Managing working capital.[check] This checklist is aimed at managers who have responsibility for managing working capital. For most businesses the control of working capital is fundamental to their finances, and good working capital management can improve their cash position. Working capital management involves the control of stock, debtors and creditors and may involve a number of employees in the process. Definition The term "working capital" refers to the current assets Current Assets Appearing on a company's balance sheet, it represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year. of the firm, ie, cash, and those items that can be converted into cash within the next 12 months, such as stock and work-in-progress and debtors. Debtors are amounts owed to the organisation. Net working capital is defined as the difference between current assets and current liabilities Current Liabilities Usually appearing on a company's balance sheet, it represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year. . Current liabilities consist of amounts that are owed by the firm that will be paid within 12 months. The major proportion of current liabilities are often, but not always, trade creditors, ie amounts owed to suppliers. Advantages of good working capital management These can include: * helping to earn interest or reducing interest payments * assisting in producing a realistic annual budget * helping managers take financial responsibility * helping managers to think about the future and plan accordingly * helping managers to measure their own performance and the performance of their team * helping managers in different parts of the organisation to co-ordinate their activities. Disadvantages of poor working capital management These can include: * cash shortages * an inability to pay suppliers * overstocking overstocking carrying more livestock on a particular area of pasture than it can support for any length of time. The pasture is killed, exposing the soil to erosion and the invasion of weeds. Called also overgrazing. * the failure of the organisation. Action checklist 1. Establish systems to measure working capital Check that levels of working capital can be measured accurately and regularly, ideally on a daily basis, and certainly on a weekly basis. You need systems that will allow you to state the amount of cash, debtors, stock and work-in-progress, and creditors. 2. Record past and current levels of working capital Knowing your current and past levels of working capital is a useful starting point Noun 1. starting point - earliest limiting point terminus a quo commencement, get-go, offset, outset, showtime, starting time, beginning, start, kickoff, first - the time at which something is supposed to begin; "they got an early start"; "she knew from the . This helps with setting a realistic budget and will enable you to establish times of the month/year when elements of working capital are higher/lower. For example, some businesses will hold higher levels of stock as Christmas approaches. 3. Benchmark your levels of working capital Although it can prove difficult, it's very useful if you can compare your levels of working capital with similar organisations. Some of these may be willing to share information with you on a regular basis. At the very least you may be able to obtain their annual financial accounts and calculate useful ratios: * Stock days (Cost of sales divided by 365, multiplied mul·ti·ply 1 v. mul·ti·plied, mul·ti·ply·ing, mul·ti·plies v.tr. 1. To increase the amount, number, or degree of. 2. Mathematics To perform multiplication on. by stock). This shows how many days stock the organisation holds at its financial year-end. A stock-days figure of 40 would mean that the organisation could continue trading for 40 days, without buying or manufacturing more stock, before it runs out. A lower figure is usually better as it means that lower levels of stock are held, i.e. there is relatively little money tied up in stock. * Debtor One who owes a debt or the performance of an obligation to another, who is called the creditor; one who may be compelled to pay a claim or demand; anyone liable on a claim, whether due or to become due. days (Sales divided by 365, multiplied by debtors). This shows the average number of days that elapse e·lapse intr.v. e·lapsed, e·laps·ing, e·laps·es To slip by; pass: Weeks elapsed before we could start renovating. n. before a customer pays for goods. A lower figure is better as cash is being received faster from customers. * Creditor An individual to whom an obligation is owed because he or she has given something of value in exchange. One who may legally demand and receive money, either through the fulfillment of a contract or due to injury sustained as a result of another's Negligence days (Cost of sales divided by 365, multiplied by creditors). This shows the average number of days that elapse before the organisation pays its suppliers. A higher figure is better as cash remains in the organisation for longer. However, recent legislation gives small businesses the right to charge interest for late payment. Delayed payment, particularly to small businesses, could cause them cash flow problems. 4. Look for improvements There are a number of ways in which lower stocks and debtors, and higher creditors, can be achieved: a) stock and work-in-progress * forecast sales accurately * improve stock control systems to identify over- or under-stocking * where appropriate, get suppliers on a "Just-in-Time" system (where, in effect, they hold the stock for you) * minimise your holdings of finished goods by accelerating the dispatch A dispatch or dispatches can refer to:
