Working capital management
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Working capital management

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Working capital management Working capital management Presentation Transcript

  • WORKING CAPITAL MANAGEMENT
  • Meaning “ The excess of current assets over currents liabilities ” also known as circulating, revolving or fluctuating capital Components of Working Capital Current liabilities Current assets Taxes & dividends payable Inventory of raw materials, Stores & spares, FG Advances received Receivables Short term borrowings Short term advances Outstanding expenses Temporary investments Creditors Cash & bank balances
  • TYPES
      • Gross working capital & net working capital
      • Permanent working & temporary working capital
      • Positive working & negative working capital
      • Balance sheet working cap & cash working cap
    • Methods of estimating working capital .
      • Conventional method -
    • cash inflows & cash outflows are matched together. Emphasis is on liquidity & its ratios.
      • Operating cycle method
    • It considers the production and other business operations.
    • It emphasis on profitability & liquidity of the firm
  • Factors determining WC requirements
            • Nature of business
            • Manufacturing cycle
            • Production process
            • Business cycle
            • Seasonal variations
            • Scale of operations
            • Inventory policy
            • Credit policy
            • Accessibility of credit
            • Business standing
            • 11. Growth of business
            • 12. Market conditions
            • 13. Supply situations
            • 14. Environment factors
  • Working capital management
    • Working capital management refers to the management of working capital with twin objectives of Liquidity & profitability.
    • Working capital management establishes the best possible trade-off between the profitability of net current assets employed and the ability to pay current liabilities as they fall due.
    • Objectives:
      • Optimize investments in current assets.
      • To see that the company meets its current liabilities obligations
      • Manage current assets to see that the return on current assets is more than cost of capital
      • Proper balance between current assets & current liabilities
  • Components of WCM
      • INVENTORY MANAGEMENT
      • CASH MANAGEMENT
      • RECEIVABLES MANAGEGMENT
  • INVENTORY MANAGEMENT
    • Meaning-
    • Objectives-
      • For continuous supply for uninterrupted production
      • To reduce wastage & losses
      • To introduce scientific inventory management techniques
      • To reduce cost of purchase & storage
      • To reduce excessive or shortage of inventory
      • To have uninterrupted production
      • for effective utilization of store space
      • To provide right material at right time, from right source & at
      • right prices.
  • TOOLS OF INVENTORY MANAGEMENT
      • Fixation of levels- Maximum level
    • Minimum Level
    • Reorder level
    • Danger level
    • 2. Fixation of EOQ-  2AO÷C
      • ABC analysis
      • VED analysis
      • FSN /FNSD analysis
      • Perpetual inventory system
      • Periodic inventory system
      • Inventory turnover ratios
      • JIT Analysis
  • CASH MANAGEMENT
    • Objectives- To make prompt cash payments
    • To maintain minimum cash reserve
    • Motives of holding cash-
    • Transaction motive
    • Precautionary motive
    • Speculative motive
    • compensatory motive
    • Cash management strategies -
      • Cash planning
      • Managing the cash flows
      • Optimum cash balance
      • Investing idle cash.
    • Cash planning – It is a technique to plan for & use of cash. It involves cash forecasting and budgeting. Cash budgets & forecasting – Short term cash forecasting Long term cash forecasting Methods of cash forecasting – 1. Receipt & Disbursement method 2. Adjusted net income method
  • 2. Managing cash flows
    • Accelerating cash collection
      • Prompt payment by customers
      • Lock box system
      • Concentrating banking
      • Electronic fund transfer
      • Decentralize collection
    • Controlling Disbursement
      • Playing the Float-collection float
    • payment float
      • Payment on last day & by drafts
      • Centralization of payments
  • 3. Determining optimum cash balance 4. Investment in marketable securities. Selection of securities Safety Maturity Marketability
  • RECEIVABLES MANAGEMENT
    • Meaning –
    • Determinants of accounts receivable/credit sales-
      • Credit sales volume
      • Credit policies
      • Business terms- time period, discounts
      • Competition
      • Location
      • New products
    • Cost of receivables/trade credits-
      • Carrying cost
      • Defaulting cost
      • Administration cost
  • Management of receivables
      • Forming of credit policy
      • Executing credit policy
      • Formulating & executing collection policy
    • Credit rating-5 C ’ s (character, capacity, capital, collateral & condition)
    • Ageing schedules
    • This is a statement prepared to determine the quality of the individual debtors. A comparative statement of individual for two periods will be prepared. The time period may be two periods in the same year or two years.
    • It may also be split in the period having a frequency of 30 days i.e., 0-30, 31-60, 61-90 days etc., Factoring
  • Ageing Schedule
    • This is a statement prepared to determine the quality of the individual debtors. A comparative statement of individual for two periods will be prepared. The time period may be two periods in the same year or two years.
    • It may also be split in the period having a frequency of 30 days i.e., 0-30, 31-60, 61-90 days etc.,