2. Working Capital Management
 Working capital is the cash needed to pay for the day
to day operation of the business
 Working capital calculated like below
Current
Assets
Current
Liabilities
Working
Capital
 Stocks
 Debtors
 Cash
 Investments
 Trade Creditors
 Dividends
 Taxation
 Short term Loans

3. Working Capital Cycle

4. When Working Capital mismanaged? Cash Flow
Problems
 Main Causes of Cash flow problems
Low profits or Losses
Over- Investment in Capacity
Too Much Stock
Allowing Customers too much Credit
Over Trading
Unexpected Changes
Seasonal Demand

5. 



6.  Mr. Silva has set up a business 2 years ago. His annual turnover is Rs.200,000
and annual profit is Rs.18,000. He operates with a bank OD of up to Rs.25,000.
His working capital is sufficient to steadily expand the business.
 Then he get a contract to supply Business A.(with d excitement of increasin
sales) The order is for Rs.40,000 a month for two years. He will be paid 75 days
after delivery.
The first month
Business runs smoothly. Suppliers start delivering as promised. The only
problem is that he is short of space.
The second month
Things still look good. He has made the first delivery to Business A. He
increases her overdraft.
The third month
Silva has problems. He has made more deliveries to Business A but His
overdraft is at the limit. He is getting calls from unpaid suppliers.

7. The fourth month
Silva in hot seat. Can’t pay all His suppliers. Some stopped delivering and
some are threatening legal action. He thinks that he will be fine because he is
still supplying Business A.
The fifth month
His overdraft is Rs.40,000 over the limit. 3 suppliers start legal action. The
bank refuses to pay cheques. Then first payment from Business A arrives on
time.
The sixth month
The next Business A payment does not arrive on the due day. He cannot fulfill
any more orders. The bank demands that the overdraft be repaid within seven
days.

8.  Debtors
 Increasing credit sales volume
 Extended credit sales period
 Increasing and excessive reliance on trade payables
 Increase in short term borrowings
 Cash
 Increasing sales without corresponding increase in
profit
 Lack of cash in hand or at bank
Symptoms of Over Trading ……

9.  Creditors
 Stocks are ordered earlier and need to be paid for before
they are sold
 Extended trade payable periods
 Inventory
 Increasing inventory days
 More stock required to meet sales demand
Increasing the length of working capital cycle!!

10.  Internal causes
 Poor management of operations
 Production problems
 Poor marketing decisions
 External causes
 Economic
 Financial failure:

11. Investigation of overtrading….
 Stock (inventory) days
 Debtor (trade receivable) days
 Creditor (trade payable) days
 Current ratio
 Quick ratio
 Gross profit margin
 Net profit margin
 Return on capital employed

12. Examples for Over Trading …..
o Seylan Bank PLC
o Next Clothing Retailer
o Sock Shop

13. o Borrowing or increasing in capital to increase current assets - cash
o Sale of non-trading assets
o Tightening terms of credit granted to customers
o Negotiating longer credit terms from major suppliers
o Setting new payment terms
o Offering discounts for prompt payments
o Automated payments
o Invoice discounting or Factoring
o Negotiating terms with suppliers
o Improve inventory control
o Lease/hire purchase assets
o Introduction of new capital
o Reduce distribution of profit
o Cost cutting

14. Anyone can think that
overtrading sounds like a good
thing, but actually it isn’t – the
key to a healthy business is to get
a good balance between under
trading and overtrading
Borrowing Money
Shrinking profits
Late payments
Over Expansion
Depletion of Working Capital
Accountant
Impact on financial Health and Business…..

15. Discipline Cycle !!!
Discipline
Consistency
Patience
Profits &
Success

16.  Overtrading means trying to grow quickly without having the financial
strength .
 Overtrading can be a very big problem for companies, especially SME.
 This is common in start- ups and expanding businesses
 Over-trading can be a problem for many firms when the economy moves
out of a recession.
 If company is growing, It’s vital that you have excellent financial
management information in place to keep the business on track and
prevent problems arising.