Working Capital Mgt

WorkingCapital

Management

Compiled by: Qassim MushtaqPremier DLC

Working capital management

Working capital is the amount of finance required for the day to day running of the business e.g to pay bills, to purchase stocks, payment of wages and salaries.

Working capital is calculated as follows;

Working Capital = Current Assets – Current Liabilities.

Where; Current Assets = Stocks + Debtors + Cash.

Current Liabilities =Trade Creditors.

Working Capital Cycle/Operating Cycle/ Trade Cycle/Cash Cycle:

Working Capital Cycle is the time delay between payment of cash for raw materials and eventual receipt of cash from the customers.

The business always intends to minimize the time period in which cash is blocked in operating cycle.

Operating cycle is calculated as follows;

Operating Cycle = Stock days + Debtor’ Days – Creditors’ Days.

Each business seeks to minimize the blockage or investment of cash in operating cycle i.e. each business intends to minimize the operating cycle.

How to minimize or reduce the operating cycle:

Reduction in stock days. Reduction in debtor days.

Working Capital Ratios:

Stock Turnover Period:

Stock Days = Average Stock X 365 daysCost of Sales

Or

Stock Turnover = Cost of SalesAverage Stock

Stock turnover period can be further classified as follows:


Stock Days (Finished Goods) = Average Stock X 365 daysCost of Sales

Stock Days (Raw Materials) = Average Raw Material Stock X 365 DaysAnnual Purchases

Average Production (W.I.P) Period =Average WIP x Degree of WIP

CompletionX 365 Days

Cost of Sales

Optimum period of stock days will vary industry by industry, and will vary for different types of stocks held by a firm.

High stock days or low stock turnover may arise due to:

The firm is being excessively prudent in its stockholding policies Obsolete or slow-moving stock.

Low stock days or high stock turnover may arise due to: Supply difficulties, which might result in stock-out and loss of sales.

Debtors’ Days:

Debtors’ Days/Debtors’ Payment Period = Trade Debtors X 365 DaysCredit Sales

Turnover

Creditors’ Days:

Creditors’ Days/Creditors’ payment Period =Average Trade

Creditors X 365 DaysPurchase or Cost

of Sales

It helps to asses the liquidity of the company. An increase in creditors days is a sign of lack of long-term finance or poor

management of current assets.

Current Ratios:

Current Ratio = Current assetsCurrent Liabilities

Acceptable level 2:1

Quick Ratios:

Quick Ratio/Acid Test Ratio = Current assets – StocksCurrent Liabilities

Acceptable level 1:1


Objective of Working Capital Management:

The objective of working capital management is to strike a balance between liquidity and profitability.

Day to day operations of the business must be run smoothly and day-to-day liabilities are paid when they fall due.

The possible conditions in relation to working capital are as followsOvertrading:

Overtrading is a situation in which business tries to do too much trade without long-term capital base. This might result in following,

1. Increase in stock and debtors due to rapid increase in credit sales. Significant increase in creditors, which will result in lesser working capital.

2. Financing of fixed assets from working capital.3. Shortage of cash but the business is profitable.4. There is little or no increase in long-term capital to support the ever increasing

volume of sale. Symptoms:

Symptoms of Over Trading

Liquidity RatiosCurrent Ratio<2:1 Indicate over trading.Quick Ratio<1:1

Turnover Periods Longer stock days.Longer debtor days.Even longer creditor days.

Sales Turnover Rapid IncreaseVolume of Assets, especially Current Assets.

Rapid Increase.

Bank Overdraft. It often reaches or even exceeds the agreed limit.Less long-term capital Repaying a loan without replacing it, will result in less long-term

capital to finance the current level of operations.

Remedies:

Short-term remedies:

Better management of stock and debtors. Delay capital expenditure. Maintain the sales volume instead of increasing it.


Long-term remedies:

Inject fresh capital.

Overcapitalization:

The over investment by the company in current assets, like excessive stocks, debtors and cash, and very few creditors, results in excessive working capital and this condition is called overcapitalization.

In short, over investment in working capital is over capitalization.

Symptoms:

Symptoms of Over CapitalizationSales/Working Capital Comparison with previous years or similar companies

Liquidity RatiosCurrent Ratio > 2:1

Indicate over investment.Quick Ratio > 1:1

Turnover Periods Long turnover periods for stock.Long turnover periods for debtors.Short credit period from suppliers.

Sales Turnover Decrease.

