Page 100 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 6: Managing Collection and Disbursement of Working Capital

Notes

Caselet Coca-Cola Working Capital

oco-Cola is a publicly held company that has reported profits over its lifespan.
Although the company has reported losses in some years, this has not prevented
Cthe company from expanding. Every company has room for improvement and
advancement within its respective market. The company has indicated profits over the last
two years, 2008 and 2009. Using the information provided by Coco-Cola’s financial statements,
certain recommendations can be presented to improve the company’s operating cycle.

Financial decision and operating cycle recommendations need to be considered with
great discussion and understanding. It is important to understand the impact these
recommendations will have on the organizations overall working capital. The working
capital of a company is defined as the current assets minus liabilities; this “measures how
much in liquid assets a company has available to build its business” (N.A., 2010). Based on
the financial statements and the figures calculated for Coca-Cola, the company has a good
working capital that allows it to improve operations and expand its business. The increase
in the accounts receivable period caused a slight increase on the accounts payable period.

Self Assessment

State whether the following statements are true or false:

4. The firm can never maximises the extent to which accounts payable are used as a source of
funds, a source which requires no interest payment by waiting as long as possible.
5. The working balance is maintained for transaction purposes like paying bills.

6. Finding the optimum involves a trade-off of transaction costs against opportunity costs.
6.3 Finding the Optimal Working Balance

Having done all we can to improve our collection and disbursement procedures, let us now take
the pattern of receipts and disbursements as given. Over any time period, a firm’s beginning and
ending cash balances are related as follows:
Ending balance = Beginning balance + Receipts – Disbursement
If receipts and disbursements were constant each day, we would know with certainty the amount
of each component daily and our problem would be simple. Since receipt always would exceed
disbursements by the same amount, we could withdraw the ending balance each day and use it
for other purposes. In practice, we have two problems: variability and uncertainty. In most
firms, receipts and disbursements vary both over the month and over the year. Over a month,
receipts and disbursements for current operating expenses are likely to show some variation,
perhaps in a regular pattern. In seasonal firm, the amounts also will vary over the year. Less
frequent outlays such as those for capital expenditure, taxes, and dividends, introduce still more
variability. Some of this variability may be predictable, but some probably is not. Let us examine
these two problems of variability and uncertainty separately.

6.3.1 Variability

Suppose both receipts and disbursements vary and are not synchronised, but the variations are
completely predictable. Determining the appropriate working balance in the face of

LOVELY PROFESSIONAL UNIVERSITY 95