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Chapter 20 Strategic working capital management

Corporate Financial Strategy 4th edition Dr Ruth Bender. Chapter 20 Strategic working capital management. Working capital: contents. Learning objectives Working capital affects sustainable growth The working capital cycle Working capital in different industries

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Chapter 20 Strategic working capital management

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  1. Corporate Financial Strategy4th edition Dr Ruth Bender Chapter 20Strategic working capital management

  2. Working capital: contents • Learning objectives • Working capital affects sustainable growth • The working capital cycle • Working capital in different industries • Risk and return in working capital • The order-to-receipt cycle • Funding requirements over time • Cash flows in factoring

  3. Learning objectives • Identify the components of working capital generated from a company’s business model, and understand the impact of this on its growth and value potential. • Select appropriate financing strategies for a company’s working capital needs.

  4. Working capital affects sustainable growth g = return on investment × retention ratio If working capital as a % of sales is reduced, g will increase

  5. Buy goods Receive cash The working capital cycle Sale Stock manufacturing/ holding period Credit period taken by debtors Credit period allowed by creditors CASH CONVERSION PERIOD Operating Cycle

  6. Working capital in different industries Manufacturer Working capital requirement Supermarket Negative Working capital Consultancy Working capital requirement Inventories Receivables Payables

  7. Risk and return in working capital

  8. The order-to-receipt cycle Set terms & conditions Receive order Order fulfilment Invoicing Collection procedures Cash processing and banking

  9. Funding requirements over time Funds needed Overdraft Cash on deposit £ Long-term debt Equity Time

  10. Cash flows in factoring Company FacCo Customer 1 January Movement of goods/services Send invoice for £1,000 Send copy invoice 2 January Commission paid £10 Funds deposited in factoring account, £800 31 March Payment of invoice £1,000 Payment of balance of funds £200 Interest paid on £800 borrowed for 3 months at 10%, £20 (actually charged on a daily basis)

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