Remedies:

Optimal management of stock, debtors and creditors. Investment of surplus cash in profitable investments.

Methods of Financing Working Capital:

There are following methods of Financing Working Capital:a) Conservative Approach.b) Moderate/Matching Approach.c) Aggressive Approach.

All these approaches are in relevance to two types of current assets.

Types Of Assets NatureFixed Assets. These benefit a business for several accounting

periods.Permanent Current Assets.

Core level or minimum level of investment in current assets needed for a given level of business activity.

Examples include certain stock levels maintained to meet unexpected demand and certain permanent debtor e.g. govt. institutions etc.

Fluctuating Current Assets.

The variable portion of current assets required on demand or need basis.

a) Conservative Approach:


All permanent current assets and majority of fluctuation current assets are financed from long-term sources.

This is a risk adverse approach, which will result in low risk and low return.

b) Moderate/Matching Approach:

Permanent current assets are financed from long-term sources and fluctuating current assets are financed from short-term sources e.g. overdraft.

This is a risk neutral approach, which results in moderate risk and return.

c) Aggressive Approach:

All the fluctuating current assets and majority of the permanent currents assets are financed from short-term sources.

This is a risk seeker approach and results in high risk and high return.

Working Capital Management :

Working Capital Management implies the following:

a) Management of Stocks.b) Management of Debtors.c) Management of Cash.d) Management of Creditors.

a) Management of Stocks:

Why we hold stock: To meet the day to day demand of production. In order to meet emergency demand. Stock may be kept in anticipation of inflation of prices in the future. Stocks may be part of production process. Stock may be held to provide buffer between two processes. Stock may be held as a deliberate investment policy.

Objectives of Stock Mangement:To minimize total stock related costs.To ensure that stock available to meet routine and emergency demands.

Objective # 1: To minimize total costs associated with stocks.

(i) Costs of stocks:

Purchase cost. Annual costs of keeping stock include holding costs and ordering costs where;

Annual Ordering cost = No. of orders x Ordering cost/ orderWhere; Number of orders = Annual Demand

Order Size/ quantity

Ordering Cost is the cost incurred to place one order, which includes: Ordering staff’s salary.


Administration cost e.g. postage, telephone, and expenses. Delivery costs.

Holding cost = Average Stock x Holding cost per unit per annum (H)Where;

Average stock = (Q) Order Quantity/ Store Size2

Holding cost is the cost incurred to store/hold one unit of stock for a year. Cost of Capital. Store related costs:

Storekeeper’s salary. Rent of Store. Heating, Lighting and cooling of store. Insurance cost. Store equipment and vehicles’ cost.

Obsolescence of stock. Pilferage, theft and deterioration of stock. Opportunity cost of investment blocked in stock.

As the objective is to minimize costs which gives us

Q = 2 x Ordering cost per order x Annual demand

Holding cost per unit per annum

This is the ‘Economic Order Quantity Model’.

EOQ is the optimal order quantity or order size at which ordering and holding costs are minimum.

Total annual costs = Purchase cost + Ordering cost + Holding cost.

Exercise # 1:

Demand for a product is 70,000 units/month. Cost of holding a unit in stock for a week is£ 0.2. Cost of ordering an order is £15. The purchase cost of a unit of output is £4. Required:

a) Calculate EOQ.b) Calculate Total Annual Costs at EOQ.

Example # 2:A Ltd. has annual demand of 40,000 units, holding cost is £0.2/month and cost of placing one order is £2. Purchase price is£ 10/unit.

Required:Calculate total stock related cost if stock is ordered in following quantities.

a) 1,000 units /order.b) 10,000 units /order.c) EOQ.

(ii) Discounts:

If discounts are offered on bulk purchase of item, it only makes sense to avail them. But other costs along with the purchase cost should be considered to reach at a decision

whether to avail the discount offered or not.


Now total annual costs will be minimized: At pre-discount EOQ level, so that a discount is not worthwhile, or At the minimum order size necessary to earn discount.

Exercise # 3:The following data for the current year relate to a study lamp purchased by a departmental store:

Annual demand 10,000Monthly Holding cost per lamp £2Cost of placing per order £150Purchase cost per lamp £220

From the start of next year the cost of placing an order will increase by 20% but all the other data will remain the same.For the current year the supplier has offered the following discounts:

Order size Discount %age500 – 750 4%751 and above 7%

Required:a) Calculate EOQ.b) Calculate EOQ of the next year.c) Which order size would minimize the total annual costs?

