4. working capital management

8/3/2019 4. Working Capital Management

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NOOR HAMIZAH BT HAJI BAHARIN (Introduction)

NURUL ARAFAH BT ISHAK (Current assets)

TEO KIEN HEE

IRAJ NIKOOKAR( SHORT TERM FINANCING)

OMID ASHOORI

MEHDI HAJ ALI LARIJANI

ATHIRA BT (Cash conservation cycle )

SUHAILI BT SAADON

WORKING CAPITAL

MANAGEMENT


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INTRODUCTION OF WORKING

CAPITAL MANAGEMENT

PRESENT BY :

NOOR HAMIZAH BTE BAHARIN

(MA101315)


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NOOR HAMIZAH

The expression working capital is used in

different senses by different people. Strictly

speaking, all capital supplied by shareholders and

creditors to a business enterprise works byearning revenues, providing finance for expansion,

being invested in new assets and used up in

discharging obligations incurred in the course of

everyday operations.

INTRODUCTION


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NOOR HAMIZAH

Theconceptof working capital is associatedwith current assets, which include cash, near-cash (eg: short term securities ) and trading non-monetaryassets such as stocks, work-in-progress and debtors.

A proportion of funds required for investment inthese assets is provided by suppliers and short termcreditors, while the remainderthe difference

between the total current assets and the totalcurrent liabilities must be financed frompermanent capital.


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DEFINITION

A firms working capital comprises of its currentassets minus current liabilities. Current assets

comprise principally of inventories, accounts

receivables, cash and short term securities. These

assets are termed current as the assetsconcerned can be converted into cash within one

year or less. Current liabilities, on the other hand,

comprise principally of account payable, accruals,

short-term borrowing and taxes payable. These

are obligation owed by the firm that are expected

to come due within one year or less. Net working

capital is defined as the differences between the

firms current assets and current liabilities.

NOOR HAMIZAH


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NOOR HAMIZAH

Working capital, therefore, can be

defined as the net balance of current

operating assets or the surplus of

current assets over current liabilities.

This is a usual standard definition.

A balance sheet is a static picture of

net assets employed in a company,

and how they are financed, at a given

point in time


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SAMPLE OF BALANCE SHEET


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NOOR HAMIZAH

BENEFIT

To keep stocks and debtors at

the lowest possible levelconsistent with the efficientoperation of the business. A

chronic shortage of stock or anunwillingness to extend the

usual credit terms to customers

could seriously hinder therunning of the company

To obtain the largestpossible amount of

credit that the suppliersare willing to grant,

consistent withoptimum buying

principles.


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CURRENT ASSETS AND CURRENT

LIABILITIES

PRESENT BY :

NURUL ARAFAH ISHAK

TEO KIEN HEE


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Learning Objectives Important Terms

Cash Management

Reasons for Holding Cash

Determining the Optimal Cash Balance Cash Management Techniques

Accounts Receivable Management

The Credit Decision

Credit Policies

The Collection Process Inventory Management

Inventory Management Approaches

Evaluating Inventory Management

TEO KIEN HEE

Lecture Agenda


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LEARNING OBJECTIVES

You should understand the following:

How to manage individual asset items, such as cash,

receivables, and inventory

The nature of the major sources of short-termfinancing, such as trade credit, bank loans, factoring

arrangements, and money market securities

The fact that in evaluating current asset and currentliability decisions, the final decision rests on the

standard problem of trading off expected benefits

and potential costs

TEO KIEN HEE


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Cash and Marketable Securities

Working Capital Management

Current Assets and Current

Liabilities

TEO KIEN HEE


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Gross Working Capital : (Current Assets)

New Working Capital : (Current Assets - Current

Liabilities) Working Capital Management

Involves investing in current assets and financing of

current assets:

Current

Liabilities

Long-Term

Financing

Current Asset

Investment

Working Capital Management:An Overview

TEO KIEN HEE


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Transactions motive

-To meet cash needs that

normally arise from doing

business

Precautionary motive

-To meet any unexpected

need for cash

Speculative motive

-To take advantage of

potential profit making

situations

Reasons for Holding Cash

TEO KIEN HEE


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The optimal cash balance is the amount of cash that

balances the risks of illiquidity against the sacrifice in

expected return that is associated with maintaining

cash.

Differs substantially across firms

Firms with predictable cash flows will have

lower optimal cash balance requirement Firms with excess borrowing capacity (unused

line of credit for example) can hold less cash.

