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Chapter 12
MANAGING
WORKING CAPITAL
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.2
LEARNING OUTCOMES
You should be able to:
Identify the main elements of working capital
Slide 12.3
Major element
Inventories
Trade payables
Trade receivables
Cash (in hand and at bank)
Working
capital
Current assets
equals
Current liabilities
less
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.4
Cash sales
Cash/
bank
overdraft
Finished
goods
Credit sales
Work in
progress
Trade
receivables
Raw
materials
Cash
Trade
payables
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.5
60
Trade
receivables
settlement
period
40
52.6
Days
2010
Inventories
Trade payables
turnover period settlement period
46.0
34.2
20
0
2009
Days
60
40
20
53.0
45.5
34.8
0
Source: Compiled from information in All tied up: working capital management report 2011, Ernst and Young, www.ey.com.
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.6
Type of
operations
Cost of
capital
Average
inventories
held
Cost of
holding
inventories
Operating Cost as %
profit/
of operating
(loss)
profit/(loss)
(a)
(b)
(a) x (b)
Associated
British
Foods
Food
producer
10.0
1,332
133
842
15.8
Kingfisher
Home
improvement
retailer
8.1
1,668
135
698
19.3
J. Sainsbury
Supermarket
10.0
757
76
851
8.9
Source: Annual Reports of the businesses for the year ending in 2011.
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.7
Managing inventories
Procedures and techniques that can be used to
ensure the proper management of inventories
Budgeting future demand
Financial ratios
Recording and reordering systems
Levels of control
Inventory management models
Materials requirements planning (MRP) system
Just-in-time (JIT) stock management
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.8
Financial ratios
Average inventories
turnover period
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.9
100
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.10
Inventories level
Time
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.11
Ordering
costs
Annual
costs
()
Total costs
Holding
costs
Average inventories
level (units)
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.12
EOQ
2DC
H
where:
D = the annual demand for the
inventories item (expressed in
units of the inventory item);
C = the cost of placing an order;
H = the cost of holding one unit of
the inventories item for one year
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.13
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.14
Slide 12.15
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.16
Slide 12.17
Slide 12.18
Collection policies
Develop customer relationships
Publicise credit terms
Issue invoices promptly
Monitor outstanding receivables
Produce an ageing schedule of receivables
Answer queries quickly
Deal with slow payers
Identify the pattern of receipts
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.19
Days outstanding
Total
1 to 30
days
31 to 60
days
61 to 90
days
More than
90 days
A Ltd
20,000
10,000
30,000
B Ltd
24,000
24,000
C Ltd
12,000
13,000
14,000
18,000
57,000
Total
32,000
47,000
14,000
18,000
111,000
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.20
40
Actual
%
30
20
10
June
July
August
September
Time
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.21
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.22
Slide 12.23
Managing cash
Main techniques
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.24
Purchase
of goods
on credit
Payment
for
goods
Sale of
goods on
credit
Cash
received
from credit
customer
Inventories
holding period
Operating cash
cycle
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.25
Average settlement
period for receivables
minus
Average payment
period for payables
equals
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
Slide 12.26
Days
40
42.3
40.8
30
20
10
2009
2010
Source: Adapted from figure in All tied up: working capital management survery 2011 Ernst and young, p.2, www.ey.com
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013