Objective # 2: To reduce or eliminate the risk of stock-outs thus the stock-out costs.Stock out costs arises if stock is not available to meet certain demand and production is

stopped.

Stock-out costs include: Labor Idle time. Cost of potential sales. Extra costs of emergency stock. Loss of customer goodwill and future sales. Cost of production stoppages. Wastage of Machine time. Low employee morale.

Cost of Stock-outs = Cost of Stock-outs x Expected number of Stock-outs per order x Number of orders per year.

Where; expected number of stock-outs per order = various levels by which demand could exceed the re-order level during the lead-time.

Stock Control Level:Lead Time:

The time gap between placing an order and eventual receipt of order from supplier.

(i) Re-order level:

Re-order level is the measure of stock, at which a replenishment order should be made.


Action ResultOrder placed too late. Stock-out costs Order placed too early. Excessive stock holding costs.

Reorder level includes a buffer/safety stock. It is important when there is uncertainty concerning volume of demand and the time taken

to attain the required stock (lead time).

Re-order level = maximum usage x Maximum lead-time.

(ii) Maximum Level:

It is a warning signal to management that stocks are getting excessive.

Maximum Stock Level = Re-order level + Re-order Qt. – (Minimum usage x Minimum lead time).

(iii) Absolute Minimum Level/Buffer Stock/Safety Stock:

It is a warning to management that stocks are reaching a dangerously low level and the stock-out is possible.

Min. Stock Level/Buffer/Safety Stock = Re-order Level – (Max. Usage x Max. Lead-time).

Annual cost of safety stock = Qt. of Safety stock x Stock holding Cost per unit/annum.

(iv) Average Minimum Stock Level:

Stock levels fluctuate evenly between minimum and maximum stock level.

Average Minimum Stock level = Reorder level – (Average Consumption x Average Lead time)

Example # 4:

Maximum Lead time = 9 daysMinimum Lead-time = 5 days.Maximum Consumption / day = 20 unitsMinimum Consumption / day = 10 unitsAnnual Demand = 2,000 units.Ordering Cost = £2 /order.Holding cost = £1 / unit/ month.

Objective # 3: Avoiding the need to carry any stocks.

Just-in-Time Procurement System: It is the policy of obtaining the stocks from suppliers at the latest possible time.

Benefits: Reduction in stock holding costs. Reduced manufacturing lead-time. Improved labor productivity. Reduced scrap/rework/warranty cost. Lower level of investment in working capital.


ExercisesExercise # 1:

Oak Ltd has the following balance sheet and income statement:

Balance Sheet at the Y/E Dec 2006:

£ £Non Current assetsProperty, Plant and equipment 50,000Intangible Assets 10,000 60,000Current AssetsStock 10,500Debtors 10,700Cash 22,000 43,200

103,200

Equity and LiabilitiesOrdinary share Capital 40,000Loan Notes 12% 10,200Profit for the year 44,300 94,500Current liabilitiesCreditors 5,000Taxation 3,700 8,700

103,200

Income Statement at the Y/E Dec 2006:

£ £Sales 140,000Cost Of SalesOpening stock 10,000Production cost 89,000(Closing Stock) (15,000) (84,000)Gross Profit 56,000Expenses:Depreciation 4,200Wages and salaries 450Administration costs 3,000Selling and distribution costs 1,350 (9,000)Profit before interest and Tax 47,000Interest (2,000)Profit Before Tax 45,000Tax (7,00)Profit After Tax 44,300


Required:Calculate the following:

a) Stock Days.b) Debtor’s Days.c) Creditor’s Days.d) Trade Cycle.e) Working Capital.f) Current Ratio.g) Acid Test Ratio.

Exercise # 2:

Debtor’s days = 15 Creditor’s days = 27Stock days = 54

Sales turnover = £178,000Purchases = £78,000Cost of sales = £94,000

Required:a) Operating Cycle.b) Average Stock.c) Trade debtors.d) Trade creditors.

Exercise # 3:Furlong Co. income statementFor the year ended 31 December 2008,

£ £Revenue 30,000Cost of salesOpening Stock 1,200Production 12,000Closing stock (1,000) (12,200)Gross profit 17,800Expenses:Depreciation 1,000Selling and administration cost 5,300Interest 3,000 (9,300)Net Profit 8,500

Balance sheetFor the year ended 31 December 2008,

£ £Non current assets 10,000Current AssetsInventory 1,000Receivables 1,500 2,500

12,500


Equity and LiabilitiesOrdinary share capital 1,000Share premium Account 200Retained earnings 9,000 10,200

Creditors 1,000Overdraft 1,300 2,300

12,500

Required:Calculate the following:

a) Stock Days.b) Debtor’s Days.c) Creditor’s Days.d) Trade Cycle.e) Working Capital.f) Current Ratio.g) Acid Test Ratio.

