Chapter12ManagingworkingcapitalManagementAccountingforDecisionMakersTenthEdition
LEARNINGOUTCOMESYoushouldbeableto:Discussthepurposeofworkingcapital,it’sscaleandthenatureoftheworkingcapitalcycleIdentifythemainelementsofworkingcapitalExplainthefactorsthathavetobetakenintoaccountwhenmanagingeachelementofworkingcapitalExplaintheimportanceofestablishingpoliciesforthecontrolofworkingcapital
ThenatureandpurposeofworkingcapitalMajorelementsMajorelementInventoriesTradereceivablesCash(inhandandatbank)TradepayableslessequalsCurrentliabilitiesWorkingcapitalCurrentassets
Figure12.1TheworkingcapitalcycleTradepayablesTrade
receivablesFinishedgoodsCash/
bankoverdraftWorkinprogressRawmaterialsCashsalesCreditsalesCash
Figure12.2Averageinvestment(indays)forthemainworkingcapitalelementsSource:Compiledfrominformationin‘Navigatinguncertainty:PwC’sannualglobalworkingcapitalstudy’,2018/19,.TradereceivablessettlementperiodInventoriesturnoverperiodTradepayablessettlementperiodDays040206050301047.948.141.051.92013201420152016201751.854.056.458.953.12013201420152016201758.258.860.462.968.02013201420152016201767.77080
InventoriesfinancingcostSource:Annualreportsofthebusinessesfortheyearsendedduring2018.BusinessTypeofoperationsCostofcapitalAverageinventoriesheldFinancingcostofholdinginventoriesOperatingprofit/(loss)Financingcostas%ofoperatingprofit/(loss)(a)(b)(a)×(b)%%AssociatedBritishFoodsFoodproducer9.2￡2,386m￡220m￡1,282m17BTGroupTelecoms8.9￡369m￡30m￡3,421m0Go-AheadTransport5.5￡17m￡1m￡121m1KingfisherDIY8.7￡2,574m￡224m￡580m39TescoSupermarket9.5￡2,617m￡249m￡2,606m10
ManaginginventoriesBudgetingfuturedemandFinancialratiosRecordingandreorderingsystemsInventorymanagementmodelsEnterpriseresourceplanning(ERP)systemsLevelsofcontrolJust-in-time(JIT)stockmanagementProceduresandtechniquesthatcanbeusedto