Working Capital Management

• This course focuses on the management of a company’s working capital which has a fundamental impact on its liquidity
• We will assess the impact of working capital changes on the company’s ability to generate free cash flows;
• The programme will review the dangers & effects of poor working capital management and the impact of over-trading on the going concern;
• This training programmes assess the impact of varying factors, including seasonality on the working capital needs and working investment;
• We will assess the due diligence that corporate bankers and investment officers should undertake in order to assess the effectiveness
• Reviews the working investment needs of a range of different companies across a wide range of different industrial sectors;
• Assesses the impact of effective working capital management on the financial performance of different companies.

We understand that the client is particularly interested in covering the following areas as part of the training programme:

• Assessing the importance of liquidity to the going concern and the impact of working capital management on liquidity;
• Reviewing and measuring the Asset Conversion cycle;
• Using the Asset Conversion Cycle to measure the company’s working capital need (working investment).
• The dangers of poor working capital management and its impact on the corporate company’s ability to generate positive operating cash flow
• Understanding how to assess the overall quality of Working Capital management;
• Reviewing different areas of due diligence that corporate bankers and investment managers need to undertake in order to assess the effectiveness of working capital management by corporate clients;
• Reviewing Industry benchmarks for levels of working capital in different industries;
• Methods for the financing of Working Capital (How to secure revolving credit facilities and other asset-based financing as well as factoring);
• The importance of assessing each client’s Business model including the inherent scope of the business’ seasonality and working capital needs;
• Assessing the impact of seasonality on the company’s working investment;
• Assessment of working capital management in different stressed scenarios.

Session 1

A revision of basic working capital and cash flow principles

• Overview of the economic and financial challenges facing companies globally caused by rising inflation, interest rates, energy prices and continuing supply chain challenges.
• Why Liquidity is so important to the health and survival of the going concern
• Importance of cash flow for debt repayment and company value
• Cash flow analysis as part of the overall credit and business analysis
• Cash flow and liquidity in terms of its impact on free cash flow generation
• Analysis of different measures of liquidity and why the Current Ratio (and derivatives) is not always reliable.
• Review of the cash flow statement and how changes in working capital management can impact on free cash flow generation from a wide range of different industries
• A review of the challenges of working capital management in emerging markets.
• The difference between Profit and Cash and why EBITDA (Earnings before interest taxes depreciation and amortisation) does not spell cash flow.
• The calculation of the Debt Service Coverage Ratio and how working capital management can be measured in terms of its impact on the DSCR.

Workshop – During this session, we will analyse a range of different worked examples of cash flow statements from companies operating in developing markets. We will use examples of an African and an Asian company to review the cash flow statement, focusing on the operating cash flows and analysing how changes in working capital impact operating cash flow and therefore the ability of the company to honour its annual debt service as demonstrated by the companies’ Debt Service Coverage Ratio. 

The session will be highly interactive with delegates required to analyse the cash flow and provide explanations of their interpretation of what is going on ‘behind the figures’.

Session 2 

Reviewing and measuring the Asset Conversion Cycle

• The calculation of working capital and working investment using the Asset / cash conversion cycle
• The assessment of working capital ratios and the calculation of the core trading asset conversion cycle using trading assets and liabilities (trade payables and receivables)
• Just-in-time inventory methods and their impact on working capital planning and management as well as working capital needs (post Covid ‘Just in Case’ inventory)
• Reviewing the difference between gross working capital need (aka working investment) and the financing of the net working capital need.
• Cash flow and liquidity in terms of their impact on free cash flow generation.
• How client management frequently uses the asset conversion cycle and working capital terms strategically to increase turnover and the pitfalls of overtrading.

Workshop – We will analyse how we can calculate a company’s gross and networking needs by using the asset conversion cycle. We will refer to the net working capital needs in terms of the amount of financing that a bank will provide. The delegates will use a number of different cash study examples of companies operating in different sectors to calculate the cash conversion cycle and therefore the gross working capital need (the working investment) of the companies. We will also assess how small changes in the days on hand of the asset conversion cycle can impact the company’s working capital need and the pitfalls of poor management of working capital for the going concern.

Session 3 

Review of the content and application of the cash flow statement in working capital and cash flow analysis of a company.

