15 - Working capital management Flashcards
(20 cards)
What is working capital management?
The management of a company’s short-term assets and liabilities to ensure sufficient cash flow.
What is the cash-to-cash cycle?
The period of time between outlaying cash for raw material and receiving cash from product sales.
How does the cash-to-cash cycle relate to service businesses?
In service businesses, it primarily revolves around managing working capital due to fewer physical assets.
What are the key elements of the working capital cycle for a service business?
- Supplier credit
- Inventory/work-in-progress
- Customer credit
What is project accounting?
A system where each contract is assigned a unique project account to track costs and revenues.
What is the significance of time costs in project accounting?
Time costs are recorded as both sales revenue and cost of sales, affecting the income statement and balance sheet.
How do service providers recognize profit in project accounting?
They may recognize profit as the project progresses using long-term contract accounting rules.
What is the average working capital cycle duration for service providers?
60 days, or two months.
What was XYZ Co’s working capital cycle duration in the prior year?
98.1 days.
What would XYZ Co have needed if their working capital cycle had not improved?
$1 million in additional cash.
How long does XYZ Co take to pay its workers and subcontractors?
15 days.
What is XYZ Co’s days in inventory (DIO)?
30 days.
What are two strategies XYZ Co can use to improve days in inventory?
- Set up month-end processes for billing
- Secure up-front payments
What is ‘negative inventory’?
A situation where advance payments create a balance on the balance sheet that reduces working capital.
What is XYZ Co’s current days sales outstanding (DSO)?
45 days.
What was the DSO for XYZ Co in the prior year?
68 days.
What arrangement can service providers negotiate for large contracts to improve cash flow?
To have a portion of each invoice paid upfront.
What payment method can be used for fixed-term service contracts?
Monthly standing orders or direct debits.
What is the potential cash freed up by reducing the working capital cycle by 15 days?
$410,000.
What are the challenges in improving working capital management for existing contracts?
Improvements are easier with new contracts than with existing ones.
