Working Capital Management

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

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 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

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
Centralisation 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- 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.

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Working Capital Management

by Dayasagar S

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