• Assessment of the importance of cash flow analysis as part of credit risk analysis
• Review of how working capital management will affect the client’s cash flows and its ability to honour its ongoing debts.
• Review of the content of the cash flow statement under IAS7 and the difference between the Indirect and Direct methods of presenting cash flows
• Analysis of the reconciliation of key profit entries on the Income Statement, with the operating cash flow and how these affect overall cash flow generation
• The importance of assessing the client’s maintenance capital expenditure for calculation of the company’s current and future free cash flow forecasts.
• Further review of why EBITDA does not spell Cash flow
• Creation of two case study cash flows using the Income Statement and Balance sheet
• Financial analysis of a new corporate case study based in Africa, focusing on the use of the cash flow statement.

Workshop: Applied breakout team case studies whereby delegates will prepare two different cash flow statements for potential clients. The aim of the exercise is to provide the delegates with a deeper, internal understanding of the content and changes in working capital in the cash flow statement, which will allow them to improve their usage cash flow as part of their overall credit analysis.

Session 4 

Assessing the quality of Working Capital Management

• Reviewing practical, applied cash flow examples of the impact of changes in working capital on the client/investment target’s free cash flow generation.
• Examples of how large and small companies can get working capital management wrong and its impact on company liquidity
• Monitoring client management’s working capital management:
  • The importance of working capital assessment as part of initial and ongoing due diligence
  • Understanding how management uses working capital strategically when trading and negotiating with suppliers and customers
  • Understanding management’s cognisance of the impact of changes in working capital arising from their actions
  • Avoiding the pitfalls of overtrading and methods to control management action through loan covenants or board participation
  • Assessing and controlling stock purchasing and the importance of client management in avoiding speculative inventory purchases and build-
  • Assessing how management prepares for the financing of working capital changes ahead of changes in trading agreements with clients and suppliers.
  • How we can control working capital management as lenders to client companies
• Assessment of different Early Warning Signals of poor working capital management in both SMEs (Small and Medium Enterprises) and large corporates

Workshop – we will review different case studies whereby delegates will be required to assess the movements in working capital over time and assess what management action is being taken in terms of the strategic use of working capital to develop the companies’ businesses. The delegates in their project groups will assess an additional case study of a financing request. The delegates will be required to assess the request and draft a list of due diligence questions that they would present to the company in analysing the financing request, focused on management behaviour and usage of working capital.

Session 5

Monitoring and Managing the client’s working capital.

• The importance of assessing internal management control over liquidity and working capital
• Reviewing tools and policies that can be implemented by client management to preserve liquidity, particularly during a crisis.
• Budgeting and accounting internal control measures to monitor working capital management on a daily basis.
• Review of the 13 weeks cash flow model and its implementation in liquidity management
• Areas of potential distress (early warning signals) from poor liquidity management
• Daily management of the cash conversion cycle
• Additional ratios used by management in monitoring the corporate’s cash position
• Areas of due diligence are required by management to understand management control and behaviour regarding working capital and liquidity.

Workshop: Having reviewed different methods of internal control that management should be implemented for good working capital management, delegates will work in breakout groups to identify a list of due diligence questions and information areas to understand the effectiveness of the clients’ working capital management.

Session 6

Reviewing Industry benchmarks for levels of working capital in different industries and the importance of assessing business models for working capital

• A review of different measures that are used for assessing corporate liquidity and how they can vary between different industries. (manufacturing, companies working with commodity suppliers, different types of service companies, agribusiness companies
• Reviewing how to assess working capital needs for companies experiencing high seasonality (especially agriculture, agribusiness, construction and retail) by using the flow of funds and assessing the impact of peak and low seasons on working capital needs at different times of the year.
• Identifying variations in working capital levels and management across different companies in different industries
• Calculating acceptable levels of working capital usage between different businesses.
• The use and application of working capital ratios (working investment/sales, the cash ratio etc) to different companies in different industries.
• A review of a number of different companies across different industries in emerging and emerging markets
• Having introduced some of the concepts in the earlier part of the course particularly in terms of undertaking due diligence of working capital management in section 3 above, we would develop particular areas including:
  • The impact of seasonality on a company’s working capital needs in different industries
  • The importance of accounting for seasonality in terms of providing working capital financing methods
  • The use of credit terms for end clients by different companies in different industries (common in automotive or consumer goods retail) and can affect working capital needs.
  • The need for assessing seasonality and its impact on working capital through monthly cash flows covering peak trading periods.
  • Common aspects of seasonality in different industries and a review of those industries most and least affected by seasonality.
  • How to measure the impact of seasonality in different industries and for different business models
  • How to avoid and control the misuse of working capital financing by management including clean-up periods and temporary increases in exposure.

