6 - Working capital Flashcards
(40 cards)
What is working capital?
The capital tied up in the trading cycle of a distributor, representing the capital needed to fund the cash-to-cash cycle.
It includes the time taken from cash leaving the business to pay suppliers until it comes back in from customers.
What does the cash-to-cash cycle refer to?
The time taken from cash leaving the business to pay suppliers until it is received back from customers.
It encompasses the time products spend in inventory.
What is working capital management?
The management of the three components of the working capital cycle, which is crucial for a distributor.
The emphasis is on minimizing the time capital is tied up.
What is days payable outstanding (DPO)?
The time taken to pay suppliers, calculated using average accounts payable divided by cost of sales.
It is also known as ‘supplier days’ or ‘creditor days’.
How is DPO calculated?
Average accounts payable divided by cost of sales as a fraction of the year, multiplied by 365 days.
Actual calculation may differ slightly due to using cost of sales instead of purchases.
What does an average DPO of 31 days indicate?
It indicates that ABC Co is paying its suppliers almost exactly on standard terms, which are typically 30 days.
This average may include a range of payment terms.
What is inventory days or days inventory outstanding (DIO)?
The time products spend in inventory before being sold, calculated using inventory divided by cost of sales.
It is also referred to as inventory days.
How is DIO calculated?
Inventory divided by cost of sales multiplied by 365 days.
A lower DIO is generally preferable, depending on the product type.
What factors affect the acceptability of inventory days?
Nature of the products, demand stability, and supplier reliability.
Perishable goods would require a lower DIO compared to durable goods.
What does ‘2 per cent 15, net 45’ indicate in supplier credit terms?
A 2% discount if paid within 15 days, with the full amount due within 45 days.
This can influence working capital decisions.
What is a potential downside of taking prompt payment discounts?
It can constrain sales levels by tying up working capital for 30 days.
This may outweigh the benefits of the discount.
What is days sales outstanding (DSO)?
The time customers take to pay their invoices, calculated using average accounts receivable divided by sales.
It is also referred to as ‘customer days’ or ‘debtor days’.
How is DSO calculated?
Accounts receivable divided by sales multiplied by 365 days.
This metric helps assess the efficiency of credit control.
What cultural factors influence stock levels?
Historic inflation and currency devaluation can lead to higher stock levels in certain countries.
For example, Turkish distributors may hold more stock than their German counterparts.
What trend is observed in stock levels in mature markets?
Stock levels have decreased significantly due to cost pressures and improved supply chain technologies.
This trend increases risk of disruption if logistics are affected.
What is the significance of inventory stratification into A to E classifications?
It helps manage inventory levels and minimize investment while reducing stock-out risks.
‘A’ items are fast-moving, while ‘E’ items are service parts.
What is the impact of Pareto’s law on inventory?
20% of products account for 80% of the volume, leading to inefficiencies in inventory management.
This requires regular audits to maintain an optimal inventory profile.
What is the ‘count back’ method in calculating DSO?
A method used in seasonal businesses to provide a more accurate DSO by considering sales variations.
It accounts for the timing of sales throughout the year.
What does DSO stand for?
Days Sales Outstanding
What is the purpose of tracking DSO over time?
To ensure the credit control function is effective and to monitor changes in credit arrangements
What is the ‘count back’ method used for?
To calculate DSO in seasonal businesses
How is total DSO calculated using the ‘count back’ method?
Total DSO = Days from current month + Days from previous month sales
If receivables at 31 December are $480,000 and December sales are $385,000, what is the receivables balance from November’s sales?
$95,000
How many days of November’s sales does the $95,000 represent if November sales are $325,000?
9 days
