Chapter 13 • Management of working capital
to its settlement will reduce the value of the amount owed, in terms of the home
currency. This risk normally needs to be managed. This and other aspects of interna-
tional transactions are dealt with in some detail in Chapter 15.Ratios
These can be useful in trade receivables management. Probably the most widely used
is the trade receivables settlement period ratio (average trade receivables ×365/
annual credit sales revenue) which indicates the average time taken between a sale
being made and the cash being received. It gives an overall impression of what is
actually happening with trade receivables, which can be compared with the business’s
settlement policy to provide a control device. Where settlement periods are in fact
exceeding those specified in the policy, steps can be taken to try to correct matters.In summary, trade receivables management should be thought through in advance
and conducted in a systematic manner. Incidences, by accident or by design, of depar-
ture from the established credit policy should be highly exceptional.Trade receivables settlement periods in practice
In the UK, as in many parts of the world, the standard credit terms are that credit
customers are ‘required’ to pay within about four weeks, though it can vary from
supplier to supplier. In 2007, the average time taken by credit customers was 61 days
(Guthrie 2007).
Although 61 days is the average period, there is almost certainly a fairly wide vari-
ation. Of course, individual policies on trade receivables management, like offering
discounts for prompt payment, will normally have an effect.13.9 Cash (including overdrafts and short-term deposits)
If we glance back at Figure 13.1 on page 351, we see that cash is sooner or later
involved in everything that the typical business does. Some businesses may not hold
inventories (perhaps because they sell services rather than goods), others may have no
trade receivables or trade payables (because they neither give nor receive credit), but
all of them have cash. Admittedly, some businesses have negative cash balances (over-
drafts), but a business with no cash balance at any given moment would be rare.
Cash tends to be held for three reasons:l to meet planned needs to pay suppliers and labour;
l as a fund to meet unexpected obligations: for example, a short-term lender de-
manding payment earlier than expected;
l to enable unexpected opportunities to be taken: for example, to place a larger than
planned order for inventories to exploit some temporary price advantage.As we saw in our discussion of Figure 13.1, cash is much more than just one of the
elements of working capital. As the medium of exchange and store of value it provides
the linkage between all financial aspects of the business. More specifically, it links
short- and long-term financing decisions with one another, and with decisions invol-
ving investment both in non-current assets and in working capital.