This final lesson examines the management of the individual components of working capital—cash, inventory, receivables, and payables—and the use of key ratios and policies for effective working capital management. It synthesises the module by covering practical techniques for optimising working capital, as detailed in the ACCA syllabus and university curricula at the University of Peradeniya and Munster Technological University .

 

  • Cash Management: Efficiently managing cash and cash equivalents to ensure sufficient liquidity while maximising returns on idle funds. TAMK’s Advanced Accounting and Finance course covers how cash processes and balances can be improved .

  • Inventory Management: Balancing the costs of holding inventory with the need to meet demand. Techniques include:

    • Economic Order Quantity (EOQ): Determines the optimal order quantity to minimise total ordering and holding costs.

    • Just-in-Time (JIT): Reduces inventory levels by receiving goods only as they are needed. TAMK’s course includes JIT as an advanced method .

  • Receivables Management: Establishing credit policies and managing the collection of outstanding debts. Key ratios include:

    • Receivables Days: Estimates the time taken for customers to pay. Businesses prefer lower receivables days .

  • Payables Management: Managing the payment of suppliers. Key ratios include:

    • Payables Days: Estimates the time taken to pay suppliers. Businesses prefer to increase payables days, unless this proves expensive in terms of lost settlement discounts .

  • Key Working Capital Ratios: The ACCA article identifies key ratios for evaluating working capital management :

    • Current Ratio: Current Assets / Current Liabilities. Indicates liquidity.

    • Quick Ratio: (Current Assets – Inventory) / Current Liabilities. A more conservative measure of liquidity.

    • Inventory Days: (Inventory / Cost of Sales) × 365. Indicates how quickly inventory is sold.

    • Sales to Working Capital Ratio: Sales / (Inventory + Receivables – Payables). Indicates how efficiently working capital is being used to generate sales.

  • Working Capital Policies: The ACCA syllabus covers “Working capital policies” as a core topic . Policies relate to the level of investment in current assets and the financing of those assets. The University of Peradeniya syllabus includes “Financing of Working Capital; Banking Norms and Macro Aspects; Factoring and Forfaiting” .

  • Interpretation of Ratios: For meaningful evaluation, it is necessary to identify trends (change in a ratio over time) and use external benchmarks (industry average ratios) . The ACCA article provides a worked example showing how to calculate and comment on a firm’s cash operating cycle, current ratio, quick ratio, and sales to working capital ratio 

 

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