WORKING CAPITAL POLICY

AN ASSESSMENT OF CABLE AND WIRELESS COMMUNICATION PLC.

BY

OGBEIBU SAMUEL M1005382 MBA ACCOUNTING AND CORPORATE FINANCE (ACF) INTAKE 8 AUGUST 2011

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

i. EXECUTIVE SUMMARY

This course work is focused on assessing and revealing the working capital policy of cable and wireless communication plc. The working capital policy tools are used to appraise how the firm Cable and Wireless Communications Plc. measures the availability and magnitude of its liquid assets as it regards the companys growth, thus the organizations liabilities and debts are essential determining factors as to whether the end figure would be either positive or negative. In order to critically analyze and unveil the useful financial results, core accounting tools regarding working capital calculations such as the calculation of average inventory days, average receivable days, average payable days and a test of the companys liquidity status as it relates to its cash conversion cycle, have been utilized. Furthermore, this work shows how the company and one of its major competitors (TalkTalk Group Plc.) is appraised with relation to how their working capitals are set, the factors it should consider in setting its working capital policy and what level of working capital is to be maintained.

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

TABLE OF CONTENTS
i. EXECUTIVE SUMMARY 1. INTRODUCTION 2. BRIEF CABLE AND WIRLESS COMMUNICATION DEVELOPEMENT ANALYSIS

3. EVALUATION OF WORKING CAPITAL POLICY 4. WORKING CAPITAL DEFINED

5. MANAGING WORKING CAPITAL 6. INVENTORY DAYS

7. AVERAGE RECIEVABLE DAYS

8. AVERAGE SETTLEMENT PERIODS FOR TRADE PAYABLES

9. CASH CONVERSION CYCLE 10. COMPANYS LIQUIDITY ANALYSIS

11. CONCLUSION 12. REFERENCES

13. LIST OF TABLES 14. WORKINGS

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

1. INTRODUCTION In earlier times, organizations have allowed their working capital positions to slightly outgrow their historical boundaries due to some suggestions that some tightening of working capital policy might be appropriate, however the working capital policy would have to service the return and growth of the organization and not the other way round. This is because the working capital policy would be valued on the net present value of the firms future cash flows with the discount rate set at the weighted average cost of the capital. Following from that, the Working capital is a very large component of capital employed, cash flow and valuation metrics, averaging close to 12 per cent of sales and 20 per cent of capital employed in Europe. (Smid, 2007) Cable and Wireless Company has stood on the ground of telecommunication for over 80 years and since 1852 and its history could be traced back to a number of British telegraph companies founded by Sir John Pender in the 1860s. However the companys current chairman is known as Sir Richard D. Lapthorne and the present Chief Executive Officer, Director W. Anthony (Tony) Rice. Hence, the cable and wireless communication company have provided telecommunication services, networks and equipment to businesses, even governments and other residential customers the world over. (Report, 2011)

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

2.0 BRIEF CABLE AND WIRLESS COMMUNICATION DEVELOPEMENT ANALYSIS Good progress has been made in the company since its demerger in March 2010 as all four business units in the Caribbean, Panama, Macau and Monaco which have also been strongly positioned for the future in order to advance its vision of delivering world class communications to local markets. Market leading positions have been continuously maintained through improved network coverage and quality rendered services. There is product offering extension in mobile data, pay TV, managed services and carriers. The pay TV experienced growth in Panama, while in the Caribbean the mobile TV was launched and also the opening of east-west undersea cable. More to this, is a growth increase of mobile data in Macau and Monaco and Islands. (Report, 2011) Furthermore, the cable and wireless communication company have also made the first steps in expanding its operating activities in the Pan America and also have an award of the 911 in El Salvador and the cable assess partnership with Cuba.(Report, 2011) 2. EVALUATION OF WORKING CAPITAL POLICY To this end the working capital policy is a set of principles and plans which establishes a course of action for dealing with the current assets and the current liabilities. To critically appraise the working capital policy of the company, a set of working capital tools such as the average inventory days plus the average receivable days less the average payable days (which reveals the total Cash conversion Cycle) are utilized to target the proportion of assets that is to be financed by a long-term form of financing which is permanent. The working capital policy could be viewed as conservative, aggressive or normal. However, the differences between these policies are generally distinguished by the level of net working capital which is also the current assets less current liabilities. (Belt, 1979) Furthermore, in setting the working capital policy, the company would have to consider some optimal level requirements in the continuity and working capabilities of management to maintain a proper level in various components of working capital such as cash receivables, inventories and payables. The companys working capital requirements are contingent upon various financial and economic factors which should be adequately utilized as antecedents of the working capital management such as the operating cycle of firm, level of economic activity, the leverage, and growth of firm, operating cash flows, firm size and also the return on assets. (Ghassan AL Taleb, 2010) 3. WORKING CAPITAL DEFINED Working capital is usually defined as current assets less current liabilities. (Peter Altrill, 2011) It is imperative to note that the key elements of current assets in this regard are the inventories, the trade receivables, cash which could be either in hand or at bank and the major elements of current liabilities are the trade payables and the bank overdrafts. Hence the capital of Cable and Wireless Communication Plc. represents net investments in their shortterm assets. Working capital can also be defined as the capital that is invested in the operating processes of the organization in order to buy, also make and sell. Understanding the complexity of the