* eliminate slow moving lines * where appropriate, hold one central store, rather than several. b) debtors: * agree trade terms with customers * carry out checks to verify (1) To prove the correctness of data. (2) In data entry operations, to compare the keystrokes of a second operator with the data entered by the first operator to ensure that the data were typed in accurately. See validate. that prospective customers can pay * establish an effective credit control system with a sensible collection policy * ensure that statements and invoices are issued correctly and promptly * offer early payment discounts and charge interest on overdue OVERDUE. A bill, note, bond or other contract, for the payment of money at a particular day, when not paid upon the day, is overdue. 2. The indorsement of a note or bill overdue, is equivalent to drawing a new bill payable at sight. 2 Conn. 419; 18 Pick. debts * follow up late invoices in person * resolve disputed invoices quickly * pay commission to sales people on receipt of cash from customers, rather than when the sale is agreed/invoiced. c) creditors * agree trade terms with suppliers or lenders, eg, banks * delay payment to suppliers until the last day of trade terms * calculate whether it is worth paying suppliers early in order to qualify for discounts. d) cash * predict cash surpluses and make investment plans * predict cash shortages and make prior arrangements with banks and other lenders * ensure that you borrow from the cheapest source, but be aware of penalties for late payment * deposit cash at the bank every day if practicable practicable adj. when something can be done or performed. . 5. Set targets and incentives Targets and incentives can be set in each of the areas above. A bonus could be paid for the achievement of a lower debtor days figure. 6. Establish cash and working capital budgets You may need the help of an accountant to establish realistic cash and working capital budgets. These should give predictions for the levels of cash, stock, debtors and creditors on a weekly or monthly basis. 7. Monitor against budget and take appropriate action On a regular basis you should compare actual performance against budget and take appropriate action. For instance, if stock levels are higher than budget you may need to review the list of slow moving product lines and possibly discontinue dis·con·tin·ue v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues v.tr. 1. To stop doing or providing (something); end or abandon: some. Do's and Don'ts for managing working capital Do Be realistic. Take last year's working capital trends into account. Be aware of seasonal fluctuations within the year. Monitor on a regular basis (daily, weekly, monthly). Delegate A person who is appointed, authorized, delegated, or commissioned to act in the place of another. Transfer of authority from one to another. A person to whom affairs are committed by another. A person elected or appointed to be a member of a representative assembly. responsibility for each part of working capital to an appropriate individual. Constantly strive for improvement. Don't Be over-optimistic. Leave too little time for planning. Draw up a working capital plan without involving key people, including, for example, your bank manager. Useful reading Books The real cost of capital: a business field guide to better financial decisions Tim Ogier, John Rugman, Lucinda Spicer London, Prentice Hall Prentice Hall is a leading educational publisher. It is an imprint of Pearson Education, Inc., based in Upper Saddle River, New Jersey, USA. Prentice Hall publishes print and digital content for the 6-12 and higher education market. History In 1913, law professor Dr. , 2004 (Financial Times series) Finance for strategic decision making: what non financial managers need to know M P Narayanan and Vikram K Nanda San Francisco San Francisco (săn frănsĭs`kō), city (1990 pop. 723,959), coextensive with San Francisco co., W Calif., on the tip of a peninsula between the Pacific Ocean and San Francisco Bay, which are connected by the strait known as the Golden Calif., Jossey Bass, 2004 Financial management textbook textbook Informatics A treatise on a particular subject. See Bible. , 4th ed Geoffrey Knott Basingstoke, Palgrave MacMillan, 2004 Planning and controlling physical and financial resources National Extension College Trust Prime Training, Cambridge 2002 Finance for non financial managers in a week, 3rd ed Roger Mason For other uses, see Roger Mason (disambiguation). Roger Le Roy Mason (born September 18, 1958 in Bellaire, Michigan) is an American former professional baseball player who pitched in the Major Leagues primarily in relief from 1984-1987, 1989, and 1991-1994. Chartered Management Institute Inspiring Leaders The Chartered Management Institute is a professional institution for managers, based in the United Kingdom. In addition to supporting its members, the organisation encourages management development, carries out research, produces a wide variety London, Hodder and Stoughton, 2003 Principles of corporate finance, 6th ed Richard A Brealey and Stewart C Myers Boston Mass, McGraw Hill, 2000 Tolleys businesswise: financial planning Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against for the small and medium sized enterprise, Peter Lyons Peter Lyons was born in Ireland about 1734. He graduated from Trinity College, University of Dublin. Following this, he came to King William County, Virginia, and studied law under his uncle, James Power. Croydon, Tolley, 2001 Thought starters * Do your financial systems give you regular and accurate figures for cash, stock and work-in-progress, debtors and creditors? * Have you analysed past performance in order to set realistic targets for the future? * Have you considered some quick and simple improvements, such as trying to get money in from a major debtor, or reducing stocks of slow moving items? |
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