Working Capital Management-B.V.Raghunandan

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Basics of working capital and its management as presented in an Executive Development Programme

Basics of working capital and its management as presented in an Executive Development Programme

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  • 1. Working Capital Management - B.V.Raghunandan SVSC,Bantwal AIBA-Executive Development Programme July 29,2006.
  • 2. Working Capital
    • Funds needed to meet day-to-day expenses
    • Gross Working Capital is the sum of all the Current Assets---financed by both long-term and short-term funds
    • Net Working Capital is the difference between the Current Assets and Current Liabilities---financed by long term sources of funds
  • 3. Current Assets
    • Cash in hand & Cash in Current Account
    • Near Cash Items like balance in SB A/c, Bank Deposit, Investment in Money Market Instruments, Mutual funds
    • Accounts Receivable
    • Inventory
    • Advance Payments
  • 4. Current Liabilities
    • Accounts Payable
    • Taxes Payable
    • Customer Deposit
    • Dealers’ Deposit
    • Accrued Expenses Payable
  • 5. Assessment of Working Capital Requirement
    • Operating Cycle Method
    • Forecasted Balance Sheet Method
    • Percentage of Sales Method
    • Trial & Error Method
  • 6. Operating Cycle Method
    • Estimation of Conversion periods like RMCP,WIPCP,FGCP,BDCP
    • Estimation of PDP
    • Estimation of Net Operating Cycle
    • Determination of No. Net Operating Cycles in a Year
    • Sales/ No.of Net Operating Cycles =Working Capital Needed
  • 7. Forecasted Balance Sheet Method
    • Forecast the elements of the Balance Sheet of the Period
    • Sum Up the Current Assets
    • Sum Up the Current Liabilities
    • Current Assets-Current Liabilities= Net Working Capital
  • 8. Percentage of Sales Method -Establishing the Working Capital as a Percentage of Sales -Working Capital is estimated for each period as a percentage of the sales forecasted -This method is becoming popular for its simplicity -RBI also favors this method to be followed by the Bankers
  • 9. Management of Current Assets
    • Cash Management
    • Management of Accounts Receivable
    • Inventory Management
  • 10. Cash Management
    • Preparation Cash Budget
    • Wherever Possible, use SB A/c with Autosweep facility
    • Investment in Near Cash Items like Bank FD, Money Market Instruments, MFs, MMMFs
    • Acceleration of Cash Inflow through…..
    • Deceleration of Cash Outflow through……..
  • 11. Acceleration of Cash Inflow
    • ECS and RTGS
    • Discounting Cheques
    • Factoring
    • Stock Clearance
    • Cash Discount to Debtors
    • Discounting of Bills
    • Disposal of Useless Assets/Brands
  • 12. Decelerating Cash Outflow
    • Delay Payment of Insensitive Items like Utility Bills, Taxation
    • Using Multi-city Cheques instead of Bank Drafts
    • Using Credit Card and Charge Accounts without attracting Interest
    • New loans in declining interest rate period and opting for Floating interest rate loan
    • In a period of increasing interest rate , opt for fixed interest rate loans
  • 13. Inventory Management
    • Material Budget
    • Purchase Budget
    • Inventory Levels
    • Economic Order Quantity
    • Control of Spoilage
    • Browsing Websites to reduce lead time
    • Plant Proximity
    • Just in Time Management
    • ERP for Multi-Location Stores
  • 14. Management of Accounts Receivable
    • Desirability of Credit Sales
    • Establishing a Credit Policy for debtor evaluation, credit limit, cash discount
    • Billing Procedure: frequency of Statement of Account
    • Raising Finance through Factoring, Discounting Bills of Exchange
    • Review of Credit Policy