Determining the Optimal CashBalance

TEO KIEN HEE


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Cash flow synchronization can free up cash (and lower theamount of capital a firm requires)

This is done by:

Speeding Up Cash Inflows :

Bill clients earlier each month

Increase cash sales through incentives

Encourage customers to pay using electronic paymentssystems such as direct deposit, automatic debit, debitcard, rather than cheque.

Delaying Outflows :

Arrange with suppliers for more liberal trade creditterms (net 40 rather than net 30 for example)

Paying employees once a month rather than twice.

Cash ManagementTechniques

TEO KIEN HEE


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Cash Managements

Float is the time that elapses between the time the paying firminitiates payment, and the time the funds are available for use bythe receiving firm.

Float has been reduced or eliminated through:

Debit cards

Preauthorized payments Electronic funds transfer (EFT) and electronic data interchange

(EDI) systems.

Float

TEO KIEN HEE


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Everything else remaining the same, higher levels of current

assets mean lower risk and lower expected return

Lower Risk

Greater ability to meet short-run obligations.

Lower Return

Cash and marketable securities typically yield low returns.

Furthermore, when current assets are increased,

additional financing costs will be incurred thereby

lowering returns.

Lower levels of current assets result in opposite effects.

Current Asset Investment Policy

TEO KIEN HEE


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0

2

4

6

8

10

12

14

0 20 40

Current Asset (millions of $)

Sales (millions of dollars)

Conservative - low risk

Aggressive - high risk

Moderate

Alternative Current AssetInvestment Policies

TEO KIEN HEE


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Temporary vs. Permanent Investmentin Current Assets

Commonly, firms experience short-runfluctuations in current assets. For

example, retail department stores willhave high levels of inventory around

Thanksgiving. In January, the inventoryshould be low.

Firms always have some minimum level ofinvestment in current assets (i.e., a permanent

investment). As a firm grows over time, the levelof permanent current assets also grows (e.g., a

supermarket chain with 70 stores will have morepermanent inventory than a chain with 4 stores).

Temporary Investment

Permanent Investment

TEO KIEN HEE


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0

2

4

6

8

10

12

14

0 3 6 9 12 15 18 21

Millions of dollars

Time Period

Temporary Fluctuations in

Current Assets

Permanent Current Assets

Temporary and PermanentCurrent Assets

TEO KIEN HEE


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Accounts Receivable



Liabilities

Nurul Arafah


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1. The decision to extend credit to customers has significantcash flow and credit risk implications for the firm.

Firms often dont have a choice, if the availability of

credit is an important factor in the customers

purchase decision process (if competitors offer credit,then the firm must at least match those credit terms,

and then choose to compete on another basis.)

2. The second decision (once the firm has decided to extend

credit) is to determine which customers will be grantedcredit.

3. The credit terms must be established.

4. The collection process must be decided.

Accounts Receivable

Nurul Arafah

Nurul Arafah


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The Credit Decision

Nature Of

TheProduct

Sold

TheIndustry

Practices

OfCompetito

rs

The decision to extend credit is determined:

Nurul Arafah


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The process designed to assess the risk of non-payment bypotential customers, which involves collecting information

about potential customers with respect to their credit history,

their ability to make payments as reflected in their expected

cash flows, and their overall financial stability.

From the firms point of view:

Often willing to extend credit on terms better than a bank

because:

The potential for the firm developing a good customerinto the future, and

Losses are limited to production costs in the case of

default.

Credit Analysis

Nurul Arafah


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Credit Analysis

Variables that are weighed in the credit analysisprocess:

Capacitythe customers abilityto pay

Collateral the securitythat could be seized to

satisfy payment

Conditions the state ofthe economy.

Character thecustomers

willingness to pay

Nurul Arafah


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The firm must choose what terms of credit to offerits customers.

Terms of credit include:

The due date The discount amount (if any)

Options include:

Cash on delivery (COD)

Cash before delivery (CBD)

Net 30, net 40 - no incentive for early payment

2/10 net 30 - a 2% discount for early payment

Credit Policies

Nurul Arafah


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Change in Credit Policy Analysis

When extending more lenient credit

terms the firm hopes to increaserevenues through the sale of more units,

and perhaps even charge higher prices.

These benefits are offset by financingcosts and the increased risk of non-

payment.

Nurul Arafah


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The firm must monitor outstanding A/R by customer and bycategory.

The firm must then determine what action it will take whenlate payments occur.