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

working capital policy helps to offer scopes for improvement generate sales and maximize the wealth due to the fact that it relates the difference between debtors and inventories and the companys creditors. (Smid, 2007) However to achieve an efficient level of working capital management policy, involves a critical planning of and an effective controlling of the current assets and the current liabilities in a way in which the risk of the companys inability to meet due short term obligations on one hand and a heavy investment is in assets on the other hand is avoided and eliminated. (AMA, 2004) 4. MANAGING WORKING CAPITAL Some manufacturers working capital cycle and inventory levels tend to be higher, than in many other types of businesses as there is yet a prevalent need to hold three kinds of inventories which are the raw materials, work in progress and finished goods. Thus each form of industry reveals a significant stage in the production cycle. (Peter Altrill, 2011) A simple working capital cycle

Source: Adapted from QFINANCE (The Ultimate Financial Resource), 2011. Now with respect to the diagram, the big question is that on the average, how long will it take for goods received today to be sold to generate cash received which leads to a profit or loss from sales at a given period? This question is what drives us to the point of cash conversion cycle (CCC) calculations know-how (which involves average inventory days plus trade receivable days less trade payable days). 5. AVERAGE INVENTORY DAYS This is also known as the average stock days or stock turnover periods and it shows the number of days an average stock is held in a business. It is further calculated thus; Average Inventories held x 365 (Peter Altrill, 2011) Cost of sales In this case the result is reported in days and a shorter period is preferred as it means a lower cost of holding inventories.

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

Following from the 2010/2011 financial statement of Cable and Wireless Communication plc. where cost of sales was $1,530 million, average inventory/stock days was calculated to be for 12 days in 2009/2010. However there was increase in the stock turnover for the year 2010/2011 with cost of sales amounting to $1,586 million which has been calculated showing 19days of stock turn over period, revealed much longer inventory periods held as compared with the previous year. This on the other hand would cause the company to incure more storage and handling costs and increase stock of financing the inventories since shorter stock days are preferred for inventory periods. Furthermore, the TalkTalk Group Plc. had a 1day stock turnover period for both financial years with cost of sales at 838 million (2009/2010) and 877 million (2010/2011) respectively. This shows a good maintenance stock stability in the number of stock days as inventories where held for just one day for both financial periods respectively (figures in appendix). 6. AVERAGE RECIEVABLE DAYS This is also called Debtors Days or Debtors Ratio and it shows on the average just how many days it takes for customers/debtors to pay their debts or pay what they owe. It is also reported in days and a shorter average settlement or payment period is preferred. Thus its formula is: Average trade receivables Credit sales revenue x 365 (Peter Altrill, 2011)

