WORKING CAPITAL

MANAGEMENT
GROUP MEMBERS

NAME STUDENT NUMBER

FADZAI T DANHA R133483P
MARGRET KUJINGA R138009E
ANESU ZVIZHINJI R163339P
 WHAT IS WORKING CAPITAL
MANAGEMENT
The process of ensuring a company is using its financial resources in the most
effective way possible.

It is a business strategy designed to ensure that a company operates efficiently by

monitoring and using its current assets and liabilities to their most effective use.

It involves monitoring and controlling a company's short-term finances in order to

effectively manage its operations and liquidity.
 WHAT DOES IT DO
• Requires monitoring a company's assets and liabilities to maintain sufficient
cash flow to meet its short-term operating costs and short-term debt
obligations.
• Primarily revolves around managing accounts receivable, accounts
payable, inventory, and cash.
• Involves tracking various ratios, including the working capital ratio, the
collection ratio, and the inventory ratio.
• Improves a company's cash flow management and earnings quality by
using its resources efficiently.
• Working capital management strategies may not materialize due to market
fluctuations or may sacrifice long-term successes for short-term benefits.
 WHY MANAGE WORKING CAPITAL

Working capital management can improve a company's cash flow management and earnings quality through the efficient
use of its resources. Management of working capital includes inventory management as well as management of accounts
receivable and accounts payable .

Working capital management also involves the timing of accounts payable (i.e., paying suppliers). A company can conserve
cash by choosing to stretch the payment of suppliers and to make the most of available credit or may spend cash by
purchasing using cash—these choices also affect working capital management.

In order to effectively manage working capital, businesses must have a strong understanding of their cash flow, financial
obligations, and revenue streams.

By maintaining a comprehensive view of their financial position, companies can make informed decisions about spending,
borrowing, and investing.
WHAT ARE ITS MAIN COMPONENTS
Though working capital often entails comparing all current assets to current
liabilities, there are a few accounts more critical to track.

These are
1. Cash
2. Receivables
3. Payables
4. Inventory
 TYPES OF WORKING CAPITAL
In its simplest form, working capital is just the difference between current assets and current liabilities. However, there
are many different types of working capital that each may be important to a company to best understand its short-term
needs.

● Permanent Working Capital: Permanent working capital is the amount of resources the company will always
need to operate its business without interruption.
● Regular Working Capital: Regular working capital is a component of permanent working capital. It is the part of
the permanent working capital that is actually required for day-to-day operations and makes up the "most
important" part of permanent working capital.
● Reserve Working Capital: Reserve working capital is the other component of permanent working capital.
Companies may require an additional amount of working capital on hand for emergencies, seasonality, or
unpredictable events.
● Fluctuating Working Capital: Companies may be interested in only knowing what their variable working capital
is. For example, companies may opt into paying for inventory as it is a variable cost
● Gross Working Capital: Gross working capital is simply the total amount of current assets of a business before
considering any short-term liabilities.
● Net Working Capital: Net working capital is the difference between current assets and current liabilities.
WORKING CAPITAL CYCLE
The working capital cycle is a measure of the time it takes for a company to convert its current assets into cash, or:

Working Capital Cycle in Days = Inventory Cycle + Receivable Cycle - Payable Cycle

The working capital cycle represents the period measured in days from the time when the company pays for raw materials or inventory to
the time when it receives payment for the products or services it sells. During this period, the company's resources may be tied up in
obligations or pending liquidation to cash.

Inventory Cycle
The inventory cycle represents the time it takes for a company to acquire raw materials or inventory, convert them into finished goods, and
store them until they are sold.

Accounts Receivable Cycle

The accounts receivable cycle represents the time it takes for a company to collect payment from its customers after it has sold goods or
services.

The accounts payable cycle

represents the time it takes for a company to pay its suppliers for goods or services received.
1. MANAGING AND MEASURING LIQUIDITY

Liquidity is the term used to describe the liquid assets/cash a company can use to meet
its current and future debts and other obligations, such as payments for goods and
services.

Liquidity management is the strategy any organization adopts to optimize, maximize, and
safeguard its liquidity.

1.Have some cash or cash equivalent instrument

2.Use liquid proxies to access the markets

3. Identify areas of the market with greater liquidity

4.Be diversified
MEASURING LIQUIDITY

1. Current Ratio = Current Assets/Current Liabilities

2. Quick Ratio = Liquid Assets/Current Liabilities

3. Cash Ratio = Cash and Cash equivalent + Short term Investments/Current

Liabilities
2. MANAGING ACCOUNT RECEIVABLES
What Is Accounts Receivable?
Accounts receivable refers to the payments owed to a business by the customers. They represent
lines of credit for previous purchases and act as recorded assets on the organization’s balance
sheet.