Charge interest on outstanding balances Notify customer of arrears (email, mail, telephone)

Actions on unpaid amounts:

Allow no further purchases on credit

Choose from a number of additional options to collect:1. Take legal action

2. Sell receivable to a collection agency

3. Write off the debt as uncollectable.

The Collection Process

Nurul Arafah


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FACTORING

It may not be cost-effective for a firm to manage the

collection process itself.

Factoring arrangements are the sale of a firms

receivables, at a discount, to a financial company

called a factor, which specializes in collections, orthe out-sourcing of the collections to a factor.

Nurul Arafah


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INVENTORY



Liabilities

Nurul Arafah


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Inventory The level of inventory a firm holds is a trade off between

benefits and costs:

Benefits of Holding Inventory: Take advantage of large-volume discounts

Reduce the probability of production disruptions

because of lack of inventory

Minimize lost sales because of stock-outs

Costs of Holding Inventory:

Financing costs associated with inventory investment

Storage, handling, insurance, spoilage and

obsolescence costs. Nurul Arafah


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Carrying Costs storage and handling costs, insurance, propertytaxes, depreciation, and obsolescence.

Ordering Costs cost of placing orders, shipping, and handlingcosts.

Costs Of Running Short loss of sales or customer goodwill, and

the disruption of production schedules.Reducing the average amount of inventory generally reducescarrying costs, increases ordering costs, and may increase thecosts of running short.

Types Of Inventory Costs

Nurul Arafah


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SHORT-TERM FINANCING

Presented By:Iraj Nikookar

Omid Ashoori

Mehdi Haj Ali Larijani


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Short-term

Financing


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Financing that will be repaid in one year or less.

Short-term financing may be used to meet seasonal and

temporary fluctuations in funds position as well as to meet long-

term needs.

For Example, Providing :

1)Additional Working Capital

2)Finance current assets (such as receivables and inventory)

3)Interim financing for a long-term project until long-term

financing is arranged

What is the Short-Term Financing?

Iraj Nikookar


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SPEED:A Short-term loan can be obtained much faster than long-term credit. Lenders will insist

on a more thorough financial examination before extending long-term credit.

Therefore ,if founds are needed in a hurry ,the firm should look to the short-term

market.

FELEXIBILITY:If its needs for funds are seasonal or cyclical , a firm may not want to commit itself to

long-term debt for three main reasons:

1) Flotation costs are higher for long-term debt than for short-term credit

2) Although, long-term debt can be repaid early, provided the loan agreement includes

a prepayment provision, prepayment penalties can be expensive.

3) Long-term loan agreements always contain provisions or covenants, which

constraint the firms future actions.

Why do we ChooseShort-Term Financing?

Iraj Nikookar

Cost of Long Term Vs


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Interest rates are generally lower on short-term debt. Thus, under normalconditions, interest costs at the time the founds are obtained will be

lower if the firm borrows on a short-term rather than long-term basis.

Even though short-term rates are often lower than long-term rates, short-term credit is riskier for

two reasons:

1) If a firm borrows on a long-term basis. Its interest costs will be relatively stable over time,but if it uses short-term credit, its interest expense will fluctuate widely, at times going quite

high.

2) If a firm borrows heavily on a short-term basis, a temporary recession may render it unable

to repay this debt. If the borrower is in a weak financial position, the lender may not extend

the loan, which could force the firm into bankruptcy.

Cost of Long-Term VsShort Term Debt

Risk of Long-Term VsShort-Term Debt

Iraj Nikookar


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1. Trade Credit

2. Bank Loans3. Commercial Finance Loans

4. Commercial Paper5. Receivable Financing

Source of Short-Term Financing

Iraj Nikookar


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1) Cost

2) Effect on financial ratios

3) Effect on credit rating

4) Risk (reliability of the source of funds for future borrowing)

5) Restrictions

6) Flexibility

7) Expected money market conditions

8) Inflation rate

9) Company profitability and liquidity positions

10) Stability and maturity of operations

11) Tax rate

The different sources merits ofshort-term financing that

should be considered by focusing on:

Iraj Nikookar


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Trade credit (accounts payable) are balances owed by your

company to suppliers.