Lets take a brief look at Cable and Wireless Communication plc. and TalkTalk Group Plc. settlement periods for trade receivables for two financial years(2009-2011). As at 2009/2010, credit sales revenue (becomes sales or turnover where credit sales is not available) for Cable and Wireless Communication plc. was $2,346 million with a calculated payment period of 76 days and a credit sales revenue of $2,440 million with a calculated payment period for 89 days. An increase in stock days from 2009/2010-2010/2011, shows that it took the company longer days to receive payment from debtors in both years hence it is imperative to note that shortage/long delay of cash inflows is very detrimental to the companys working capital and financial growth. On the other hand, TalkTalk Group Plc. had a settlement period of 39 days with credit sales revenue of 1,686 million as at 2009/2010 and credit sales revenue of 1,765 million for a settlement period of 32days. This shows a shorter average settlement period which is emphatically preferred since quick cash inflow from debtors payments will aid in facilitating the working capital processes and financial growth. (Figures available in appendix)

7. AVERAGE SETTLEMENT PERIODS FOR TRADE PAYABLES This could also be called creditors days, creditors ratio or even payable days. It relates on average the amount of days it takes for a company to pay its debts/creditors for assistance, services rendered and even supplies. However, the selection of Supplier process and the management of inventory are reciprocal and this is to help companies deal with uncertainties relating to consumer demand. Thus the accounts payable is one of the prime sources of unsecured short-term financing (Gitman, 2009).

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

It reported also in days and calculated thus; Average trade payables x 365 Credit purchases (Peter Altrill, 2011)

To this end, when there is no credit purchases the cost of sales is used. Now the cost of sales of $1530 million of Cable and Wireless Communication Plc. was calculated as an average settlement period for trade payables was 183 days as at 2009/2010. Although the average settlement period for trade payables decreased in 2010/2011 financial year, with cost of sales amounting to $1,586 million and trade payables as 173 days. This is good as it reveals that the company had longer days to pay its debts it owes to suppliers thereby given it more time to run its working capital operations in order to yield value added outputs since much delay of payments to suppliers can create problems for a business such as low outputs due to less raw materials and logistics support coming from suppliers and the general environment. More to this, a brief assessment of TalkTalk Group Plc. shows cost of sales of 838, million and calculated payable days of 174days as at 2009/2010 financial period, but showed a decrease of settlement periods for payables which was 156 days for 877 million as cost of sales. It is however important to note that the longer days are preferred as it helps to aid in the working capital management process of both companies. (Figures in Appendix). 8. CASH CONVERSION CYCLE The cash conversion cycle or operating cash cycle (OPC) deals with the measurement of time length in days in which the firms cash is tied up in its own current operating cycle. It shows an interrelationship of sales, collections and trade credit. However the shorter the firms' cash conversion cycle (CCC), the more efficient the operations and capital management implementations will be. It can be thus calculated as; Average inventories turnover period + Average settlement period for trade receivables Average payment period for trade payables. (Peter Altrill, 2011) OR Days Inventory Outstanding + Days Sales Outstanding Days Payables Outstanding Source: Fox Chase Bank (Where America Saves), 1867. Hence the cash conversion cycle for Cable and Wireless Communication Plc. was a total of ()95 days as at 2009/2010 financial period and (-) 65 days for the year 2010/2011. This is a good figure for the company as it experienced a short operating cash cycle which would improve the firms profitability. However, it took TalkTalk Group Plc. (-)134 days to complete its operating cash cycle in 2009/2010 and although cash conversion cycle was ()123 days in 2010/2011, it still showed a high operating cash cycle which will lead to a higher investment in financing working capital as compared with Cable and Wireless Communication Plc. cash conversion cycle. (See appendix) It is important to note that in order to achieve value creation managers must try to reduce their firms number of days as it regards accounts receivable and inventories.(G and M, 2005) Similarly, by reducing the operating cash cycle up to an optimal level, the company can also create value for its shareholders (Howorth C, 2003).

