LIQUIDITY DECISIONS/ WORKING CAPITAL MANAGEMENT

Meaning “ The excess of current assets over currents liabilities” also known as circulating, revolving or fluctuating capital Components of wc 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

Components of wc

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

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 11. Growth of business Manufacturing cycle 12. Market conditions Production process 13. Supply situations Business cycle 14. Environment factors Seasonal variations Scale of operations Inventory policy Credit policy Accessibility of credit Business standing

Nature of business 11. Growth of business

Manufacturing cycle 12. Market conditions

Production process 13. Supply situations

Business cycle 14. Environment factors

Seasonal variations

Scale of operations

Inventory policy

Credit policy

Accessibility of credit

Business standing

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

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

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.

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

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.

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

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 Centralisation of payments

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

Centralisation of payments

3. Determining optimum cash balance 4. Investment in marketable securities. Selection of securities Safety Maturity Marketability

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

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- it is a statement prepared to determine quality of individual debtors. No of days, period ending, % age of debt etc. Factoring- Services- finance, maintenance of accounts, collection of data or protection against credit risks.

Forming of credit policy

Executing credit policy

Formulating & executing collection policy

Credit rating-5 C’s (character, capacity, capital, collateral & condition)

Ageing schedules- it is a statement prepared to determine quality of individual debtors.

No of days, period ending, % age of debt etc.

Factoring-

Services- finance, maintenance of accounts, collection of data or protection against credit risks.