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Summary Working Capital Management €4,99
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  3. Hanzehogeschool Groningen (Hanze)
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  5. AIF-1 (AIF1)

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Summary Working Capital Management

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For the specialization in International Finance in your last year minor. This summary includes one component of the course, namely: Working Capital Management

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  • Onbekend
  • 3 maart 2019
  • 5
  • 2018/2019
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Voorbeeld van de inhoud

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

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