Chapter 3: Management of working capital

Working capital=Receivables+Cash+Inventory-Payables
Working capital is the name given to net current assets which are
available for day-to-day operating activities
Liquidity ratios:
o Current ratio=Current Assets/Current liabilities
o Quick ratio=Current assets-inventory/Current liabilities
Efficiency ratios
o Inventory turnover=Cost of goods sold p.a./Average inventory
o Receivable turnover=Credit sales p.a./Average receivables
o Payables turnover=Credit purchases p.a./Average payable
Overcapitalisation is where the overall level of working capital is too high
o Solution is to reduce the level of working capital by better
management of receivables, cash and inventory
Overtrading is where the level of working capital is too low
Chapter 4: Management of working capital
Look at the given formulas from the formula list
Chapter 5: Management of working capital receivables and payables
Practice the calculation
Chapter 6: Management of working capitalCash
Reasons for holding cash:
o Transaction motive
o Precautionary motive
o Speculative motive
Methods of dealing with cash shortages
o Reduce inventories
o Defer capital expenditure
o Defer or reduce dividends
o Chase receivables to pay earlier
o Postpone the payment of payables
o Use short-term borrowing
o Sell surplus assets
o Sale and leaseback

Pro-forma for cash budgets and how it should be structured
Chapter 7: Investment appraisalMethods
Rate of interest at which NPV is 0 is known as the internal rate of return
Accounting rate of return=Average profit p.a. from an
investment/Average book value from the investment
Payback period is the number of years it takes for a project to recoup the
original investment in cash terms