Working Capital Management


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Working Capital Management

  2. 2. Meaning “ The excess of current assets over currents liabilities” also known as circulating, revolving or fluctuating capital <ul><li>Components of wc </li></ul>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
  3. 3. TYPES <ul><li>Gross working capital & net working capital </li></ul><ul><li>Permanent working & temporary working capital </li></ul><ul><li>Positive working & negative working capital </li></ul><ul><li>Balance sheet working cap & cash working cap </li></ul><ul><li>Methods of estimating working capital . </li></ul><ul><li>Conventional method - </li></ul><ul><li>cash inflows & cash outflows are matched together. Emphasis is on liquidity & its ratios. </li></ul><ul><li>Operating cycle method </li></ul><ul><li>It considers the production and other business operations. </li></ul><ul><li>It emphasis on profitability & liquidity of the firm </li></ul>
  4. 4. Factors determining WC requirements <ul><ul><ul><ul><ul><li>Nature of business 11. Growth of business </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Manufacturing cycle 12. Market conditions </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Production process 13. Supply situations </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Business cycle 14. Environment factors </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Seasonal variations </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Scale of operations </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Inventory policy </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Credit policy </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Accessibility of credit </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Business standing </li></ul></ul></ul></ul></ul>
  5. 5. Working capital management <ul><li>Working capital management refers to the management of working capital with twin objectives of Liquidity & profitability. </li></ul><ul><li>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. </li></ul><ul><li>Objectives: </li></ul><ul><li>Optimize investments in current assets. </li></ul><ul><li>To see that the company meets its current liabilities obligations </li></ul><ul><li>Manage current assets to see that the return on current assets is more than cost of capital </li></ul><ul><li>Proper balance between current assets & current liabilities </li></ul>
  6. 6. Components of WCM <ul><li>INVENTORY MANAGEMENT </li></ul><ul><li>CASH MANAGEMENT </li></ul><ul><li>RECEIVABLES MANAGEGMENT </li></ul>
  7. 7. INVENTORY MANAGEMENT <ul><li>Meaning- </li></ul><ul><li>Objectives- </li></ul><ul><ul><li>For continuous supply for uninterrupted production </li></ul></ul><ul><ul><li>To reduce wastage & losses </li></ul></ul><ul><ul><li>To introduce scientific inventory management techniques </li></ul></ul><ul><ul><li>To reduce cost of purchase & storage </li></ul></ul><ul><ul><li>To reduce excessive or shortage of inventory </li></ul></ul><ul><ul><li>To have uninterrupted production </li></ul></ul><ul><ul><li>for effective utilization of store space </li></ul></ul><ul><ul><li>To provide right material at right time, from right source & at </li></ul></ul><ul><ul><li>right prices. </li></ul></ul>
  8. 8. TOOLS OF INVENTORY MANAGEMENT <ul><li>Fixation of levels- Maximum level </li></ul><ul><li>Minimum Level </li></ul><ul><li>Reorder level </li></ul><ul><li>Danger level </li></ul><ul><li>2. Fixation of EOQ-  2AO ÷C </li></ul><ul><li>ABC analysis </li></ul><ul><li>VED analysis </li></ul><ul><li>FSN /FNSD analysis </li></ul><ul><li>Perpetual inventory system </li></ul><ul><li>Periodic inventory system </li></ul><ul><li>Inventory turnover ratios </li></ul><ul><li>JIT Analysis </li></ul>
  9. 9. CASH MANAGEMENT <ul><li>Objectives- To make prompt cash payments </li></ul><ul><li>To maintain minimum cash reserve </li></ul><ul><li>Motives of holding cash- Transaction motive </li></ul><ul><li>Precautionary motive </li></ul><ul><li>Speculative motive </li></ul><ul><li>compensatory motive </li></ul><ul><li>Cash management strategies - </li></ul><ul><li>Cash planning </li></ul><ul><li>Managing the cash flows </li></ul><ul><li>Optimum cash balance </li></ul><ul><li>Investing idle cash. </li></ul>
  10. 10. <ul><li>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 </li></ul>
  11. 11. 2. Managing cash flows <ul><li>Accelerating cash collection </li></ul><ul><li>Prompt payment by customers </li></ul><ul><li>Lock box system </li></ul><ul><li>Concentrating banking </li></ul><ul><li>Electronic fund transfer </li></ul><ul><li>Decentralize collection </li></ul><ul><li>Controlling Disbursement </li></ul><ul><li>Playing the Float-collection float </li></ul><ul><li>payment float </li></ul><ul><li>Payment on last day & by drafts </li></ul><ul><li>Centralisation of payments </li></ul>
  12. 12. 3. Determining optimum cash balance <ul><li>4. Investment in marketable securities. </li></ul><ul><li>Selection of securities </li></ul><ul><li>Safety </li></ul><ul><li>Maturity </li></ul><ul><li>Marketability </li></ul>
  13. 13. RECEIVABLES MANAGEMENT <ul><li>Meaning – </li></ul><ul><li>Determinants of accounts receivable/credit sales- </li></ul><ul><li>Credit sales volume </li></ul><ul><li>Credit policies </li></ul><ul><li>Business terms- time period, discounts </li></ul><ul><li>Competition </li></ul><ul><li>Location </li></ul><ul><li>New products </li></ul><ul><li>Cost of receivables/trade credits- </li></ul><ul><li>Carrying cost </li></ul><ul><li>Defaulting cost </li></ul><ul><li>Administration cost </li></ul>
  14. 14. Management of receivables <ul><li>Forming of credit policy </li></ul><ul><li>Executing credit policy </li></ul><ul><li>Formulating & executing collection policy </li></ul><ul><li>Credit rating-5 C’s (character, capacity, capital, collateral & condition) </li></ul><ul><li>Ageing schedules- it is a statement prepared to determine quality of individual debtors. </li></ul><ul><li>No of days, period ending, % age of debt etc. </li></ul><ul><li>Factoring- </li></ul><ul><li>Services- finance, maintenance of accounts, collection of data or protection against credit risks. </li></ul>