ACCA Applied Skills · Financial Management

Management of Inventories, Receivables, Payables and Cash

Working capital management is how a business controls inventory, receivables, payables and cash so it can pay its bills without tying up money needlessly. In ACCA FM you calculate the cash operating cycle, apply EOQ, compare discount and factoring offers, and forecast cash. Then you recommend an action.

What this chapter covers

This chapter covers the short-term side of financial management. It looks at how money moves through the business day to day: stock is bought, goods are sold on credit, customers pay, and suppliers are paid. You learn to measure that flow, control each part of it, and decide how to finance it.

The chapter is very calculation-friendly. You measure days for inventory, receivables and payables. You work out the economic order quantity. You compare the cost of an early settlement discount with the cost of short-term borrowing. You build a cash forecast and decide what to do with a surplus or a shortfall. Each topic ends in a recommendation, not just a number.

It links to the rest of the paper in clear ways. Working capital investment affects the cash flows in investment appraisal. Financing policy links to sources of finance and cost of capital. Cash forecasting links to risk and to the financial ratios you use in analysis. Questions often blend two of these areas, so the ideas here are worth knowing well.

Working capital questions suit both parts of the exam. In Section A and the OT cases, short calculations such as EOQ, days, discount cost and cash balances are marked all or nothing, so accuracy pays. In Section C, a longer question may ask you to calculate, compare policies and write a reasoned recommendation. The formulas are few and the method is repeatable, so this is one of the chapters where steady practice reliably turns into marks.

Management of inventories, accounts receivable, accounts payable and cash: topics in the order to study them

1Working Capital Cycle and Cash Operating CycleStart here because it gives you the days measures and the picture that every later topic builds on.
2Working Capital Investment and Financing PoliciesNext, learn how much to invest and how to fund it, so you see why the later control techniques matter.
3Inventory Management and Economic Order QuantityInventory is the first item in the cycle and has the most formula work, so tackle it while you are fresh.
4Accounts Receivable ManagementReceivables follow inventory in the cycle and bring in discount, factoring and credit-control decisions.
5Accounts Payable ManagementPayables mirror receivables, so you can reuse the discount-cost method from the previous topic.
6Cash Management and Cash Flow ForecastingForecasting pulls together the receipts and payments patterns you have just studied.
7Short-Term Investment and Borrowing of CashFinish with what to do with the surplus or deficit that a forecast reveals.

How to prepare Management of inventories, accounts receivable, accounts payable and cash

Treat this chapter as a set of small methods. Learn each one, then practise it until you can do it without notes.

Learn the cash operating cycle first: inventory days + receivable days − payable days. Practise finding each day figure from statement of financial position and income statement data, and note which base (sales or cost of sales) each one uses.
Write out the EOQ formula, EOQ = √(2 × Co × D ÷ Ch), where Co is the cost per order, D is annual demand and Ch is the holding cost per unit per year. Do five or six questions, including ones with bulk discounts, where you compare total annual costs.
Practise the discount calculation for receivables and payables. The annual cost of forgoing a discount is (1 + d ÷ (100 − d))^(365 ÷ n) − 1, where d is the discount percentage and n is the number of days of extra credit gained. Compare the result with the cost of borrowing.
Build cash forecasts from scratch. Lay out receipts, payments and the opening and closing balance by period, and watch timing, such as credit sales received one or two months later, and non-cash items like depreciation.
Learn the qualitative points in short lists, such as the pros and cons of factoring, aggressive versus conservative financing, and the main short-term cash investment criteria. Practise turning each list into a short, reasoned paragraph.
Finish with mixed timed questions. Do OT-style questions at about two minutes each, then one full constructed response question, ending each with a clear recommendation.

Common mistakes in Management of inventories, accounts receivable, accounts payable and cash

Using the wrong base for the days calculations, such as sales for inventory days.
Fix: Write the pairing once: inventory with cost of sales, receivables with credit sales, payables with credit purchases or cost of sales. Check what the question gives you.
Forgetting to add the ordering cost and holding cost correctly in EOQ questions, for example holding cost per unit on the order quantity rather than on the average stock.
Fix: Use the EOQ formula to find the order size. For total cost, use ordering cost = (D ÷ Q) × Co and holding cost = (Q ÷ 2) × Ch.
Comparing a discount's cost with an interest rate without making them annual and on the same basis.
Fix: Always convert the discount to an effective annual rate using the formula, then compare it with the annual borrowing rate.
Including non-cash items or items at the wrong date in cash forecasts.
Fix: Go line by line and ask: is this cash, and in which period does it move? Remove depreciation and shift credit receipts and payments to the correct months.
Ending a Section C answer with numbers and no recommendation.
Fix: Keep two minutes for a clear conclusion that says what the business should do, why, and what risk remains.
Treating a lower cash operating cycle as always good.
Fix: Remember the trade-offs. Cutting inventory can cause stock-outs and squeezing suppliers can harm relationships, so discuss the effect on the business before you recommend.

Last-day revision: Management of inventories, accounts receivable, accounts payable and cash

Cash operating cycle = inventory days + receivable days − payable days.
Inventory days use average or closing inventory ÷ cost of sales × 365; receivable days use receivables ÷ credit sales × 365; payable days use payables ÷ credit purchases (or cost of sales) × 365.
EOQ = √(2 × Co × D ÷ Ch); at the EOQ, annual ordering cost equals annual holding cost.
With a bulk discount, compare total annual cost (purchase + ordering + holding) at the EOQ and at each discount quantity.
A conservative policy holds high working capital and uses long-term finance; an aggressive policy holds low working capital and uses more short-term finance.
Annual cost of forgoing a discount = (1 + d ÷ (100 − d))^(365 ÷ n) − 1; take the discount if this is higher than your cost of borrowing.
Factoring can speed up cash and cut admin costs, but it costs fees and interest and may affect customer relationships.
Reducing receivable days frees up cash; the saving is the reduction in receivables × the cost of finance.
Cash forecasts show timing only: leave out non-cash items such as depreciation.
Overtrading means growth without enough finance, so look for a rising need for cash and a strained overdraft.
Surplus cash should be placed with attention to liquidity, risk and return; shortfalls can be met by overdrafts, loans or tighter working capital.
In a Section C answer, state the calculation, then give a recommendation and one or two risks.

Management of inventories, accounts receivable, accounts payable and cash practice questions

Management of inventories, accounts receivable, accounts payable and cash in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Management of inventories, accounts receivable, accounts payable and cash: frequently asked questions

What is the cash operating cycle in ACCA FM?

It is the time between paying for inventory and receiving cash from customers. You calculate it as inventory days plus receivable days minus payable days. A shorter cycle usually means less cash is tied up.

How do I calculate the economic order quantity?

Use EOQ = √(2 × Co × D ÷ Ch). Co is the cost of placing one order, D is annual demand and Ch is the holding cost per unit per year. Make sure D and Ch cover the same period.

Is working capital management only calculation, or do I need to write answers too?

Both. Section A and the OT cases test mainly calculations and short concepts. Section C may ask you to calculate and then recommend, so you need to practise short, reasoned written points.

How do I decide whether to take an early settlement discount?

Work out the effective annual cost of forgoing the discount, using the formula with the extra days of credit. If it is higher than the rate at which you can borrow, take the discount and borrow if needed.