Cash Flow and Working Capital Management

Transcription

1 Introduction to Financial Management in SMEs Financial statements analysis Cash Flow and Working Capital Management Investment Projects Appraisal Financing policies in SMEs Cash Flow and Working Capital Management The concept of (Net) Working Capital. Working Capital as an investment The relationship of cash flow management with business processes Managing Working Capital flow through the managing of customers, suppliers and production processes G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

2 Cash Flow and Working Capital Management The concept of (Net) Working Capital G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

3 Definition of Net Working Capital Short vs long term approach NWC is the difference between short term assets and long term assets it is employed to value the short term solvency of a firm (liquidity and quick ratios) A high level of NWC is good news for the firm NCE&NFP approach NWC is the difference between trade credits inventory and trade debits (and other operating assets and liabilities) It is the part of NCE invested in the daily processes of the firm A high level of NWC is bad news for the firm G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

4 Cash Flow and Working Capital Management The relationship of cash flow management with business processes G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

5 Credit Management G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

6 Credit Management G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

7 Credit Management G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

8 Operating cycle components Inventories are purchased on credit which create trade payables The sale of inventories is made on credit which creates trade receivables Trade payables need to be paid, and cash is collected from the trade receivables Purchase Production Trade Payables Finished Goods Sale of Trade Receivables Inputs Starting Payment Completed Finished Goods Collecting t 0 t 1 t 2 t 3 t 4 t 5 Trade Payables time Raw Material Inventory Production Cycle/ Work-In-Progress Inventory Finished Goods Inventory Trade Receivables Inventories bought on credit temporarily help with cash flow as there is no immediate to pay for these inventories If cash collected from the trade receivable is not enough to pay to the trade payables, a financial need is generated. This means there is no cash inflow even though inventory has been sold. The cash for the sold inventory will be received later Cash has to be collected from the trade receivable and used to pay the trade payables. G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

9 Operating cycle components Purchase Production Trade Payables Finished Goods Sale of Trade Receivables Inputs Starting Payment Completed Finished Goods Collecting t 0 t 1 t 2 t 3 t 4 t 5 Trade Payables time Raw Material Inventory Production Cycle/ Work-In-Progress Inventory Finished Goods Inventory Trade Receivables Working capital cycle (in days) Raw materials Days In Inventory t 1 t 0 WIP Days In Inventory t 3 t 1 Finished Goods Days In Inventory t 4 t 3 Days of Sales Outstanding t 5 t 4 Days of Payables Outstanding t 2 t 0 G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

10 Which firm is performing better? Purchase Production Finished Goods Sale of Trade Payables Trade Inputs t 0 Starting t 1 Completed t 3 Finished Goods t 4 Payment t 2 Receivables Collecting t 5 A Raw Material Inventory Trade Payables Production Cycle/ Work-In-Progress Inventory Finished Goods Inventory time Trade Receivables B Purchase Production Trade Payables Finished Goods Sale of Finished Trade Inputs Starting Payment Completed Goods Receivables t 0 t 1 t 2 t 3 t 4 Collecting t 5 Trade Payables time Raw Material Inventory Production Cycle/ Work-In-Progress Inventory Finished Goods Inventory Trade Receivables G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

11 Cash Flow and Working Capital Management Working Capital as an investment G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

12 Net Working Capital and financial needs Sales DSO/DII DSO/DII Stable 100 /month 1 month 3 months months G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

13 Net Working Capital and financial needs DSO/DII Sales Sales 3 months -10% per month + 5% per month months G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

14 Net Working Capital and financial needs Long term financial needs for NWC investment Long term financial needs for NWC investment months G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

15 Net Working Capital and financial needs Contingent shortterm financial provisions Medium-to-Short term financial provisions Long-term financial needs for NWC investment Long term financial provisions months G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

16 Cash Flow and Working Capital Management Managing Working Capital flow through the managing of customers, suppliers and production processes G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

17 Cash Flow and Working Capital Management Managing Working Capital flow through the managing of customers, suppliers and production processes - Credit management See CS2 G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

18 Cash Flow and Working Capital Management Managing Working Capital flow through the managing of customers, suppliers and production processes - Managing inventories See CS3 G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara

19 Payment practices in 2015 Average (days) Western Europe Germany Austria The Netherlands Denmark Great Britain Sweden Swiss Ireland France Belgium Spain Italy Greece days days days More than 90 days Source: Atradius, Statistical appendix Atradius Payment Practices Barometer, Survey results for Western Europe, Spring 2015 G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara