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 - 2017-2018 131
Cash Flow and Working Capital Management The concept of (Net) Working Capital G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2017-2018 132
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 - 2018-2019 133
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 - 2017-2018 134
Credit Management G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2018-2019 135
Credit Management G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2018-2019 136
Credit Management G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2018-2019 137
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 - 2018-2019 138
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 - 2018-2019 139
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 - 2018-2019 140
Cash Flow and Working Capital Management Working Capital as an investment G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2017-2018 141
Net Working Capital and financial needs 900 800 Sales DSO/DII DSO/DII Stable 100 /month 1 month 3 months 700 600 500 400 300 200 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 months G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2018-2019 142
Net Working Capital and financial needs 900 800 DSO/DII Sales Sales 3 months -10% per month + 5% per month 700 600 500 400 300 200 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 months G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2018-2019 143
Net Working Capital and financial needs 1400 1200 1000 800 Long term financial needs for NWC investment 600 400 200 Long term financial needs for NWC investment 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 months G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2018-2019 144
Net Working Capital and financial needs Contingent shortterm financial provisions 1400 1200 1000 800 Medium-to-Short term financial provisions Long-term financial needs for NWC investment 600 400 Long term financial provisions 200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 months G. Marzo - Financial Management - Department of Economics and Management - University of Ferrara - 2018-2019 145
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 - 2017-2018 146
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 - 2017-2018 147
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 - 2017-2018 148
Payment practices in 2015 Average (days) Western Europe 75 17 5 3 33 Germany 92 5 5 22 Austria 91 6 2 23 The Netherlands 85 14 24 Denmark 86 11 3 26 Great Britain 83 16 26 Sweden 92 6 27 Swiss 88 10 27 Ireland 79 18 2 32 France 67 28 4 34 Belgium 78 14 6 3 34 Spain 47 34 15 5 47 Italy 41 36 17 6 51 Greece 42 27 18 14 53 0-30 days 31-60 days 61-90 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 - 2018-2019 149