Session 7

Workshop – Firstly we will review the CCC and working capital needs of major listed companies across a wide range of different industries. In continuation, we will review an African chicken meat and processed chicken producer, reviewing its business model and its impact on working capital needs over time. The company experiences high seasonality so delegates will structure a revolving credit facility for the company including terms, the maximum limit, guarantees and other terms and conditions that will mitigate credit risk to fit with its high seasonality. We will also identify errors that the company has made in its working capital management.  Using a financial model we will also assess how changes in the company’s working capital days on hand will impact the company’s ability to honour its debt service as demonstrated through its DSCR.

Session 8

Assessment of working capital management in different stress scenarios including the current global economic recession caused by rising inflation, interest rates, energy prices and the war in Ukraine.

• The importance of cautious working capital management during a crisis
• The dangers, pitfalls and examples of poor working capital management during the recovery (lessons learned from post-Covid lockdown scenario – supply chain challenges).
• Applied methods that companies can apply to increase liquidity during a crisis
• Examples of techniques that companies can use during the ongoing economic problems
• The application and use of weekly cash flow forecasts to monitor and control liquidity and the role of working capital management in that process.
• Review of case studies and practical examples of how the banker and equity investment officers can work with the client company to manage working capital during the ongoing Covid pandemic.
• Initiatives developed by other development banks delivered during the current economic downturn to assist in working capital management.

Workshop: the delegates will be required to assess a company in the health sector in Asia that is struggling with its working capital as a result the current Covid Crisis. In their project groups, the delegates will calculate the company’s asset conversion cycle and provide recommendations regarding how management can improve liquidity through the effective management of working capital.  We will also review a 13-week cash flow forecast that client companies can use to manage their working capital and cash flow needs during the ongoing Covid crisis.

Course summary and feedback.

For the past 20 years, the trainer has provided training programmes to some of the world’s largest financial institutions including HSBC, EBRD and the EIB. Cooperating with a number of leading training companies, he has trained delegates from some of the largest industrial and financial institutions across the Middle East, Far East, Europe and Southern and Eastern Africa. He also lectures in a number of professional papers for the ACCA and CIMA examination boards at the Tianjin University of Finance and Economics, the leading Business School in China.

In parallel to his training, the trainer also has a 30-year career in Banking and Finance that originated in the City of London and has specialised in credit risk analysis, debt structuring and problem loan workout and debt restructuring for international corporate clients. He has worked with a number of the world’s leading financial institutions providing lending facilities or private placements worth over US$ 5 billion to the corporate sector. The trainer is also a senior partner in a London-based investment management company that raises debt and equity financing for Technology start-ups for MedTech, AgTech and Fintech companies. It is this practical, hands-on experience of credit risk analysis and balance sheet restructuring that he brings to his professional finance workshops.

Before embarking on his career in banking, he acted as an Economic and Political Adviser to the Prime Minister of the Slovak Republic.

The principal objectives of the course are to provide delegates (as described below), with a comprehensive overview of the importance of and need for the assessment of working capital management in terms of credit risk and business analysis.

We will review the importance of working capital management for the safeguarding of good liquidity in any client business and how company management action needs to be monitored and controlled in terms of effective working capital management.

Ultimately, we will assess how working capital management will impact the ability of the target, client company to generate free cash flow in order to a) honour its debt service and b) increase its DCF (Discounted cash flow) valuation.  

Training methodology

The course will be based on a series of intensive workshops where the delegates will be required to apply the planning and working capital management techniques covered during the course to apply problem-solving.  Case study analysis, exercises and problem resolution will therefore be central themes of the course. Working in project groups and on an individual basis, the delegates will be required to present their solutions to the trainer and the rest of the delegate group for discussion.

We will use a wide range of different case studies from different industries to assess how working capital management is managing central to the health and survival of the client company. Many examples and case studies will be drawn from practical examples of cases arising during the recent Covid crisis and ongoing economic problems caused by high inflation and energy costs and the political instability caused by the war in Ukraine.