Why Is Accounts Receivable Important?

Accounts receivable is essential for companies that sell goods or products to customers, as it allows
them to accurately measure what they’re owed for what they’ve already provided. AR enables
businesses to:
1. Keep track of owed profits
2. Maintain financial order
 WHAT IS ACCOUNTS RECEIVABLES MANAGEMENT
Accounts receivable (AR) management is the practice of obtaining customer payment within a given period of time. Organizations that sell products and
services use AR management to ensure the proper tracking and management of every step involved in collecting payment after the customer places an
order. It’s a vital component of building liquidity and profitability and avoiding bad debts—and it includes much more than simply receiving payment on a bill.

A strong, efficient AR management process can mean the difference between dwindling capital and a booming busines

Why Does Accounts Receivable Management Matter?

1. With robust AR management, an organization is able to better build and maintain customer loyalty. Allowing customers to make purchases on the
basis of credit (in lieu of upfront payment) establishes a relationship of transactional ease. And strengthening that relationship happens by offering
easy, consistent communication,
2. AR management makes sending invoices and related documents a breeze so that customers always know what they owe, when it’s due, and how to
submit payment.
3. It also helps companies maintain a healthy cash flow, which is essential for avoiding shortages or, in some cases, bankruptcy. Because a business’s
future revenue is based on incoming cash, avoiding delays in customer payments is paramount.

In healthcare, for example, accounts receivable management includes proper maintenance of medical billing and collections. If a healthcare organization fails
to provide proper, timely billing or collect patient payments, the subsequent limited cash flow can render them unable to cover their own operating costs.
THE ACCOUNTS RECEIVABLE MANAGEMENT PROCESS

1. DETERMINE CUSTOMER’S CREDIT RATING

Before agreeing to any terms or conditions or accepting a new customer, you’ll first need to identify whether or
not they’re able to actually pay for your goods and/or services.

2. MONITOR LATE PAYMENTS

It’s essential to keep regular tabs on when each payment is due and to send out payment reminders accordingly.

3. MAINTAIN CUSTOMER RELATIONSHIPS

Providing excellent customer service by addressing any complaints or questions in a timely manner is crucial for
managing solid working relationships.

4. MAINTAIN ACCOUNT BALANCES

You’ll want to be certain that you update customer balances to accurately reflect payments so that nothing falls
through the cracks. Both internal teams and customers should have easy access to real-time balances.
COMMON CHALLENGES OF ACCOUNTS RECEIVABLE MANAGEMENT

1.Not billing on time

2.Not Collecting on time
3.Errors in billing, invoices, duplicate payments etc.
4.Being overwhelmed with number of invoices
3. MONITORING CASH USES AND LEVELS
WHAT IS MONITORING CASH USES AND LEVELS
It is the process of managing cash inflows and outflows.
Cash is a key component of a company financial stability and usually considered as
part of total wealth portfolio.
Individuals can use options like banks and financial institution for cash management.
Business, cash flow statement is a central component of cash flow management

WHY IT IS IMPORTANT
The process of monitoring cash uses and levels is important for individuals and
business because cash is the primary asset used to invest and pay liabilities
It can also be used to improve profitability
Keys to Cash Management
Create an efficient Accounts Receivable Collection Process
Accounts receivable refers to the money you are owed, and slow accounts receivable
collections can cause a significant strain on the business therefore there is need to have
This can help speed up the rate at which cash gets back into the business account

Keep Operating Expenses Under Control

Operating expenses can contribute to the depletion of financial reserves. These
operating costs include employ wages, payroll services, utility bills and insurance cost.
These may be reduced by:
Take Advantage of Payment Terms
Taking money out of your accounts before bills are due increase chances of a cash
flow issues. Therefore, taking advantage of payment terms and paying when bills are
due can help keep money in your hand longer, preventing potential cash flow issue
while your business may be waiting to get paid by others.

Have a plan for Excess Cash

Effective business cash management is all about increasing the amount of money that
comes into a business, minimizing the amount the goes out and determining how to
use excess funds
 4. MANAGING ACCOUNTS PAYABLES
What is Accounts Payable Management?

Payables management is the handling of a company's unpaid debts to third-party vendors

for purchases made on credit.

Account payables management involves tasks such as seeking trade credit lines, acquiring
favorable terms of purchase, and managing the timing and flow of purchase.

Accounts payable management is one of the important business processes that help in
managing payable obligations of the entity in the most effective manner.