The Advantages:1) Least Expensive Form of Financing Inventory

2) readily available, since suppliers want business

3) no collateral is required

4) there is no interest charge

5) it is likely to be extended if the company gets into

financial trouble

Source of Short-Term FinancingTrade Credit

Omid Ashoori


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The company purchases $500 worth of merchandise per day fromsuppliers. The terms of purchase are net/60, and the company

pays on time. The accounts payable balance is:

$500 per day x 60 days = $ 30,000

The company should typically take advantage of a cash discountoffered for early payment because failing to do so results in a

high opportunity cost. The cost of not taking a discount equals:

360

Trade Credit ( Cont.)

Omid Ashoori


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The company buys $1,000 in merchandise on terms of 2/10,

net/30. The company fails to take the discount and pays the

bill on the thirtieth day. The cost of the discount is:

The company would be better off taking the discount even if it

needed to borrow the money from the bank, since theopportunity cost is 36.7 percent. The interest rate on a bank

loan would be far less.

$20$980

x 36020

= 36.7%

Trade Credit ( Cont.)

Omid Ashoori

Source of Short Term Financing


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Bank financing may take the following forms:

1) Unsecured loans 5) Secured loans

2) Lines of credit 6) Letters of credit

3) Revolving credit

4) Installment loans

Bank Loans are an important source of short-term credit. When a bank

loan is approved a promissory note is signed. It Specifies:

1) The Amount borrowed.

2) The Percentage interest rate

3) The repayment schedule4) The collateral

5) Any other conditions to which the parties have agreed

Source of Short-Term FinancingBank Loan

Omid Ashoori


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Unsecured Loans: Most short-term unsecured (uncollateralized) loansare self-liquidating. This kind of loan is recommended if the company has an

excellent credit rating. It is usually used to finance projects having quick cash flows

and is appropriate if the company has immediate cash and can either repay the loan

in the near future or quickly obtain longer-term financing.

Secured Loans: If the company's credit rating is deficient, the bank maylend money only on a secured basis. Collateral can take many forms, including

inventory, marketable securities, or fixed assets. Even if the company is able to

obtain an unsecured loan, it may be better off taking a collateralized loan at a lower

interest rate.

Lines of Credit. Under a line of credit, the bank agrees to lend money up toa specified amount on a recurring basis. The bank typically charges a commitment

fee on the amount of the unused credit line. Credit lines are typically established for

a one-year period and may be renewed annually.

Bank Loans (CONT.)

Omid Ashoori


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The company borrows $200,000 and is required to keep a 12percent compensating balance. It also has an unused line of

credit of $100,000, for which a 10 percent compensating

balance is required. The minimum balance that must be

maintained is:

A line of credit is typically decided upon prior to the actual

borrowing. In the days between the arrangement for the loanand the actual borrowing, interest rates may change. Therefore,

the agreement will stipulate the loan is at the prime interest

rate prevailing when the loan is extended plus a risk premium.

000,34$000,10$000,24$)1.0000,100($)12.000,200($

Bank Loans (CONT.)

Omid Ashoori

k ( )


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Letter Of Creditis a document issued by a bank guaranteeing the payment of a

customer's drafts up to a specified amount for a designated time period. In effect, thebank's credit is substituted for that of the buyer, minimizing the seller's risk.

Payment may be made on submission of proof of shipment or other performance.

Letters of credit are used primarily in international trade.

There are different types of letters of credit:

1) Commercial letter of credit

2) confirmed letter of credit

Revolving Credit. A revolving credit is an agreement between the bank and the

borrower in which the bank contracts to make loans up to a specified ceiling withina prescribed time period. With revolving credit, notes are short term (typically ninety

days). When part of the loan is paid, an amount equal to the repayment may again be

borrowed under the terms of the agreement. Advantages are the readily available

credit and few restrictions compared to line-of-credit agreements. A major

disadvantage may be restrictions imposed by the bank.

Bank Loans (CONT.)

Mehdi Haj ali Larijani

B k ( )


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Installment Loans: An installment loan requires monthlypayments of interest and principal. When the principal on the

loan decreases sufficiently, you may be able to refinance at a

lower interest rate. The advantage of this kind of loan is that it

may be tailored to satisfy seasonal financing needs.

Interest:

Interest on a loan may be paid either at maturity (ordinary

interest) or in advance (discounting the loan). When interest is

paid in advance, the loan proceeds are reduced and theeffective (true) interest rate is increased.

Bank Loans (CONT.)


Bank Loans Interest


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Example 1:

The company borrows $30,000 at 16 percent interest per annum and repays the

loan one year later. The interest is $30,000 .16 = $4,800. The effective

interest rate is 16 percent ($4,800/$30,000).

