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Working Capital
Management
By CA Shubha Ganesh
Moneyshiksha
www.shubhaganesh.com
www.moneyshiksha.co.in
shubha.ganesh@gmai...
LearningObjectives
 Importance of working capital in a small business
 Differentiate between long term and
short term as...
Theoretically
 Working Capital is stated in two ways:
 Gross Working capital - Sum of all current
assets

 Net Working...
Practically
 Apart from one time buying land, machinery, furniture and
other fixed assets for manufacturing your firm’s p...
Need for Working capital
Working capital is required to ensure that a firm has sufficient
funds to pay maturing short-term...
Current Assets
 Those assets which in ordinary course of business
will be converted to cash within one year without
losin...
The differentiator
 Time dimension
 Short term asset lose their identity very
quickly say within a year/operating cycle
...
Current Assets
 Inventories
Raw material
Work in progress
Finished goods
 Sundry debtors
 Loans and advances
 Cash ...
Current Liabilities
 Current liabilities are those liabilities which are
intended at their inception, to be paid within o...
Managing working capital
 This involves decisions regarding:
Stock levels
Debtor levels
Cash levels
Creditors
Working capital management
 Decisions regarding working capital should be taken very
carefully as they affect either:-
 ...
Why managethem?
 Working capital management should therefore aim at striking a
balance such that there is an optimum amou...
Liquidity a primary concern
A company can be endowed with assets and
profitability but is short of liquidity if its assets...
Learning to balance
 If the size of current assets are large the comfort
zone increases and liquidity increases but profi...
Working Capital
 Cash flow in a business is:
uncertain
asynchronous
Buffers
 There is a need for buffers
 To manage the mismatch
 Decouple sourcing and production
 Makes activity smooth,...
Types of capital
 Permanent
 Temporary
Working capitalmix
 Hedging
 Conservative
 Mix of both
• Choice will be based on trade off of risk vs. cost
Sourcesof workingcapital
 Bank credit
 Trade credit
 Factoring
 Commercial paper
 Cost of these funds
Determinantsofworkingcapitalrequirements
 Nature of business
 Time taken for production
 Availability of raw materials
...
 Approximate working capital required can be pre-determined
Determinationof working capitalrequired
 Caselet -1
Working capital cycle
 The daily flow of resources through a firm's short term assets and
liabilities
Operatingcycle
 The continuing flow from cash to suppliers to inventory, to
accounts receivable and back to cash is calle...
Timeline
OG1 RG15 PI40 SG218 DG221 SI230 CP280
Cash flow chart
Cash
Accts. Payable
Cash Purchases
Inventory
Cash Sales
Accounts Receivable
L
L
Cash flow
 There is a continuous flow of cash in a business
 Cash inflows and outflows do not match
 Cash flows in and ...
Cash flow cycle
 The time lag between paying the suppliers and receiving
payment from customers
 The time lag between ea...
Cash conversioncycle
Exercise
 Garfield cat foods Ltd. On an average collects
debtors after 45 days, holds inventory for 75 days
and pays cred...
Answer
 Cash cycle-45+75-30=90 days, 3 months
 Cash turnover-12mths/3mths=4
 Minimum working capital-120/4=Rs.30 lakhs
...
Thank you
Working capital management handout emerg
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Transcript of "Working capital management handout emerg"

  1. 1. Working Capital Management By CA Shubha Ganesh Moneyshiksha www.shubhaganesh.com www.moneyshiksha.co.in shubha.ganesh@gmail.com
  2. 2. LearningObjectives  Importance of working capital in a small business  Differentiate between long term and short term assets  Components of working capital  Working capital cycle of a small business  Managing the big three  Identify working capital stress signals
  3. 3. Theoretically  Working Capital is stated in two ways:  Gross Working capital - Sum of all current assets   Net Working capital - Current assets less current liabilities
  4. 4. Practically  Apart from one time buying land, machinery, furniture and other fixed assets for manufacturing your firm’s products, you will need short –term assets and short –run resources to run the firm This is called working capital
  5. 5. Need for Working capital Working capital is required to ensure that a firm has sufficient funds to pay maturing short-term debt, upcoming operational expenses and for regular operations.