Exercise # 4:

Debtor’s days = 45Creditor’s days = 17Stock days = 20

Average Trade debtors = £230,000Average trade creditors = £350,000Average stock = £78,000

Required:a) Cost of salesb) Purchasesc) Credit Sales turnoverd) Operating cycle.

b) Management of creditors:

Objectives of Creditor’s Management: Attempting to obtain credit from the supplier. Attempting to extend credit when needed. Maintaining good relationship with the supplier. Evaluation of discounts offered from suppliers.

Step # 1: Annualize the discount with following formula;

D 365 Annualize discount %age = x 100 – D tWhere;

D = discount, e.g. if discount is 6% then D would be 6.T = reduction in the credit period in order to avoid discount.


Step # 2: compare the required rate of return of the company / business with annualized discount %age.If the annualized discount is greater than the required rate of return the discount should be accepted.

Example # 1:Suppliers of A Ltd. offer 50 days credit. Supplier has offered 3% discount for payment within 15 days.Then, (3/ 15 x 50)Where; 3 is the 3% discount.

Discount is offered if the payment is within 15 days.Otherwise the normal payment period is 50 days.

Company can invest at 20% per annum / required rate of return of the business.

Required:Evaluate the viability of the early settlement discount.

Solution:Annualized discount %age / Cost of lost discount = 3 / (100 –3) x 365/35 = 32.25%

As the annualized discount %age exceeds required rate of return of the company, the discount should be availed.

Example # 2:Supplier has offered the following terms (2/12 x 38)The required rate of return of the company is 30 %.

Required:Evaluate the supplier’s offer.

Solution:Annualized discount %age / Cost of lost discount = 2 / (100 –2) x 365/38 = 19.6%

As the annualized discount %age is less than the required rate of return of the company, the discount should not be availed.

Bills of exchange:

It is a form of trade credit. Supplier or the creditor issues the ‘bills of exchange’ on customer, that he would pay the

certain amount of money on a certain date. Customer signs the bill to accept and give acknowledgement of his/her debt to creditor. When a certain date is reached, customer pays the creditor.

Acceptance credit:

It is an alternative to bank overdraft. It is a source of finance from banks for large companies.

Difference from bills of exchange/trade bills:

It is a facility to customer to draw bills on the bank, which bank would accept.


Accepted bills are sold by the bank in the discount market on behalf of the customer.The money obtained from sale less the bank ‘s acceptance commission is made

available to the customer. When bill matures, customer will pay the bank the value of bill, bank will turn pay the bill

holder/creditor.

Attractiveness of Acceptance Credit:

It is an alternative source of finance. There is a specific period of time limit for credit. There is cost advantage to customer, as the rate of discount on bank bills is lower than

the interest rate on bank loan or overdraft. There is the certainty in the cost of the credit facility, as it is fixed.

c) Management of debtors:

Objectives of management of debtors:

i. Granting of credit: Assessing credit worthiness of customers. Decision about credit limits to be granted.

ii. Extension of credit/ early settlement of discounts: Evaluation of financial consequences of extension in credit limit and credit period. Evaluation of financial consequences of early settlement discount offered to

customers.

iii. Financing of Debtors:

Evaluation of different financing option. Evaluation of;

a) Factoring proposals.b) Invoice discounting opportunities.

iv. Managing overseas debtors: Assessing credit worthiness of overseas debtors. Evaluation of credit extension for overseas debtors. Overseas factoring.

v. Use of customer’s data: Debtor’s aged analysis report. Internal credit ratings. Individual customer profitability analysis.

Detailed Discussion of Objectives:

i. Granting of credit:1) Assessing credit worthiness of potential customer.

Following are the sources of information with the help of which credit worthiness of a customer can be judged;

References:a) Reference from other customers.b) Reference from the bank.c) Reference from the supplier.


Credit ratting agencies. Audited financial statement of the potential customers. Department of trade and industries. Business journal. Press cuttings.

