Working Capital Management MM UIA 2014

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Working Capital Management


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Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School

Introduction

What ?- broad definition: management of current assets

and current liabilities

Current Assets Current Liabilities

Inventory Financial liabilities

Accounts receivable Accounts payable

Cash Other non-financial

Marketable securities


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Introduction

What ?most common interpretation:Acc Rec + Inventory Acc Pay

graphical representation

Objectiveavoid excessive and non-productive assetsfund the firm as cheap as possible

Importance ?

liquidityprofitability

solvency

value creation (EVA)


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Net Working Capital Management

Revenuemanagement

Supply chainmanagement

Expendituremanagement


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REL Consultancy Group

Working capital typically accounts for 20% ofcapital employed

Causes: late billing, customer complaint treatment, bad

accounts receivable policy, excess inventory,

Companies focusing on working capital typically achieve aglobal reduction of between 15 to 25%

Improving working capital management is often easier to

accomplish than raising sales or increasing profit margin !

It is the cheapest form of finance !


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Key levers of NWC management (REL)

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Revenue management

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Expenditure management

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Supply chain management

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Misconceptions about NWC

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Some definitions

DSO (Days Sales Outstanding)

= Accounts receivable / (net sales/365)

DIO (Days Inventory Outstanding)

= Inventory / (net sales/365)

DPO (Days Payables Outstanding)

= Accounts payable / (net sales/365)

DWC (Days Working Capital)

= (AR + InvAP)/ (net sales/365)

= DSO + DIO - DPO

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Some figures for major players

Company

DSO DIO DPODWC

Boeing 126 39 28 137

Dell 32 3 64 -30

Hewlett Packard 59 30 46 43

IBM 104 12 35 81

Procter Gamble 26 31 24 33

Kimberly Clark 50 40 22 68


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Some figures for major players

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CompanyDSO DIO DPO

DWCBlack&Decker 66 58 31 93

Harley Davidson 9 16 18 8

Xerox 130 27 21 136

Caterpillar 307 49 50 307

Tupperware 32 50 27 55


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Huge differences within a sector

ndustry

Bottom DWC TopDWC

Airlines 34 -12

Computer related hardware 86 -30

Home construction 323 15


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Huge differences within a sector: the case of Ryanair

NWC/Sales NWC per

1 bio in sales

Investment

exceeding the

Ryanair level

Alitalia 8,1% 81 mio 109 mio

Air France 2,2% 22 mio 50 mio

Ryanair -2,8% -28 mio


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Amazon.com versus Barnes & Noble

DSO DIO DPO DWC

Amazon.com 10 10 57 -37

Barnes Noble 4 94 53 45

2010 figures (USD - $) Amazon.com Barnes & Noble

Sales 34.204 bio 5.808 bio

Total assets 18.797 bio 3.706 bio

Inventories 3.202 bio 1.370 bio

Inventory/Sales 9.4% 23.6%

Assets turnover 1.82 1.57

Cash & equivalents 9 bio 59 mio

Assets turnover (excl cash) 3.49 1.59


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Inventory management

Raw materials, goods in process, finished goods,commodities

Keep as low as possible, but make sure to avoid stock

outage

Determinants?


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Just-in-time (e.g. Toyota)

Reduce inventory raw materials and

goods in progress

Set up costs need to be low, production process and

personnel flexible and well adapted to the JIT-system

Very high quality standards

Supplier is essential partner in the production process, high

degree of cooperation among suppliers

JIT: lowers inventory costs, but requires a lot from personnel,

suppliers and production process


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Accounts receivable management = credit management

Objective: minimize risk, maximize collection (preferablyasap), while maintaining good relationships with customers

Granting credit is not free !

financial cost/NWC

time + organisation

analysis of creditworthiness: evaluation and scoringadministration and follow-up (monitoring receivables)

collection

costs rise with distance and time

Develop procedures and systems

Management of the whole process


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Average payment terms

Germany: 34 days

France: 38 days

Italy: 100 days

Contractual payment terms are often not respected

Observation: the more southwards in Europe, the longer arethe contractual payment terms and the payment delays


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Collection policy

Make sure you have an adequate collection policy

Strict monitoring (according to risk profile of customer)

Example: delinquency letter (2d), telephone call (7d), reminder

(15d), CREDIT STOP: take legal action

Leave it to collection agency (effective but)


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Outsourcing of the collection

Factoring: sell of the accounts receivable

safe, but usually expensive

unpleasant for customers?

Credit insurance

might be a good solution

covers part of the accounts receivable (principle of co-insurance)works with credit limits per customer


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Randstad (Dec. 31, 2005)

DSO currently 53 days

Payables usually help financing receivables, but not at Randstadexternal purchases are limited

interim employees are paid immediately

In 5 years time, Randstad reduced DSO from 58 days to 53 days

Accounts receivables are 1.3 bio at present, and equal 57% oftotal assets !

What are the savings from 1 more day reduction in DSO?


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Randstad


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Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School | 19-1-2010 |35 |

Case Working Capital

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Working Capital Management MM UIA 2014