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

9. LIQUIDITY ANALYSISCOMPANYS Assessing the companys liquidity analysis is imperative as it shows the firms capability to meet its short term financial obligations. (Peter Altrill, 2011) The liquidity characterise the financial situation of the company, its ability to convert assets into cash or to obtain cash to meet short-term obligations. Lack of liquidity may affect seriously the continuity of the company activities. (Pacurari Doina, 2008) To ascertain the liquidity of any firm (Cable and Wireless Communication Plc.) two kind of such as the current ratio and acid test ratios would be used. Current ratio is the ratio that is used to evaluate a firms ability to meet its short-term liabilities on time (John, 2003) and it is calculated thus; Current ratio = Current assets / Current liabilities (Pacurari Doina, 2008) The ideal ratio is usually 2 times or 2:1 although different kinds of business require different ratios. Following from this, the financial statement of Cable and Wireless Communication Plc. shows that as at 2009/2010, the companys calculated current ratio was 1.0 times but fell to 0.8 times in 2010/2011. Hence the lower the current ratio, the more less liquid the company may be considered to be. (Figures available in appendix) Acid test or quick ratio is the ratio that indicates whether a firm is in a position to pay its current liabilities immediately. This ratio is a better test of short-term financial position of the company than the current ratio, as it considers only those assets which can be easily and readily converted into cash. (P, 1996) Thus its formula is stated as follow; Quick Ratio = (Current assets Inventories) / Current liabilities (Pacurari Doina, 2008)

It is also calculated in times and the ideal ratio is 1.0 times or 1:1 (Peter Altrill, 2011), hence calculating the quick ratio analysis of Cable and Wireless Communication Plc. for the year 2009/2010 shows a ratio of 0.9 times while that of 2010/2011 shows a ratio of 0.8 times. This however reveals that the liquid current assets of the Cable and Wireless Communication Plc. does not quite cover the current liabilities, thus the business might be experiencing some liquidity problems. (See appendix for details)

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

10. CONCLUSION Assessing the working capital policy of Cable and Wireless Communication Plc. has shown how working capital represents the net investments in the short term assets of the company. Hence the study above shows how the manager would be able to determine the level of working capital to be maintained. The optimum level of working capital is determined, to a large extent, by the methods adopted by the management. Continuous monitoring is required to maintain optimum levels of various components of working capital, such as cash receivables, inventory and payables. (Mian Sajid Nazir, 2009)

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

11. REFERENCES AMA, E. (2004) 'Liquidity-Profitability Tradeoff: An Empirical Investigation in an Emerging Market', International Journal of Commerce and Management, vol. II, no. 14, pp. 48-61. Belt, B. (1979) 'working Capital Policy and Liquidity in The Small Business', Journal of small Business Management, vol. 17, no. 3, July, pp. 43-51. Fox Chase Bank (Where America Saves) (1867), [Online], Available: http://www.foxchasebank.com/business_you/cash_conversion_cycle.asp [04 Semptember 2011]. Ghassan AL Taleb, A.A..N.A.-Z.F.N.A.- (2010) 'The Determinants of Effective Working Capital Policy: A Case Study on Jordan', INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS, vol. II, no. 4, August, pp. 248-263. Gitman, L.J. (2009) Principles of managerial finance, 12th edition, Boston: Pearson Prentice Hall. G, T.P.J. and M, S.P. (2005) 'Effects of Working Capital Management on SME Profitabilty', International Journal of Managerial Finance, vol. 3, no. 2, pp. 164-177. Hoovers. A D&B Company (2011), [Online], Available: http://www.hoovers.com [27 August 2011]. Howorth C, W.P. (2003) 'The Focus of Working Capital Management in UK Small Firms. ', Management Accounting Research, vol. 14, no. 2, pp. 94-111. John, H. (2003) Financial Decision Making, 4th edition, New Delhi: Prentice Hall of India (P) Ltd. Mian Sajid Nazir, T.A. (2009) 'Working Capital Requirements and the Determining Factors in Pakistan', ICFAI Journal of Applied Finance, vol. 15, no. 4, April, p. 28. P, P.S. (1996) Liquidity Management: Principles and Practices of Managing Cash Flow, New Delhi: Vision Book (P) Ltd. Pacurari Doina, M.M. (2008) 'Analysis of a Company's Liquidity Based On Its Financial Statements', Annals of the University of Oradea, Economic Science Series, vol. 17, no. 3, pp. 1366-1371. Peter Altrill, E.M. (2011) Accounting and Finance for Non-Specialists, 7th edition, Essex: Pearson Education Limited. QFINANCE (The Ultimate Financial Resource) (2011), 03 August, [Online], Available: http://www.qfinance.com/cash-flow-management-calculations/working-capital-cycle [03 Semptember 2011]. Report, A. (2011) Cable and Wireless Communication, 25 May, [Online], Available: http://www.cwc.com [26 August 2011].