Example 2:

Assume the same facts as in the prior example, except the note is discounted. The

effective interest rate increases as follows:

Proceeds = principle Interest = $30.000 -$4.800 = $25.200

Effective Interest rate = Interest / Proceeds =$4.800 / $25.200 = 19%

A compensating balance will increase the effective interest rate.

Bank Loans-Interest(Example)


Bank Loans Interest


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The effective interest rate for a one-year, $600,000 loan that has a nominal

interest rate of 19 percent with interest due at maturity and requiring a 15

percent compensating balance is:

,%=

0.19 $600,000

10.15 $600,000

=22.4%

Assume the same facts as in the prior example, except that the loan is

discounted. The effective interest rate is: Effective interest rate (with

discount) equals:

,% =

0.19 $600,000

0.85$600,000114,000

=28.8 %

Bank Loans-Interest(Example Cont.)



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Commercial Papers


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A company's balance sheet appears below.

ASSETS Current assets $ 540,000

Fixed assets $800,000

Total assets $1,340,000

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:

Notes payable to banks $ 100,000

Commercial paper $650,000 Total current liabilities $ 750,000

Long-term liabilities $260,000

Total liabilities $1,010,000

Stockholders' equity $330,000

Total liabilities and stockholders' equity $1,340,000

The amount of commercial paper issued by the company is a high percentageof both its current liabilities, 86.7% ($650,000/$750,000), and its totalliabilities, 64.4% ($650,000/$1,010,000). Because bank loans are minimal,the company may want to do more bank borrowing and less commercialpaper financing. In the event of a money market squeeze, the company mayfind it advantageous to have a working relationship with a bank.

Commercial Papers(Example)


Source of Short-Term


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In accounts receivable financing, the accounts receivable serve as securityfor the loan as well as the source of repayment. Financing backed by

accounts receivable generally takes place when:

Receivables are at least $25,000.

Sales are at least $250,000.

Individual receivables are at least $100.

Receivables apply to selling merchandise rather than rendering services.

Customers are financially strong.

Sales returns are low.

The buyer receives title to the goods at shipment.

Receivable financing has several advantages. It eliminates the need to

issue bonds or stock to obtain a recurring cash flow. Its drawback is the

high administrative costs of monitoring many small accounts.

Source of Short-TermReceivable for Financing


Receivable for Financing (CONT )


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Accounts receivable may be financed under:

1) Factoring agreement

2) Assignment (pledging) arrangementFactoring is the outright sale of accounts receivable to a bank or finance

company without recourse; the purchaser takes all credit and collectionrisks. The proceeds received by the seller are equal to the face value of thereceivables less the commission charge, which is usually 2 to 4 percent

higher than the prime interest rate.Factoring Pros and Cons:

Advantages include:

1. Offering immediate Cash

2. Reducing Overhead

3. Providing Financial Advice4. Strengthening the companys balance sheet position

Disadvantages include:

1. High cost

2. Negative impression left with customers

Receivable for Financing (CONT.)


R i bl f Fi i (CONT )


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Assignment ownership of the accounts receivable is not transferred. Instead,

receivables are given to a finance company with recourse. The financecompany usually advances between 50 and 85 percent of the face value of thereceivables in cash; your company is responsible for a service charge, intereston the advance, and any resulting bad debt losses, and continues to receivecustomer remissions.

Assignment Pros and Cons :

Advantages Include:

1. Providing immediate cash

2. Making cash on a seasonal basis

3. Avoiding negative customer feelingDisadvantages include:

1. High cost

2. Continuing of administrative costs

3. Bearing of credit risk

Receivable for Financing (CONT.)



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CASH CONVERSION CYCLE

Present By :

SUHAILI BT SAADONATHIRA BT ABDULLAH

CASH CONVERSION


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The cash conversion cycle is a measure of working capital

efficiency, often giving valuable clues about the underlying

health of a business.

The cycle measures the average number of days that working

capital is invested in the operating cycle.

It starts by adding days inventory outstanding (DIO) to days

sales outstanding (DSO).

CASH CONVERSIONCYCLE

Suhaili saadon


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This is because a company "invests" its cash to

acquire/build inventory, but does not collect cash until

the inventory is sold and the accounts receivable are

finally collected.

However, days payable outstanding (DPO), which

essentially represent loans from vendors to the company,

are subtracted to help offset working capital needs.

