, Dell was the pioneer in manufacturing Pentium-based products and transforming its major product line to Pentium technology. In 1995, Dell was able to ship its new system that was equipped with Microsoft’s Windows 95 on the same day that Microsoft released their operations system. Now, Dell is again atop the industry outpacing revenue growth and increasing its...
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...BETWEEN WORKING CAPITAL MANAGEMENT AND PROFITABLITY OF LISTED MANUFACTURING COMPANIES IN GHANA Agyemang Badu Ebenezer Lecturer, Department of Business Administration Presbyterian University College, Ghana Michael Kwame Asiedu Lecturer, Department of Business Administration Presbyterian University College, Ghana ABSTRACT This study examines the effect of working capital management on the profitability of companies listed on the Ghana Stock Exchange. Secondary data from the Ghana Stock Exchange on manufacturing companies within the Accra metropolis was used to examine whether working capital management influence the profitability of manufacturing companies in the country. The study found out that, the major component of working capital management such as inventory days, account payable and cash conversion cycle have influence on the profitability of manufacturing companies. The study recommended that, manufacturing companies should adopt efficient and effective ways of efficiently managing these components of working capital management. KEY WORDS: Working capital management, profitability, net operating profit 1.1 INTRODUCTION Working Capital Management has become very important in financial management because of its effects on the firm’s profitability, risk and consequently its value. There are several important reasons why the management of working capital is important to both small and large organisations. (Smith, 1980). A well designed and implemented working capital management...
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...(Jordan) Analysis of the relationship between working capital policy and operating risk: an empirical study on Jordanian industrial companies Abstract The study analyzes the working capital management practices and their impact on profitability and risk of industrial Jordanian firms for the period of 2004 to 2007. The total sample of the study consists of 59 industrial firms listed on Amman Stock Exchange. The working capital management practices examine the impact of aggressive/conservative working capital investment and financing policy and analyze through cross-sectional regression models the relationship between working capital policies and profitability as well as risk of the firms. Efficient management of working capital is a fundamental part of the overall corporate strategy aiming to create the shareholders’ value. Firms try to keep an optimal level of working capital that maximizes their value. The optimal level of working capital is determined to a large extent by the methods adopted for the management of current assets and liabilities. It requires continuous monitoring to maintain proper level in various components of working capital, i.e. cash receivables, inventory and payables, etc. The result indicates a negative relationship between the profitability measures of firms and degree of aggressiveness of working capital investment and financing policy. The firms yield negative returns if they follow an aggressive working capital policy. Moreover, the present study validates...
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...CHAPTER-I INTRODUCTION 1.1 MEANING OF WORKING CAPITAL “Working Capital is the Life-Blood and Controlling Nerve Center of a business” Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact: Accounts receivable (current asset) Inventory (current assets), Accounts payable (current liability) ...
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...SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN INTERNATIONAL BUSINESS WORKING CAPITAL MANAGEMENT On Kotak Mahindra Group INDUSTRY GUIDE FACULTY GUIDE AMITY INTERNATIONAL BUSINESS SCHOOL, NOIDA AMITY UNIVERSITY – UTTAR PRADESH TABLE OF CONTENTS Chapter No. Subject Page No. Ch No.1 Executive Summary…………………. 6 Ch No.2 Research Methodology……………… 7 2.1 Primary Objective(s)…………. 2.2 Hypothesis…………………… 2.3 Research Design……………… 2.4 Sample Design……………….. 2.5 Scope of the Study……………. 2.6 Limitations……………………. Ch No.3 Critical Review of Literature……….. 9 Ch No.4 Company Profile ……………………. 18 Ch No.5 Industry Profile……………….. 21 Ch No.6 SWOT Analysis…………………. 45 Ch No.7 Data………………………………….. 46 7.1 Collection……………………… 7.2 Primary Data…………………… 7.3 Secondary Data….…………….. Ch No.8 Working Capital- Overall View……… 53 Ch No.9 Findings & Analysis…………………. 100 Ch No.10 Recommendations…………………… 112 Ch No.11 Bibliography…………………………. 114 Ch No.12 Annexure…………………………….. 115 12.1 Tables…………………………. 12.2 Graphs………………………… Ch No.13 Case Study...…..................................... 117 Ch...
