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  • For a company, total assets minus total liabilitiesalso called owner's equity, shareholders' equity, or net assets.Read more: http://www.investorwords.com/3267/net_worth.html#ixzz15K5bQgFZRead more: http://www.investorwords.com/3267/net_worth.html#ixzz15K4yG6GD
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    • 1. Working Capital Management
    • 2. Module I O Concept and meaning of working capital – Liquidity and profitability – identification of factors affecting working capital requirements – theories of working capital
    • 3. Module II O Approaches to estimation of working capital – operating cycle approach. O Management of inventories – determination of optimum inventory – lead time – Safety stock – EOQ approach
    • 4. Module III O Management of receivables – credit and Collection policy – Credit standards – Credit terms – Credit analysis – management of payables – Maturity matching.
    • 5. Module IV O Management of cash – Accelerating cash inflows – Managing collections – Concentration banking – lock box system – Control of disbursements – models for determining optimum level of cash – inventory model, stochastic – Cash budgeting – Investment of surplus cash.
    • 6. Module V O Sources of working capital finance – Approaches to optimum mix of funds – trade credit, accrual accounts – money market instruments, commercial paper, Certificate of deposits – Bill discounting and factoring – Inter corporate loans – short term bank loans.
    • 7. Presentation Topics 1st Group- Introduction to Inventory Management, objectives, importance 2nd Group- Different techniques for inventory management, lead time, safety stock 3rd Group- EOQ Approach
    • 8. Capital O Fund for establishment and to carry out day- to –day business O Capital classified into two: i. Fixed Capital ii. Working Capital
    • 9. MEANING OF WORKING CAPITAL O WC refers to short-term funds to meet operating expenses. O The funds which a company must possess to finance its day-to-day operations.
    • 10. CONCEPTS OF WORKING CAPITAL O Balance Sheet Concept O Operating Cycle or Circular Flow concept
    • 11. Balance sheet Concept O There are two interpretations of balance sheet under the balance sheet concept. -Gross Working Capital (Quantitative Concept) - Net Working Capital (Qualitative Concept)
    • 12. Gross Working Capital Concept *According to this concept, the total current assets are termed as the gross working capital or circulating capital. *this is also called as quantitative or broader approach
    • 13. Net Working Capital Concept O It is the excess of current assets over current liabilities O Net working Capital = Current asset- Current liability O It helps creditors and investors to judge the financial soundness of a firm. O It may be positive or negative.
    • 14. CURRENT ASSETS O Inventories O Trade Debtors O Prepaid Expenses O Loan and Advances O Investment O Cash and Bank Balance
    • 15. CURRENT LIABILITIES O I. Sundry Creditors. O II. Bank Overdrafts O III. Short-term Loans O IV. Provisions
    • 16. Operating Cycle or Circular Flow concept O WC refers to part of firm’s capital which is required to financing short term or current assets O Funds invested in current assets keep revolving fast and are constantly converted into cash and this cash flows out again in exchange for other current assets.
    • 17. Operating Cycle or Circular Flow concept Debtors Work-in- process Cash Sales Finished Goods Raw materials
    • 18. KINDS OF WORKING CAPITAL Kinds of working capital Concept base Time Base Gross WC or Quantitative Net WC or Qualitative Permanent WC Temporary WC
    • 19. Permanent Working Capital O It is minimum investment kept in the form of inventory of raw materials, WIP, finished goods, stores & spares and books debts to facilitate uninterrupted operation in a firm. O The minimum level of CA maintained in a firm is usually known as permanent wc.
    • 20. Temporary Working Capital O Any additional WC apart form permanent working capital required to support the changing production and sales activities is referred to as temporary or variable working capital. O In other words, and amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital.
    • 21. Importance of Working Capital O It considered as life blood and central nervous system of a firm. O Advantages of maintaining adequate amount of wc are i. Solvency of the business ii. Goodwill iii. Easy loans iv. Cash discounts
    • 22. v. Regular Supply of raw materials vi. Regular payment of salaries, wages and other day to day commitments. vii. Exploitation of favorable market conditions viii. Ability to face crisis ix. High morale.
    • 23. The Dangers of Excessive WC O Excessive wc means idle funds which earns no profits for the business – business cannot earn proper rate of return on its investments. O It results in unnecessary accumulation of inventories it leads to waste, theft and mishandling of inventories. O It is indication of excessive debtors and defective credit policy. It leads to higher bad debts.
    • 24. O Whenever there is excessive wc, relations with other banks and financial institutions may not be maintained. O Due to low rate of return on investments, the value of shares may also fall. O It degenerates in to overall inefficiency in the organization.
    • 25. Dangers of Inadequate WC O Cannot pay short term liabilities in time – loses reputation-not able to get good credit facilities. O It stagnates growth O It become difficult to exploit favourable market conditions O Difficult to meet day to day commitments
    • 26. O not able to avail attractive credit opportunities and cash discounts O Impossible to utilize fixed assets due to non-availability of liquid funds.
    • 27. Factors influencing Working Capital 1. Nature of Business 2. Size of Business/ Scale of operation 3. Production Policy 4. Manufacturing Process/ Length of Production cycle 5. Seasonal variations 6. Credit Policy or terms of Purchase and Sales 7. Rate of stock turnover
    • 28. 8. Business Cycles 9. Rate of growth of business 10. Dividend policy 11. Price level changes 12. Other factors
    • 29. Determination of required WC O Estimation of cash cost of the various current assets required by the firm. O Estimation of spontaneous current liabilities of the firm. O Compute net working capital by subtraction the estimate current liabilities O Add some percentage of net working capital if there is any contingency or safety working capital required, to get the required working capital.