2) Extension of credit limit/ early settlement discount:

Evaluation of financial consequences of extension in credit limit and credit period.a) Return on investment approach.b) Cost of financing debtors.

Return on Investment Approach Cost Of Financing DebtorsStep # 1:Calculate current average debtors using following formula.

Avg. Debtors =Debtors

Payment Period Credit x Sales

365

Step # 1:Calculate the current average debtors and current cost of financing average debtors.

Cost of Financing Avg. Debtors =

Avg. Debtors X Interest rate

Step # 2:Calculate revised sales and revised average debtors.

Step # 2:Calculate the revised average debtors and revised cost of financing debtors.

Step # 3:Calculate increase in average debtors.

Step # 3:Calculate increase in financial cost due to change in policy.

Step # 4:Calculate increase in contribution.

Step # 4:Calculate increase in contribution.

Step # 5:Calculate the return on investment using the following formula;

Return on Investment =

Increase in Contribution X 100

Increase in Avg. Debtors

Step # 5:If there is more increase in contribution than increase in cost of financing debtors, the policy is worthwhile.

Step # 6:Compare ROI with required ROI, if Required ROI is less, the policy is worthwhile and can be implemented.

Exercise#1:

Russian Bread Ltd. is considering a change of credit policy, which will result in an increase in the average collection period from one to two months. The relaxation in credit is expected to produce an increase in sales in each year amounting to 25% of current sales volume.

Selling price per unit £10


Variable cost per unit £8.50Current annual sales £2,400,000

The required rate of return on investments is 20%. Assume that the 25% increase in sales would result in additional stocks of £100,000 and additional creditors of £20,000.

Required:Advise the company on whether or not to extend the credit period offered to customers, if:

a) All customers take the longer credit of two months.b) Existing customers do not change their payment habits, and only new customers take a

full two months credit.Exercise#2:

Lowe and Price Ltd. Has annual credit sales of £12,000,000 and three months are allowed for payment. The company decides to offer a 2% discount for payments made within ten days of invoice being sent, and to reduce the maximum time allowed for payment to two months. It is estimated that 50% of customers will take the discount.

Required: If the company requires a 20% return on investments, which will be the effect of the discount? Assume that the volume of sales will be unaffected by the discount? Assume that the volume of sales will be unaffected by the discount.

Exercise#3:

Enticement Ltd. Currently expects the sales of £50,000 a month. Variable costs of sales are £40,000 a month (all payable in the month of sale). It is estimated that if the credit period allowed to debtors were to be increased from 30 days to 60 days, sales volume would increase by 20%. All customers would be expected to take advantage of the extended credit. If the cost of capital is 12.5% a year ( or approximately 1% a month), is the extension of the credit period justifiable in financial terms?

Exercise#4:

Grabbit Quick Ltd. achieves current annual sales of £1,800,000. The cost of sales is 80% of this amount, but bad debts average 1% of total sales, and annual profit is as follows.

£

Sales 1,800,000Less: cost of sales 1,440,000

360,000Less: Bad Debts 18,000Profit 342,000

The current debt collection period is one month, and the management considers that if credit terms were eased (option A), the effects would be as follows.

Present Policy Option AAdditional Sales (%) - 25%Average Collection Period 1 Month 2 Month


Bad Debts (% of sales) 1% 3%

The company requires a 20% return on its investments. The costs of sales are 75% variable and 25% fixed. Assume there would be no increase in fixed costs from the extra turnover; and there would be no increase in average stocks or creditors.

Required: Which is the preferable policy, Option A or the present one?

d) Management of cash

Cash flow problems may arise if: A business is continuously making losses. It’s the time of inflation, and the business requires ever increasing amount soft cash just

to replace old assets. The business is growing it needs to acquire more fixed assets and to support higher

amounts of stocks and debtors. There are seasonal/cyclical sales, which would result in cash flow difficulties at certain

times of the year. There is a single non-recurring item of expenditure.

Motives of holding Cash:

(i) Transaction Motive: Business needs cash to meet its regular commitment of paying its creditors, wages, taxes, and annual dividends to shareholders.

(ii) Precautionary Motive: Business needs to maintain a buffer of cash for unforeseen contingencies, which might be provided by an overdraft facility.

(iii) Speculative Motive: Business might maintain surplus cash as a speculative asset in the hope that interest rates will increase.

Objective # 1: to avoid cash shortages.

Acquisition of new fixed assets might be deferred, in situations where the postponement has no serious consequence.