Accounts payable is the amount that the entity has to pay to its suppliers or vendors on the
account of goods and services received
IMPORTANT OF ACCOUNTS PAYABLE MANAGEMENT

Accounts Payable management has the responsibility that the payment must be
done on time to avoid overdue charges, penalty or late fees.
It has to make sure that all the invoices can be easily tracked and paid before
the due date. The same helps in avoiding the non-payment or payment for the
same bill multiple times.
The porcess helps in maintaining the proper cash flows such as making
payments only when due, by making effective and appropriate use of vendor’s
credit facility etc
It also helps in refraining from any kind of fraud and theft in the business entity.
OBJECTIVE OF MANAGING ACCOUNTS PAYABLES

To protect the cash and other assets of a company, internal controls are taken care of by the
accounts payable process due to the following few reasons:

● To prevent making a payment to the fraudulent invoice

● Prevent making a payment to the inaccurate invoice
● To prevent making a payment to the vendor invoice twice.
● Prevent missing payment deadlines
MANAGING SHORT-TERM FINANCING

● Short-term financing means business financing from short-term sources, which are for
less than one year.
● The same helps the company generate cash for working of the business and for
operating expenses, which is usually for a smaller amount.
● This type of financing is required in the business process because of their uneven cash
flow into the business or due to their seasonal business cycle
● It involves developing money by online loans, lines of credit, and invoice financing.
TYPES OF SHORT TERM FINANCING
● Trade Credit- This is the floating time that allows the business to pay for the goods or
services they have purchased or received (credit purchases)
● Working Capital Loans - Banks or other financial institutions extend loans for a shorter
period after studying the business’s nature, working capital cycle, records (overdrafts)
● Invoice Discounting - It refers to arranging the funds against submitting invoices
whose payments will be received shortly. The receivables invoices are discounted with
the banks, financial institutions, or any third party
● Factoring - It is debtor finance in which businesses sell their accounts receivable to a
third party whom we call factor at a lower rate than the net realizable value.
● Business Line of Credit - The business can approach the bank for approval of a
certain amount based on their credit line structure judged through a credit score, a
business model, and projected inflows.
PROS AND CONS OF SHORT TERM FINANCING
Pros

Less interest: As these are to be paid off in a very short period within about a year, the total amount of interest cost under it
will be least as compared to long term loans that take many years to be paid off.

Disbursed Quickly: The risk involved in defaulting the loan payment is lesser than that of the long-term loan as they have
a long maturity date.

Less Documentation: As it is less risky, the documents required for the same will also be not too much, making it an option
for all to approach short-term loans.

Cons

High stort-term installments: If a high amount of loan is sanctioned, the monthly installment will come very high,
increasing the chance of default in repayment of the loan

Borrowing cycle: can leave the borrower with no other option than to come into the trap of the cycle of borrowing in which
one continues borrowing to repay the previous unpaid loan
LIMITATIONS OF WORKING CAPITAL MANAGEMENT
● Working capital management only focuses on short-term assets and liabilities. It does not address the long-term
financial health of the company and may sacrifice the best long-term solution in favor for short-term benefits.

● Even with the best practices in place, working capital management cannot guarantee success. The future is
uncertain, and it's challenging to predict how market conditions will affect a company's working capital. Whether its
changes in macroeconomic conditions , customer behavior, and supply chain disruptions, a company's forecast of
working capital may simply not materialize as they expected.

● Last, while effective working capital management can help a company avoid financial difficulties, it may not
necessarily lead to increased profitability. Working capital management does not inherently increase profitability,
make products more desirable, or increase a company's market position. Companies still need to focus on sales
growth, cost control, and other measures to improve their bottom line. As that bottom line improves, working capital
management can simply enhance the company's position.
 CONCLUSION

• In conclusion, working capital management is a critical component of

running a successful business.
• Effective management of working capital helps businesses maintain
liquidity, manage daily operations, and meet short-term financial
obligations.
• By prioritizing working capital management, businesses can set
themselves up for long-term success and sustainability.
 REFERENCES

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from South Africa. Risks, 10(3), 63.

•Sawarni, K. S., Narayanasamy, S., & Ayyalusamy, K. (2020). Working capital management, firm performance and nature of business: An
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•Pakdel, M., & Ashrafi, M. (2019). Relationship between working capital management and the performance of firm in different business cycles.
Dutch Journal of Finance and Management, 3(1), em0057.

•Yousaf, M., Bris, P., & Haider, I. (2021). Working capital management and firm’s profitability: Evidence from Czech certified firms from the
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