Fundamentals of Business

Working capital management (revenue expenditure)

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its shortterm liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

Decision criteria

By definition, Working capital management entails short term decisions - generally, relating to the next one year period - which is "reversible". These decisions will be based on cash flows and or profitability. One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

Cash conversion cycle
(asset conversion cycle, net operating cycle, working capital cycle, cash cycle)

Flow of cash that begins with payment for raw materials and ends with receipt of cash on goods sold. Shorter the number of days in this cycle, more the amount of available cash, and lesser the need to borrow,
. The cash conversion cycle
is the number of days between paying for raw materials and receiving cash from selling goods made from that raw material.
. Cash Conversion Cycle = Average Stockholding Period (stock days) + Average Receivables
. Processing Period (debtor days) - Average Payables Processing Period (creditor days) with:
. Average Stockholding Period (in days) = Closing Stock / Average Daily Purchases
. Average Receivables Processing Period (in days) = Accounts Receivable / Average Daily Credit Sales
. Average Payable Processing Period (in days) = Accounts Payable / Average Daily Credit Purchases

Mathematical argument - Cash CYCLE
1 day = 24 hours
1 hour = 60 minutes
1 minute = 60 seconds
Therefore
1 second = 1/ 24 x 60 x 60 days
Conclusion
Regardless of whether a business hold stocks or not, it has a cash cycle, the only difference is the stages the cycle goes through and time.

Enterprises do trade in either of two ways:
Business-to-Business (B2B)
Trading between firms (and not between businesses and consumers), characterized by (1) relatively large volumes, (2) competitive and stable prices, (3) fast delivery times and, often, (4) on deferred payment basis. In general, wholesaling is B2B.

Business-to-Consumer (B2C)
Selling individual products to individual buyers, usually on cash-payment basis; retailing is B2C.
In trading enterprises use distribution channels several inter connected (usually independent but mutually dependent) intermediaries such as wholesalers, distributors, agents, retailers. Each intermediary receives the item at one pricing point and moves it to the next higher pricing point until it reaches the final buyer, the customer.

Enterprise normally use - Trade Credit
Open-account, short-term (usually 30 default to 90 days) deferred payment terms offered by a seller to a buyer as a standard trade practice or to encourage sales. In some trades such as jewellery business, the credit may extend to 180 days or even longer.

Circulating (current assets)
Accounts receivables, inventory, work in process, cash, etc., that are constantly flowing in and out of a firm in the normal course of its business, as cash is converted into goods and then back into cash. In accounting, any asset expected to last or be in use for less than one year is considered a current asset.