1. ADM658 – Chapter 2: Working Capital Management.
General principle: CA-CL
Working capital management.
Net working capital: the differences
between the firm's current asset and
current libilities.
Working capital management involves
all aspect of the administration of
current asset and current liabilities.
Sales impact - must determine the
appropriate levels of receivables and
inventories to maintain.
Liquidity - must choose the levels of
cash and marketable securities to
maintain.
Covers basic relationship
Relations with stakeholders customers are concerned with proce,
availability, quality and service,
goodwill and reputation of a firm.
Firm's reputation - depends on its
ability to efficiently manage its
currents assets and current liabilities.
Maturity-matching approach.
Financing working capital. (3
approaches)
Conservative Approach
Cash Management Cycle
Aggresive approach.
NurAisyahBintiMahbob (2010312861)
Faculty of Administration Science and Policies Studies.
Page 1

2. ADM658 – Chapter 2: Working Capital Management.
hedge risk by matching the
maturities of assets and
liabilities.
Approches adapted to
finances working capital.
Maturity-matching
approaches.
permanent current assets are
financed wth long-term
financing
temporary current assets are
financed with short-term
No excess funds.
Long-term are used to finance
both permanent as well as
temporary short-term assets.
Conservative Approach
when there are excess funds,
they are invested in
marketable securities.
Aggresive approach
NurAisyahBintiMahbob (2010312861)
Faculty of Administration Science and Policies Studies.
use less long-term and more
short-term financing than the
conservative approach.
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3. ADM658 – Chapter 2: Working Capital Management.
CASH CONVERSION CYCLE.
Purchase of
Inventory
Credit Sales
Inventory conversion period (70 Days)
Payable credits (45
days)s
Debtors Collection
Period (30 days)
Inventory conversion period (60 Days)
Payment of
account payable
CASH CONVERSION CYCLE:
INVENTORY
CONVERSION
PERIOD.
DEBTORS
COLLECTION
PERIOD.
PAYABLES CREDIT
PERIOD.
FORMULAS:
Inventory Conversion Period:
Debtors Collection Period:
Creditors Credit Period:
Cash Turnover:
Minimum Operating Cash:
Inventory/COGS x 365
Receivables/sales x 365
Account payable/COGS x 365
360/Cash Conversion Cycle
Annual Cash Outlays/Cash Turnover
EXERCISE:
1. Seri Flore Comp. turnover inventory 10 times a year. Account Receivables collected in 65 days.
Account Payables are paid in 42 days. What change will occur in cash cycle if AAI, ACP, APP –
changes to 20 days, 45 days and 50 days a year?
2. Shestar Comp. sell 16” stand fan. Sales on credit, net 50 days. Payment of purchase will occur
evenly a period of 30 days. The worker takes an average of 20 days to complete the stand fan
immediately. Annual outlay is 1.8 million. Calculate cash cycle, cash turnover, MOC.
NurAisyahBintiMahbob (2010312861)
Faculty of Administration Science and Policies Studies.
Page 3

4. ADM658 – Chapter 2: Working Capital Management.
OPTIMAL CASH
BALANCE.
•Firm's desired cash level.
•Involves trade off between
opportunity cost of:
•Holding to much cost
•The cost of holding to little
cash.
•Means: a position when the
cash balance amount is on
the most ideal proportion so
that the company has the
ability to invest the excess
cash for a return (profit) and
at the same time, have
sufficient liquidity for future
needs.
•Key ingredient: cash balance
should neither be excessive
or deficient.
CASH BUDGET
•Detailed plan of a firm's
future cash flows.
•An estimation of the cash
inflows and outflows for a
firm for a specific period of
time in the future.
•Assess whether has sufficient
cash to fulfill its cash flow
requirements in the future
and whether excess cash
exists.
•3 main components
necessary for creating cash
budget:
REASONS FOR
HOLDING CASH.
•The need for cash make
everyday payments transaction.
•The need to have cash on
hand to meet unexpected
needs of unforseen expenses
- precautionary.
•Based on the desired to take
advatage of potential profit
making opportunities that
required cash - speculative.
•Time budget.
•Desired cash position
•Estimated sales and expenses.
NurAisyahBintiMahbob (2010312861)
Faculty of Administration Science and Policies Studies.
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