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Float

The document discusses various financial metrics used to evaluate working capital management including net float, days' payable outstanding, days' sales outstanding, days' sales in inventory, operating cycle, and cash conversion cycle. It provides examples of calculating each metric using financial data from sample companies. The metrics are used to analyze factors like how quickly a company collects payments, pays suppliers, turns over inventory, and manages its overall working capital needs.

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58 views8 pages

Float

The document discusses various financial metrics used to evaluate working capital management including net float, days' payable outstanding, days' sales outstanding, days' sales in inventory, operating cycle, and cash conversion cycle. It provides examples of calculating each metric using financial data from sample companies. The metrics are used to analyze factors like how quickly a company collects payments, pays suppliers, turns over inventory, and manages its overall working capital needs.

Uploaded by

ريم الميسري
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Float

Net float = disbursement float + collection float


Example
Tariq Ltd Consulting on the average writes out checks of AED 30,000 per day and this takes 3 days to
clear. Tariq Ltd Consulting also receives an average daily check of AED 25,000. The checks are deposited
immediately in the bank and takes 3 days to clear. Compute the net float.

Disbursement float =30,000 (amount) × 3(mumber of days) = 90,000


Collection float = 25,000 (amount) × 3 (number of days) = -75,000
Net float = 90,000 - 75,000 = 15,000

Example
The Z spa & salon receives an average daily check (cheque) of AED 20,000. The checks are deposited
immediately in the bank and takes 4 days to clear. Z spa & salon also write out checks of AED 15,000 on
the average per day and takes 3 days to clear. Compute the net float.

Disbursement float = 15,000 * 3 = 45,000


Collection float = 20,000 * 4 = -80,000
Net float = 45,000 – 80,000 = 35,000
Example
Each business day, on average, a company writes checks totaling $19,500 to pay its suppliers. The usual
clearing time for the checks is four days. Meanwhile, the company is receiving payments from its
customers each day, in the form of checks, totaling $37,200. The cash from the payments is available to
the firm after two days

Disbursement float = 19,500 * 4 = 78,000


Collection float = 37,200 * 2 = 74,400
Net float =78,000 - 74,4000 = 3,600

Example
Al Wafa printing company writes out checks totaling an average of AED 26,000 each day and
these checks take three (3) days to clear. They receive checks averaging AED 32,000 per day and
these checks take four (4) days to clear. 

Answer the following:

a.          Calculate the disbursement float. 


b.          Calculate the collection float 
c.          Calculate the net float  
d.          What does this say about the company's cash situation?
Days’ payable outstanding - DPO

Example -
Khadija textiles has accounts payable of AED 360,000 and cost of sales AED 880,000. Dalma
textiles has accounts payable of AED 330,000 and cost of sales of AED 760,000. Which one of
the companies on average pays its suppliers quicker? Write out any formula and show the step by
step solution.  

Khadija textiles
Days’ payable outstanding = Accounts payable / (Cost of sales / 365)          
Days’ payable outstanding =           
Days’ payable outstanding =
Days’ payable outstanding = 
Dalma Textiles
Days’ payable outstanding = Accounts payable / (Cost of sales / 365)          
Days’ payable outstanding =
Days’ payable outstanding =
Days’ payable outstanding =      
 
Days’ sales outstanding (DSO)

Example –
T&N telecom currently has accounts receivable of $1,222,111 on net sales of
$6,000,900.
1. Compute its accounts receivable turnover ratio?
Account receivable turnover= Net Sales /Account Receivable =
Account receivable turnover= $6,000,900/$1,222,111=

2. Compute its days’ sales outstanding (DSO)?     


DSO= 365/recivableturnover=365/4.91=74.3 days

3. If the industry average DSO is 50 days, what is your advice to the company?  
It takes T&N telecom about 74.3 days to collect its account receivable which is more
than the industry average (50 days). T&N telecom should be careful to collect its cash
from outside

1. Account receivable turnover= Net Sales /Account Receivable =

2. DSO= 365/Account Receivable turnover=

3. Advice:
Example - DSO

Daman insurance. currently has accounts receivable of $ 1,200,000 on net sales of


$ 15,000,000.
1. Compute its accounts receivable turnover ratio?
Account receivable turnover= Net Sales /Account Receivable =
Account receivable turnover= $ 15,000,000 /$ 1,200,000 = 12.2

2. Compute its days’ sales outstanding (DSO)?   


DSO= 365/Account Receivable turnover=
DSO= 365/12.2 =29.20 days

3. If the average DSO for companies like Daman insurance is 45 days, what is your advice
to the company?
It takes Daman insurance about 29.2 days to collect its account receivable which is less
than the industry average. Daman insurance is doing great in collecting its cash
compared to its counterparts which take 45 days, therefore Daman should keep up the
good work.
.

Days’ sales in inventory (DSI)

Days sales in inventory = 365/inventory turnover

Inventory turnover = COGS/inventory

The following is Income Statement and Balance sheet for Jackson Plc.
Required: Compute the days’ sales in inventory
Operating cycle (OC)
OC = Days’ sales outstanding (DSO) + Days’ sales in inventory (DSI)

Cash conversion cycle (CCC)

Cash Conversion Cycle = DSO + DSI – DPO


Or Cash Conversion Cycle = Operating Cycle - DPO

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