[ACYFMG1] Working Capital Management

Working Capital Management

administration and control of current asset and current liabilities to maximize value by achieving a balance between profitability and risk

Moderate Approach

seeks to maintain an optimal level of current assets, ensuring liquidity while avoiding excessive capital being tied up

Conservative Approach

involves holding higher levels of both temporary and permanent current assets to make sure the company is prepared for unexpected situations or downturns in the business

Aggressive Approach

focus on maintaining low level of current assets and short term type of financing

Cash and MS Management

maintain appropriate level of cash and marketable securities to meet cash requirements and maximize income from idle funds

Float

the time delay between when a payment is made by a payer and when the recipient actually receives the funds

Mail Float

the time it takes for a mailed payment (such as a check) to reach its destination

Processing Float

delayed caused by the company’s internal control

Clearing Float

delay caused by the banking system

Collection Float

check received by the firm

Disbursement Float

check issued by the firm

Lockbox System

a banking service that would intercept payments and speed up collection because it reduces the mail and processing float

Lockbox System

In this system, the client will not mail their remittance checks to the firm but to the numbered post office (P.O.) box instead, hence, reducing mail float. Then the bank, with authorized agent, will collect the mail from the box and deposit them directly to the bank account of the company on the same day, thereby reducing processing float.

Lockbox System

the evaluation process involves the relationship that: Incremental cost = Incremental benefit

Accounts Receivable Management

formulate policies related to sales and AR to ensure maintenance of receivables at a predetermined level and collectability as planned

1. Credit period

2. Discount

3. Credit standards

4. Collection policy

Credit Policy

Inventory Management

formulation and administration of policy to efficiently and satisfactorily meet production and merchandising requirement and minimize cost related to inventory

Economic Order Quantity

designed to help businesses determine the optimal order quantity that minimizes the total inventory costs, balancing the costs of holding inventory and the costs of ordering or replenishing it

1. Holding cost

2. Ordering cost

3. Order quantity

4. Demand

Key Compoments of ECQ

Holding cost

cost of carrying one unit of inventory for a specified period

Holding cost

includes costs like storage, insurance, and opportunity cost of tied-up capital

Ordering cost

cost incurred each time an order is placed

Ordering cost

includes costs such as administrative costs, shipping, and handling

Order quantity

represents the number of units a business should order each time to minimize total inventory costs

Demand

the annual demand for the product, expressed in units

Lead Time

Period between order is placed and received