Chapter 3: Management of working capital Working capital=Receivables+Cash+Inventory-Payables Working capital is the name given to net current assets which are

available for day-to-day operating activities Liquidity ratios:

o Current ratio=Current Assets/Current liabilities o Quick ratio=Current assets-inventory/Current liabilities

Efficiency ratios o Inventory turnover=Cost of goods sold p.a./Average inventory o Receivable turnover=Credit sales p.a./Average receivables o Payables turnover=Credit purchases p.a./Average payable

Overcapitalisation is where the overall level of working capital is too high o Solution is to reduce the level of working capital by better

management of receivables, cash and inventory Overtrading is where the level of working capital is too low

Chapter 4: Management of working capital Look at the given formulas from the formula list

Chapter 5: Management of working capital receivables and payables Practice the calculation

Chapter 6: Management of working capital—Cash Reasons for holding cash:

o Transaction motive o Precautionary motive o Speculative motive

Methods of dealing with cash shortages o Reduce inventories o Defer capital expenditure o Defer or reduce dividends o Chase receivables to pay earlier o Postpone the payment of payables o Use short-term borrowing o Sell surplus assets o Sale and leaseback

Pro-forma for cash budgets and how it should be structured Chapter 7: Investment appraisal—Methods

Rate of interest at which NPV is 0 is known as the internal rate of return Accounting rate of return=Average profit p.a. from an

investment/Average book value from the investment Payback period is the number of years it takes for a project to recoup the

original investment in cash terms