World Cash Movement

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Supply Chain and Working Capital Management
ME 2054, Lecture 4
KTH February 8th 2013

WCM - Working Capital Management

WCM – Working Capital Management
 Working Capital is the capital needed in order to finance the ongoing business  Working capital is mainly tied up in  Cash  Inventory  Accounts receivable

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The Aim of improving WCM is always increased Profitability
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 Reducing working capital improves cash flow...
 ...giving direct results on the profit  A successful WCM project is not only a “financial” project but as much a matter of improving operational conditions in the supply chain.

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All activities in a WCM and SCM project must be balanced in order to achieve increased profitability. Logistikutbildning

The Cornerstones of Logistics

SERVICE

Profitability 

Profit Captal
CAPITAL

COSTS

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The importance of cash flow

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Income vs Cash Flow
Income
Supplier

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Customer

Purchase

Sales

Cost
Production

Income

Cash Flow
Supplier Customer

Outgoing payment

Incoming payment

Capital tied up - from Order to Cash
Suppliers

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Customers

FINISHED PRODUCT

Purchasing Capital tied up
Material from supplier delivered Cash payment to supplier

Production

Sales

Machine delivered and Payment from customer invoiced customer Customer’s credit time Operating margin Machine placed in finished stock Machine produced

Working Capital tied up
Credit time from supplier
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Time

Exercise: Calculation of released capital


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A company has a total sales of 180 millions. How much operating capital can be released by having the customer’s payment 3 days earlier?

180 millions = 0,50 x 3 days = 1,5 millions 360 days
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What we want to achieve
Goods received
Average inventory lead time

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Invoiced sales
Average customer payment time

Days

Average time to payment of supplier

Cash Conversion Cycle (CCC)

Cash disbursement to supplier

Cash collection from customer

We want to decrease the lead time in inventory…

2013-02-08

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10

What we want to achieve
Goods received
Average inventory lead time

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Invoiced sales
Average customer payment time

Days

Average time to payment of supplier

Cash Conversion Cycle (CCC)

Cash disbursement to supplier

Cash collection from customer

We want to decrease the lead time in inventory… …and decrease the payment time from customers…

2013-02-08

Logistikutbildning HvE AB

11

What we want to achieve
Goods received
Average inventory lead time

Logistikutbildning

Invoiced sales
Average customer payment time

Days

Average time to payment of supplier

Cash Conversion Cycle (CCC)

Cash disbursement to supplier

Cash collection from customer

We want to decrease the lead time in inventory… …and decrease the payment time from customers… …and increase the payment time to suppliers… ...and thus reduce working capital and the cash conversion cycle ! 2013-02-08 Logistikutbildning HvE AB 12

The main drivers of Cash Flow
Income statement Balance sheet
Balance sheet

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Operating income (operational)

Changes in Working capital (operational)

Changes in Fixed assets (strategic)

Cash flow
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Working Capital Management
Balance Sheet
Assets Liabilities & Equity Equity Fixed Assets Untaxed Reserves Inventories Long-term Liabilities

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“Management of a company’s Operating Capital, e.g. the short-term assets & liabilities.”

Accounts Receivable

Short-term Liabilities Accounts Payable

Cash

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