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...CHAPTER 16 WORKING CAPITAL POLICY AND SHORT-TERM FINANCING ANSWERS TO QUESTIONS: 1. The need for working capital arises because the normal operating cycle of the firm requires that expenditures for raw materials, labor, etc. be made prior to receipt of the funds from the sale of the output. Funds must be invested during the operating cycle in the various short-term assets that make up working capital--namely, cash, inventories, and accounts receivable. 2. The operating cycle represents the length of time involved in purchasing raw materials, manufacturing the product, and distributing (selling) the product. The cash conversion cycle represents the net time interval between the collection of cash receipts from sales and the cash payments for the various resources used by the firm. The operating cycle is equal to the sum of the inventory conversion period and the receivables conversion period. The cash conversion cycle is equal to the operating cycle less the payables deferral period. 3. A relatively large investment in working capital results in lower expected profitability and lower risk for the firm. The rate of return on current assets is normally less than the rate of return on fixed assets and hence a relatively large investment in current assets lowers the overall rate of return on the total assets of the firm. However, a relatively large investment in current assets also increases the working capital position of the firm...
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...Sweden University Department of Social Sciences Business Administration D Master Thesis Fachhochschule Aachen Fachbereich Wirtschaftswissenschaften Europäischer Studiengang Wirtschaft Diplomarbeit THE IMPACT OF WORKING CAPITAL MANAGEMENT ON CASH HOLDINGS – A Quantitative Study of Swedish Manufacturing SMEs Author: Place of Birth: 1st Examiner: 2nd Examiner: Tutor: Term: Due Date: Maxime Abel Frankenthal, Germany Prof. Håkan Boter (Mid Sweden University) Prof. Dr. Jürgen Stephan (Fachhochschule Aachen) Dr. Darush Yazdanfar Summer 2008 May 30th, 2008 Abstract This study examines the impact of working capital management on cash holdings of small and medium-sized manufacturing enterprises in Sweden. The aim of this work is to theoretically derive significant factors related to working capital management which have an influence on the cash level of SMEs and test these in a large sample of Swedish manufacturing SMEs. The theoretical framework for this study consists of a treatise of motives for holding cash, working capital management and cash level. From these theoretical findings, two hypotheses are deduced: • H1: Cash holdings are negatively related to the presence of cash substitutes • H2: Cash holdings are positively related to working capital management efficiency The quantitative investigation consists of the statistical analysis – namely comparison of means and correlation analysis – of key figures which are calculated from the financial statements of a...
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...The Effects of Working Capital Management on Firm Profitability A study examining the impacts of different company characteristics Authors: Hampus Björkman & Micael Hillergren Supervisor: Lars Lindbergh Student Umeå School of Business and Economics Spring semester 2014 Degree project, 30 HP Abstract Many argue that there is a trade off between profitability and liquidity. However, many studies have found that the profitability can increase with an efficient Working Capital Management. Correctly allocating cash flows to where and when it is needed increases liquidity and simultaneously increasing profitability. The purpose of this study is to develop the research on the relationship between Working Capital Management and profitability by investigating how it is affected by different company characteristics. A quantitative method was applied with philosophical stances in objectivism and positivism and deductive theory was used to approach the subject. From the theoretical framework, five hypotheses were established and statistically tested in order to answer our research question. The first hypothesis was formulated to confirm previous research, while the remaining two aimed at providing both a theoretical and practical contribution to existing knowledge. The thesis centers on the Cash Conversion Cycle, a metric of how fast a company turns purchased products into profit, with Gross Profit Margin as the measure of profitability. The...
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