Corporate Financial Strategy

4th edition
Dr Ruth Bender

Chapter 20

Strategic working capital management

Corporate Financial Strategy

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

Corporate Financial Strategy

Learning objectives
1. Identify the components of working capital generated from a
companys business model, and understand the impact of this on its
growth and value potential.
2. Select appropriate financing strategies for a companys working
capital needs.

Corporate Financial Strategy

Working capital affects sustainable growth

g = return on investment retention ratio

If working capital as a % of sales is

reduced, g will increase

Corporate Financial Strategy

The working capital cycle

Stock manufacturing/
holding period

Credit period allowed

by creditors

Credit period taken

by debtors

CASH CONVERSION PERIOD

Operating Cycle

Corporate Financial Strategy

Receive cash

Buy goods

Sale

Working capital in different industries

Manufacturer

Working capital requirement

Supermarket

Negative Working capital

Consultancy

Working capital requirement

Inventories
Receivables
Payables

Corporate Financial Strategy

Risk and return in working capital

Risk avoided by holding Cost of the working capital

working capital
investment
Inventories

Stock-outs delaying the

manufacturing process
Loss of customers who
cannot wait for delivery

Cash tied up in stock

Costs of holding stock (incl.
warehousing, insurance,
damage, obsolescence,
pilfering, as well as the
financial cost)

Receivables Loss of customers due to

Credit control costs and bad

debts
Cash tied up in receivables

Creditors

Poor name in the industry

Charged higher prices

more attractive
opportunities elsewhere

Corporate Financial Strategy

Too heavy reliance on

bank finance

The order-to-receipt cycle

Set terms & conditions

Receive order
Order fulfilment
Invoicing
Collection procedures
Cash processing and banking

Corporate Financial Strategy

Funding requirements over time

Overdraft

Funds
needed

Cash on deposit

Long-term debt

Equity

Time

Corporate Financial Strategy

Cash flows in factoring

Company
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)

Corporate Financial Strategy

10

FacCo

Customer