CCC = DIO + DSO - DPO

Suhaili saadon

EXAMPLE


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EXAMPLE

CASH CONVERSION CYCLE MODEL


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CASH CONVERSION CYCLE MODEL The model measures the length of time it takes for cash invested in

the firms current assets to be returned.

THE PROCESS

The firm starts with some cash & receive information on demand for its product

Based on this forecast the firms order materials to produce inventories of

finished goods (a current assets)

When the firm orders materials, it creates an account payable (a current liability)

After sale, an account receivable (pay directly or promise pay

Suhaili saadon

EXAMPLE


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EXAMPLE

Suhaili saadon


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FACTOR INFLUENCE

CASH CONVERSION

CYCLE

INFLATION

Increase in the price of

factors of production.

GROWTH-Increasing investment in working capital.

-Not balanced by increasing sale revenue until extra sales worked their way rightthrough the cycle.

-Overtrading may occur as increased in current asset not supported by new funds.

-Extreme consequence will to sell fixed asset to repay liabilities.

INDUSTRY

INFLUENCEThe production process &

nature of industry must

considered on examining

working capital

requirement.

Suhaili saadon

EXAMPLE


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EXAMPLE

Suhaili saadon



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CASH

RAW MATERIALSDEBTOR

FINISHED GOODS WORK IN PROGRESS

CREDITORS

Cycle can be reduced by either

1) Improving production efficiency

2) Improving finished goods

3) Improving debtor (minimising) & creditors period (maximising)

Purchase

Production

Collection

Sales


Suhaili saadon

EXAMPLE


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EXAMPLE

Suhaili saadon

Marketable SecuritiesC b ld h t ti


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C

A

SH

CO

N

V

E

RS

I

O

N

C

Y

C

L

E

Can be sold short notice

The goal of holding similar to

holding cash

Serve a substitute for cash &

temporary investment for

funds

Inventories1) Raw Materials

2) Work-in

Process3) Finished

Goods

Account Receivables-Balance due from

customers

-Firms use aging schedule

& the day sales

outstanding

(DSO)

Inventory ManagementDetermining how many inventories to hold

when to place orders & how many units to

order.

Inventory Cost1) Carrying cost

-increase as the level of inventories rises.

2) Ordering costs

-decline with larger inventory holding.

3) Stock-out costs

-decline with larger inventory holding.

Inventory Control System1) Red-line method

- computerised inventory control system

to help keep track of actual inventory

levels.2) Two-bin method

- to ensure that inventory levels are

adjusted as sales change.

3) Just-in time (JIT) system

- to hold down inventory costs &

simultaneously.

- to improve the production process.

Suhaili saadon

EXAMPLE


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EXAMPLE

Suhaili saadon



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ATHIRA




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CASH CONVERSION CYCLEDERIVATION

Cash conversion cycle is the length of time between

the payment of creditors (accounts payable) and the

receipt of cash from debtors (accounts receivable)

CCC = DIO + DSO DPO

ATHIRA

i Days Inventory Outstanding (DIO):


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i. Days Inventory Outstanding (DIO):

Average of days takes to sell the entireinventory. The smaller number the better.

Inventory RM 2,100,000

Cost of Goods Sold (COGS) for a year RM17,500,000

DIO = RM 2,100,000 x 365 = 43.8 daysRM17,500,000

DIO = Average inventory/ COGS per day

Average Inventory = (beginning inventory +ending inventory) /n

ATHIRA


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ii. Days Sales Outstanding (DSO):

The number of days needed to collect on sales and

involves average Account Receivable (AR). Smalleris better.

Debtors RM 2,550,000

Sales RM 30,000,000

DSO = RM 2,550,000 x 365 = 31.03 days

RM 30,000,000

DIO = Average inventory/ Revenue per day

Average Inventory = (beginning inventory +ending inventory) /n

ATHIRA

Days Payable Outstanding (DPO):


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y y gInvolves the companys payment of its own bills or AP. If this can bemaximized, the company holds onto cash longer, maximizing itsinvestment potential, a longer DPO is better.

Account Payable RM 800,000

COSG for a year RM17,500,000 DPO = RM 800,000 x 365 = 16.69 days

RM17,500,000

Hence, the cash conversion cycle is:

CCC = DIO + DSO DPOCCC = 43.80 + 31.03 16.69

= 58.14 days

DPO = Average AP/ COGS per day

Average AP = (beginning AP +ending AP) /2

ATHIRA


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ATHIRA


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ATHIRA


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THANK YOU

ANY QUESTION ?

4. working capital management

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