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

Smid, R. (2007) 'Unlocking Value from Your Sheet Through Working Capital Management', Journal of Payment Strategy and Systems, vol. II, no. 2, October, p. 05. 12. APPENDICES 13. LIST OF TABLES: TABLE 1 BELOW IS THE COMBINED WORKING CAPITAL DETAILS Of CABLE And WIRELESS COMMUNICATION Plc. And TALKTALK GROUP Plc. EXTRACTED FROM BOTH COMPANYS BALANCE SHEETS.
WORKING CAPITAL DETAILS CABLE AND WIRELE SS 31 MARCH, 2010/2011 CABLE AND WIRELE SS 31 MARCH, 2009/2010 TALKTAL K GROUP Plc. 31 MARCH, 2010/2011 TALKTALK GROUP Plc. 31 MARCH,2009/20 10

US (m$) Total current assets Total current liabilities Sales Cost of sales Inventory Receivable Payables 1082 1236 2440 1586 84 592 753

US (m$) 1178 1148 2346 1530 49 491 769

UK (m) 161 474 1765 877 3 155 376

UK (m) 186 490 1686 838 2 180 400

Calculated working capital, Inventory days, Receivable days, Payable days and Cash Conversion Cycle (CCC)
Working Capital = Current assets - current liabilities Inventory days= Inventory/Cost of sales x 365 Receivable days= Receivable/Sales x 365 Payable days = Payables/cost of sales x 365 (-)154 30 (-)313 (-)304

191 day(s) 891 day(s) 1731

day(s)

121 day(s) 761 day(s) 1831

day(s)

11 day(s) 321 day(s) 1561 day(s)

1 day(s) 391 day(s) 1741 day(s)

CCC = Inventory days + receivable days payable days

(-)651
day(s)

(-)951
day(s)

(-)1231
day(s)

(-)1341 day(s)

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

14. WORKINGS Working Capital Calculations for Cable And Wireless Communication Plc. Inventory days= Inventory/Cost of sales x 365 2009/2010 49/1,530 x 365 = 12days Receivable days=Receivable/Sales x 365 2009/2010 491/2346 x 365 = 76days (days) 2010/2011 592/2,440 x 365 = 89days (days) 2010/2011 84/1,586 x 365 = 19days

Payable days = Payables/cost of sales x 365 2009/2010 769/1530 x 365 = 183days

(days) 2010/2011 753/1586 x 365 = 173days

Cash Conversion Cycle = Inventory days + receivable days - payable days 2009/2010 12 + 76 - 183 = (-) 95days 2010/2011 19 + 89 173 = (-)65days

Working Capital Calculations for Talktalk Group Plc. Inventory days= Inventory/Cost of sales x 365 2009/2010 2/838 x 365 = 1day(s) (days)

2010/2011 3/877 x 365 =1day(s)

Receivable days=Receivable/Sales x 365 2009/2010 180/1,686 x 365 = 39days

(days) 2010/2011 155/1765 x 365 = 32days

Payable days = Payables/cost of sales x 365 2009/2010 2010/2011

WORKING CAPITAL POLICY (A STUDY OF CABLE AND WIRELESS COMMUNICATION)

400/838 x 365 = 174days 877/376 x 365 = 156days

Cash Conversion Cycle = Inventory days + receivable days - payable days 2009/2010 39 + 1 174 = (-) 134days COMPANYS LIQUIDITY RATIO ANALYSIS Current ratio = Current assets / Current liabilities 2009/2010 1178/1148 = 1.0 times 2010/2011 1082/1236 = 0.8 times 2010/2011 1 + 32 156 = (-) 123days

Quick Ratio = (Current assets Inventories) / Current liabilities 2009/2010 1178-49/1148 = 0.9 times 2010/2011 1082-84/1148 = 0.8 times