Marketing Finance - Working Capital

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In this presentation, we will talk about the importance of working capital in marketing set up, several components of working capital and criticality of inventory.

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Marketing Finance - Working Capital

  1. 1. Learning Objectives Understand The role and importance of working capital in a marketing set up. The several components of working capital and how to control them. Criticality of inventory and credit management. Chapter Seven Working Capital 1
  2. 2. Structure 7.1 Introduction. 7.2 Credit Checks 7.3 Stocks / Inventory 7.4 Summary Chapter Seven Working Capital 2
  3. 3. 7.1 Introduction.Working capital in simple terms means capital required forday to day running of the business. In accounting terms it is adifference between current assets and current liabilities.Any business will need money to invest in stocks andinventory so necessary to service orders received and itscustomers. The actual amount of inventory required variesfrom company to company depending on nature of businessrequirements, raw materials used and procedure forprocuring them. Stocks block funds which are available foruse elsewhere. Thus they cost the company. Marketing ,therefore, must plan inventory critically. Chapter Seven Working Capital 3
  4. 4. 7.1 Introduction.Working capital is also required to finance sales made oncredit. Here until money is received from customerscompany’s funds are blocked in receivables. Credit sales are,however, essential to maintain healthy volume of sales.Sales on credit have to be made if industry conditions requirethem. Credit has to be extended to beat competition.Extended credit terms are to be offered to important largeclients. This is particularly so in B2B markets.To manage funds so blocked in receivables, marketing mustensure speedy recovery of dues as per terms of sale. Chapter Seven Working Capital 4
  5. 5. 7.1 Introduction.Credit sales have following associated costs : Cost of capital blocked in receivables. Cost of control to limit receivables to secure recovery. Cost of collection involved in recovering outstanding,maintaining follow up, restricting period of collection etc. Cost of delinquency where buyer fails to adhere to termsof credit. There are delays and funds are blocked for a longerperiod. Cost of default where party does not pay and debt has towritten off. This is a major cost. Chapter Seven Working Capital 5
  6. 6. 7.2 Credit ChecksTo ensure that the benefits accrued out of credit extension ,do more than cover the several costs associated with suchsales on credit, adequate credit checks need to be exercisedby the marketing function. To reduce the risks of sales oncredit one must very carefully evaluate the creditworthiness ofthe party to whom credit is being granted.The best tool available for this purpose is ‘spot groundchecks’.While granting credit it is essential that assessment is carriedon the basis of business standing, resource ownership,impressions of associates and also history of party’s pastbusiness dealings. Chapter Seven Working Capital 6
  7. 7. 7.2 Credit ChecksWhile granting credit to a distributor you must survey hisretailers and find out business behaviour and credentials ofthe distributor in respect of other products. Any gap in marketservicing of particular products may indicate supplyinterruption. Cause for such stoppage in service must beexamined to rule out payment defaults.In case of industrial buyer a visit to the buyer can reveal a lotof data required for credit rating.While granting credit, limits must be set and they must beadhered under all circumstances. Your banker assists you incredit evaluation of your customers.In case of default greater care, including cash sales for acertain period, has to be exercised before resuming credit. Chapter Seven Working Capital 7
  8. 8. 7.3 Stocks / InventoryIn a manufacturing industry inventory forms a major part ofworking capital. Costs associated with Inventory. Cost of capital since the company’s funds which can beemployed elsewhere are blocked in stocks. Cost of controlling inventory , keeping track of all items toensure customer is continuously serviced and all items aremoving. Cost of holding inventory covers warehousing, security,insurance, license fees [if applicable] and salaries of staffhandling and accounting for inventory. Cost of damages in storage and movements. Cost of shrinkage , pilferages, thefts and obsolescence. Chapter Seven Working Capital 8
  9. 9. 7.3 Stocks / InventoryInventory management is critical, as if there is more ofinventory, you incur extra costs of capital, holding andobsolescence.On the other hand if you have less than required stocks, youwill have interrupted supplies to customers leading tocustomer dissatisfaction, loss of sales and even lostcustomers.Working capital control also requires cash collected fromcustomers to be immediately transferred into operations.Expenses paid in advance, deposits with outside parties andadvances paid to suppliers form balance part of workingcapital. Hence it is prudent to obtain credit from suppliers ofgoods as well as from transporters or forwarding agents. Chapter Seven Working Capital 9
  10. 10. 7.4 SummaryWorking capital in simple terms means the capital required fro day to day running of the business.In accounting terms the amount is the difference between current assets and current liabilities.Cost associated with Credit Sales1. Cost of capital.2. Cost of control.3. Cost of collection.4. Cost of delinquency.5. Cost of default.To reduce the risks of sales on credit one must very carefully evaluate the credit worthiness of the party to whom credit is being extended. Chapter Seven Working Capital 10
  11. 11. 7.4 SummaryPost evaluation of credit worthiness of the party one must also set limits of credit to be extended. These limits can be both time limit and amount limit. Time limit will set up to what length of time credit will be extended to that party and similarly amount limit will specify the maximum amount for which credit can be extended.Cost associated with Inventory1. Cost of capital.2. Cost of control.3. Cost of holding.4. Cost of damages.5. Cost of shrinkage6. Cost of obsolescence. Chapter Seven Working Capital 11
  12. 12. 7.4 SummaryExcess inventories can lead to following costs:1. Cost of capital.2. Cost of holding. [storage, insurance, damages etc.]3. Cost of obsolescence. [ products getting unusable either due to date expiry or newer versions coming in the market] Chapter Seven Working Capital 12
  13. 13. This brings an end to our session seven on Working Capital. Next we move to session eight on “Budgets”Till then “Best Luck” Chapter Seven Working Capital 13
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