  6. 6. Current Assets  Those assets which in ordinary course of business will be converted to cash within one year without losing value or without disrupting the operations of the firm
  7. 7. The differentiator  Time dimension  Short term asset lose their identity very quickly say within a year/operating cycle  Time factor not crucial for decision making
  8. 8. Current Assets  Inventories Raw material Work in progress Finished goods  Sundry debtors  Loans and advances  Cash and bank balances  Other current assets
  9. 9. Current Liabilities  Current liabilities are those liabilities which are intended at their inception, to be paid within one year out of current assets or profits of the firm  Sundry creditors  Borrowings (short term) Commercial banks Others  Provisions
  10. 10. Managing working capital  This involves decisions regarding: Stock levels Debtor levels Cash levels Creditors
  11. 11. Working capital management  Decisions regarding working capital should be taken very carefully as they affect either:-  Profitability of the firm  Liquidity of the firm  Increases or decreases the relative risk of the firm
  12. 12. Why managethem?  Working capital management should therefore aim at striking a balance such that there is an optimum amount of short term assets so that there is sufficient liquidity to pay the liabilities at minimum cost
  13. 13. Liquidity a primary concern A company can be endowed with assets and profitability but is short of liquidity if its assets cannot readily be converted into cash The key issue in working capital management is to avoid running out of cash
  14. 14. Learning to balance  If the size of current assets are large the comfort zone increases and liquidity increases but profits will go down as funds are kept idle. They have a cost too  If the size of current assets is too small profits will improve but liquidity will decline and you are exposed to technical insolvency
  15. 15. Working Capital  Cash flow in a business is: uncertain asynchronous
  16. 16. Buffers  There is a need for buffers  To manage the mismatch  Decouple sourcing and production  Makes activity smooth, efficient
  17. 17. Types of capital  Permanent  Temporary
  18. 18. Working capitalmix  Hedging  Conservative  Mix of both • Choice will be based on trade off of risk vs. cost
  19. 19. Sourcesof workingcapital  Bank credit  Trade credit  Factoring  Commercial paper  Cost of these funds
  20. 20. Determinantsofworkingcapitalrequirements  Nature of business  Time taken for production  Availability of raw materials  Production policy  Credit policy  Operating efficiency
  21. 21.  Approximate working capital required can be pre-determined
  22. 22. Determinationof working capitalrequired  Caselet -1
  23. 23. Working capital cycle  The daily flow of resources through a firm's short term assets and liabilities
  24. 24. Operatingcycle  The continuing flow from cash to suppliers to inventory, to accounts receivable and back to cash is called the operating cycle
  25. 25. Timeline OG1 RG15 PI40 SG218 DG221 SI230 CP280
  26. 26. Cash flow chart Cash Accts. Payable Cash Purchases Inventory Cash Sales Accounts Receivable L L
  27. 27. Cash flow  There is a continuous flow of cash in a business  Cash inflows and outflows do not match  Cash flows in and out of business from sale of goods to purchase of inventory  They happen in stages  If all stages were completed instantaneously there would be no need for working capital
  28. 28. Cash flow cycle  The time lag between paying the suppliers and receiving payment from customers  The time lag between each of these is called cash cycle Conversion of cash to inventory Conversion of inventory to receivables Conversion of receivables to cash
  29. 29. Cash conversioncycle
  30. 30. Exercise  Garfield cat foods Ltd. On an average collects debtors after 45 days, holds inventory for 75 days and pays creditors in 30 days. It’s total spend Rs. 120 lakhs annually at constant rate. It can earn 10% if it invests this money.  Find-cash cycle, cash turnover, minimum cash balance and savings if inventory holding period is 45 days
  31. 31. Answer  Cash cycle-45+75-30=90 days, 3 months  Cash turnover-12mths/3mths=4  Minimum working capital-120/4=Rs.30 lakhs  New cash cycle-45+45-30=60 days, 2 months  12/2=6  120/6=Rs. 20 lakh  Savings=10lakhs*10%=Rs.1 lakh
  32. 32. Thank you
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