• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Chapter26 working capital_management
 

Chapter26 working capital_management

on

  • 496 views

 

Statistics

Views

Total Views
496
Views on SlideShare
496
Embed Views
0

Actions

Likes
0
Downloads
25
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Chapter26 working capital_management Chapter26 working capital_management Presentation Transcript

    • Chapter 26 WORKING CAPITAL MANAGEMENT © Centre for Financial Management , Bangalore
    • OUTLINE • Characteristics of Current Assets • Factors Influencing Working Capital Requirements • Level of Current Assets • Current Assets Financing Policy • Profit Criterion for Current Assets • Operating Cycle Analysis • Cash Requirement for Working Capital © Centre for Financial Management , Bangalore
    • CHARACTERISTICS OF CURRENT ASSETS • Short life span • Swift transformation into other asset forms Current Assets Cycle Accounts receivable Finished goods Wages, salaries, factory overheads Work-in- process Raw materials Cash Suppliers © Centre for Financial Management , Bangalore
    • FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS • Nature of Business • Seasonality of Operations • Production Policy • Market Conditions • Conditions of Supply © Centre for Financial Management , Bangalore
    • WORKING CAPITAL POLICY Two important issues in working capital policy are: • What should be the level of investment in current assets? • What mix of long-term and short-term financing should the firm employ to support current assets? © Centre for Financial Management , Bangalore
    • LEVEL OF CURRENT ASSETS Flexible Restrictive (Conservative) (Aggressive) Policy Policy Liquidity High Low Inventories Large Small Debtors High Low A flexible policy results in fewer production stoppages, ensures quicker deliveries to customers, and stimulates sales .. but HIGHER INVESTMENT IN CURRENT ASSETS A restrictive policy leads to more production stoppages, delayed deliveries to customers, and lost sales … but LOWER INVESTMENT IN CURRENT ASSETS © Centre for Financial Management , Bangalore
    • CAPITAL REQUIREMENTS AND THEIR FINANCING Capital requirements Fluctuating current asset requirement Permanent current asset-requirement Fixed asset requirement Time A B C © Centre for Financial Management , Bangalore
    • CURRENT ASSETS FINANCING POLICY According to the matching principle, fixed assets and permanent current assets should be supported by long- term sources of finance whereas fluctuating current assets must be supported by short-term sources of finance. © Centre for Financial Management , Bangalore
    • PROFIT CRITERION FOR WORKING CAPITAL • Investment in current assets is easily reversible. • For reversible investments, the criterion of net profit per period (which here means residual income) is equivalent to the criterion of net present value © Centre for Financial Management , Bangalore
    • OPERATING CYCLE AND CASH CYCLE Order placed Stock arrives Goods sold Cash received Inventory period Accounts receivable period Accounts payable period Firm receives Cash paid for invoice materials Operating cycle Cash cycle Average inventory Inventory period = Average COGS / 365 Average accounts receivable Accounts receivable period = Annual sales / 365 Average accounts payable Average payable period = Average COGS / 365 © Centre for Financial Management , Bangalore
    • ILLUSTRATION Financial Information for Horizon Limited Balance Sheet Data Profit and Loss Beginning of End of Account Data 20X0 20X0 Sales 800 Inventory 96 102 Cost of goods 720 Accounts receivable 86 90 Sold Accounts payable 56 60 (96 + 102) / 2 Inventory period = = 50.1 days 720 / 365 © Centre for Financial Management , Bangalore
    • (86 + 90) / 2 Accounts receivable period = = 40.2 days 800 / 365 (56 + 60) / 2 Accounts payable period = = 29.4 days 720 / 365 Operating cycle = 50.1 + 40.2 = 90.3 days Inventory Accounts period receivable period Cash cycle = 90.3 - 29.4 = 60.9 days Operating Accounts cycle payable period © Centre for Financial Management , Bangalore
    • CASH REQUIREMENT FOR WORKING CAPITAL Step 1 : Estimate the cash cost of various current assets required by the firm. Step 2 : Deduct the spontaneous current liabilities from the cash cost of current assets © Centre for Financial Management , Bangalore
    • SUMMING UP • Current assets have a short life span and are swiftly transformed into other asset forms. • The working capital needs of a firm are influenced by numerous factors : nature of business, seasonality of operations, production policy, market conditions, and supply conditions. • Determining the optimal level of current assets involves a tradeoff between carrying costs and shortage costs. • According to the matching principle, the maturity of the sources of finance should match the maturity of assets being financed. © Centre for Financial Management , Bangalore
    • • The operating cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivables. • The cash requirement of working capital is calculated by estimating the cash cost of various current assets required by the firm and deducting the spontaneous current liabilities from the cash cost of current assets. © Centre for Financial Management , Bangalore