WORKING CAPITAL MANAGEMENT

Working Capital current assets used in operations (i.e. cash, inventory, accounts
receivables).
Net Working Capital current assets current liabilities
Current Assets must be converted to cash within a year.
o Examples: cash, short-term investments, accounts receivables, and
inventories.
Current liabilities must be paid with a year. For example, when Staples
purchases supplies, it doesnt immediately pay the suppliers.
o xamples: accounts payable (!"#), short-term debt, and the current
portion o$ lon% term debt.
Net Operating Working Capital (NOWC) &peratin% 'urrent !ssets &peratin%
'urrent (iabilities
Operating Current Assets ) 'ash * !ccounts +eceivable * ,nventories
Operating Current Liabilities ) !ccounts #ayable * !ccruals
Working Capital Manageent:
-. .hat is the appropriate amount o$ wor/in% capital0
1. 2ow should wor/in% capital be $inanced0
!un"aental Tra"eo##:
2i%h .or/in% 'apital3 (ow &peratin% +is/ 4 (ow +eturn on ,nvested 'apital (+&,')
(ow .or/in% 'apital3 2i%h &peratin% +is/ 4 2i%h +eturn on ,nvested 'apital (+&,')
Cas$ Con%ersion C&'le ( the len%th o$ time between a companys payments and cash
in$lows.
Cash Inventory Receivables Payables
Conversion Conversion Collection Deferral
Cycle Period Period Period
= +
Staples1556 'ash 'onversion 'ycle ) 76.8678 * -9.:;1- :-.1-:7 ) )*+,-). "a&s
.or/in% 'apital <ana%ement -
/taples0 /ele'te" !inan'ial 1ata
Source: 'ompany -5=, <arch :, 1556 >,ncome Statement?
Source: 'ompany -5=, <arch :, 1556 >@alance Sheet?
-. In%entor& Con%ersion Perio" the avera%e time reAuired to convert materials
into $inished %oods and then to sell the $inished %oods.
Inventory
Inventory Conversion Period
Sales per day
=
1556
1, 597,-87
76.8678
-;, 7B1, 861 " 789
Inventory Conversion Period
Staples days = =
1. Re'ei%ables Colle'tion Perio" (a./.a. Cays Sales &utstandin%) the avera%e
len%th o$ time reAuired to convert the $irms receivables into cash post sale.
Receivables Receivables
Days Sales Outstanding
Average Sales Per Day Annual Sales!"#
= =
( )
1556
-9.:;1-
Days Sales Outstanding
$%%&%#'
Staples days
()&!*%&"$% !"#
= =
.or/in% 'apital <ana%ement 1
7. Pa&ables 1e#erral Perio" the avera%e len%th o$ time between the purchase o$
materials and labor and the payment o$ cash $or the materials and labor.
Payables
Payables Deferral Period
Purchases per day
=
1556
-, 985, B16
:-.1-:7
-7, 611, 5--" 789
Payables Deferral Period
Staples days = =
/trategies #or /$ortening t$e Cas$ Con%ersion C&'le0
-. +educe ,nventory 'osts
-
,mprove lo%istics and production processes >Dust-in-time inventory.?
1. +educe +eceivables 'ollection #eriod
@ill customers more $reAuently convert monthly receivables to bi-wee/ly
receivables.
EtiliFe a loc/box plan have chec/s sent to #.&. boxes located within the
customers re%ion where a local ban/ can deposit chec/s upon receipt.
!utomatic electronic trans$ers accept electronic wire trans$ers or automatic
electronic trans$ers.
7. ,ncrease #ayables
Ese trade credit pay suppliers slowly i$ the terms are acceptable.
,ncrease accruals i$ possible pay employees monthly. +ote: 'ompanies
%enerally have little control over accruals.
-
Gote: Hhe twin %oals o$ inventory mana%ement are -) to ensure available inventories needed to sustain
operations and 1) to reduce the costs o$ carryin% inventory. ,nventory costs include: stora%e and handelin%,
insurance, property taxes, spoila%e, and obsolescence.
.or/in% 'apital <ana%ement 7