Press debtors for early payment might improve the cash in flow but would result in a loss of customer goodwill.

Revising past investment decisions by selling assets previously acquired. Delaying the cash outflows:

Extension of credit period, which would have adverse effect on the credit rating.

Rescheduling the loan repayments with the banks. Deferral payment of cooperation tax in agreement with Inland Revenue. Dividend payments could be reduced.

Optimum Amount of Cash:

There are two approaches to decide the optimum amount of cash.a) Inventory Approachb) Miller-Orr Model


a) Inventory approach:

Deciding the optimum cash balances is like deciding on optimum stock levels. Costs involved in obtaining cash:

Fixed cost that is the issue cost of equity finance or the cost of negotiating an overdraft.

The variable cost/opportunity cost keeping the money in the form of cash.

This approach uses an equation quite similar to the EOQ formula for stock management.

Avg. total cost incurred for period in holding a certain level of cash (C ) =

Qi+

FS

2 Q

Where;S = the amount of cash to be used in each time period.F = the fixed cost of obtaining new funds. i = the interest cost of holding cash or cash equivalents.Q = the total amount to be raised to provide for S.

Then the C is minimized when:

Q = 2 F S i

Drawbacks:

It is unlikely to be possible to predict amounts required over future periods with much certainty.

There is no buffer stock of cash; there must be cost of running out of cash. There may be normal costs of holding cash, which increase with the average amount

held.

b) Miller-Orr Model:

It is a more realistic approach to cash management. If there is no attempt to manage the cash balances, the cash balances will drift upwards

or downwards. A limit must be imposed on this drifting. Figure: 1 Miller-Orr Model

Cash Upper limit balance

The firm buys securities

Return pointThe firm sells securities Lower limit


0 Time

If the cash balance reaches an upper limit, the firm buys sufficient securities to return the cash balance to a normal level/the return point.

When the cash balance reaches a lower limit, the firm sells securities to bring the balance back to the return point.

Upper and lower limits:

Wider limits Day-to-day variability of cash flows is high. The transaction cost in buying and selling securities

is high. Interest rates are low

Closer limits The interest rates are high. Day-to-day variability of cash flows is low. The transaction cost in buying and selling securities

is low.

To keep the interest cost of holding cash down, the return point is set at one-third of the distance (spread) between the lower and the upper limit.

Return Point = Lower limit + 1/3 x spread

The formula of Spread is as follows;

Spread = 3 x (¾ x transaction cost x variance of cash flows/ interest rate)

Steps to use Miller-Orr Model:

Step-I Set the lower limit for the cash balance. This may be zero, or may be set at some minimum safety margin above zero.

Step-II Estimate the variances of cash flows.

Step-III Note the interest rate and transaction cost for each sale or purchase of securities.

Step-IV Compute the upper limit and the return point from the model and implement the limits strategy.

Objective # 2: to avoid the deviations from expected cash flows.

Cash Budgets are only estimates. An analysis of the sensitivity of the cash flows forecasts to changes in estimates of sales

and costs. A Probability Distribution of possible outcomes for the cash position will allow a more

accurate estimate to be made of the minimum cash balances. Unforeseen deficits can be hard to finance at a short notice and advance planning is

desirable.


Objective # 3: to reduce the ‘float’.

Float is the amount of money tied up between the time when a payment is initiated and the time when the funds become available for use in the recipient’s bank account.

Reasons for a lengthy float and measures to shorten it:

Reasons Measures(i) There is a transmission delay,

because it will take a day or two longer for the payment to reach payee when sent through the post.

The payee must ensure that the lodgment delay is kept to a minimum.

Cheques received should be presented to the bank on the day of receipt.

The payee might arrange to collect cheques from the payer’s premises.

(ii) There is a delay in banking the payments received. The length of this delay might depend on the administrative procedures in the payee’s organization.

Efficient administrative procedures to bank the payments and cheques received.

(iii) There is a delay in the cheque clearance by the bank.

The payer might be asked to pay through his own branch of a bank, using the ‘bank giro system’.

BACS is a banking system, which provides for the computerized transfer of funds between banks.

Standing orders or direct debits might be used.

CHAPS is computerized system for banks to make same-day clearances between each other.

Objective # 4: to reduce delays in receiving payment from debtors.

Reducing the length of credit period. Notifying the invoicing department that goods have been dispatched, so that the invoices

are sent promptly. Invoices should contain clear instructions so that the cheques are correctly made out.


Documents

Working Capital Mgt