    • 30. O
    • 31. O
    • 32. Principles of Working Capital Management Policy O Principle of Risk variation O Principle of cost of capital O Principle of Equity Position O Principle of maturity of payment
    • 33. 1. Principle Of Risk variation (Current assets policies) O Risk refers to inability of firm to meet its obligation when they become due for payment. O Larger investment on current assets with less dependence on short term borrowings : increases liquidity and reduces risk O Less investment on current assets with great dependence on short term borrowings : reduces liquidity and increases risk and profitability.
    • 34. 2. Principle of cost of capital O Various sources of wc have different cost of capital and degree of risk involved. O Higher the risk lower is the cost and lower the risk higher is the cost. O A sound wcm should try to achieve proper balance between these two.
    • 35. 3. Principle of Equity Position O It concerned with planning the total investment in current assets. O According to this principle, the amount of wc invested in each component should be justified by a firm’s equity position. O Every rupee invested in current asset should contribute to the net worth of firm.
    • 36. 4. Principle of maturity of payment O According to this principle, a firm should make every effort to relate maturities of payment to its flow of internally generated funds. O Shorter the maturity schedule of current liabilities in relation to expected cash inflows, greater the inability to meet its obligations in time.
    • 37. Functions of WCM 1. Estimating the working capital requirements 2. Financing of working capital needs 3. Analysis and control of working capital
    • 38. Estimating Working Capital requirements i. Percentage of Sales method ii. Regression iii. Cash forecasting method iv. Operating Cycle method v. Projected BS method
    • 39. 1.Percentage of sales method O Based on the assumption that the level of working capital for any firm is directly related to sales. O Simple to understand and easy to calculate, but it cannot be applied in all cases because the direct relationship between sales and working capital may not be established.
    • 40. 2. Regression analysis method O Regression analysis: predicting the unknown value of a dependent variable from the known value of an independent variable. O Relationships between sales and working capital is represented by the eqn, y=a+bx Where y=Working capital(dependent variable) a=intercept of the least square b=slope of the regression line x=sales (independent variable)
    • 41. O
    • 42. 3. Cash Forecasting Method O It involves forecasting of cash receipts and disbursements during a future period of time. O It include all possible sources from which cash will be received and the channels in which payments are to be made so that a consolidated cash position is determined. O This method is similar to the preparation of a cash budget.
    • 43. 4. Operating Cycle Method O
    • 44. 5. Projected Balance Sheet method O Projected balance sheet for future date is prepared by forecasting current assets and current liabilities. O Estimated amount of working capital required = Forecasted Current Assets – Forecasted Current Liability
    • 45. Financing of working capital needs O Working Capital Requirements can be classified as: 1. Permanent or Fixed Working Capital Requirements 2. Temporary or variable working capital requirements
    • 46. The main sources of short- term funds are as follows: O Indigenous Bankers O Trade Credit O Installment Credit O Advances O Accounts Receivable Credit or Factoring O Accrued Expenses O Deffered Incomes O Commercial Paper O Commercial Banks O Public Deposits
    • 47. The main sources of long-term funds are as follows: O Shares O Debentures O Public Deposits O Ploughing back of profits O Loans from financial institutions
    • 48. Indigenous Bankers O Private money lenders or country bankers O Very High rates of interest
    • 49. Trade Credit O Trade credit refers to the credit extended by the suppliers of goods in normal course of business. O This type of finance is widely used because: O It is easy and convenient method of finance. O No interest charge is made by the lender; O It is flexible as the credit increases with the growth of the firm.
    • 50. O It is informal and spontaneous source of finance O The normal terms of trade credit are ‘net 30 days’, or in other words, the invoice must be paid in full within thirty days.
    • 51. O Sometimes a discount is offered to customers for early payment. O One method of extending trade credit is known as ‘stretching’. This is the practice of postponing payments to creditors beyond the originally agreed period of time. This may be accepted by the supplier especially if the business is a regular customer. O Disadvantages: 1) Supplier is charging higher prices 2) loss of cash discount
    • 52. Installment credit O It is used as a source of short-term working capital. O Goods purchased and the payment is made in installments over a pre-determined period of time. O Interest is charged on the unpaid price or it may be adjusted in the price.
    • 53. Advances O Some business houses collect advances from their customers and agents against orders. O It is a cheap source of finance in order to minimize their investment in working capital. O Firms manufacturing industrial products prefer to take advance from their customers.
    • 54. Factoring credit sales for which money has not been paid yet can be sold to a debt factoring company for an immediate cash payment (normally 80% of the amount owing). When the debt becomes due, the debt factoring company will then collect it and make a final payment to the business, keeping a commission (usually around 5%) for themselves.
    • 55. O Factoring has three main drawbacks. - High cost of factoring as compared to other sources. - Because it is expensive, it is often regarded as being a last-resort method of financing and thus may affect the reputation of a company if it is known that it is using factoring. - Adverse impact of tough stance taken by factor, against a defaulting buyer resulting in reduced future sales.
    • 56. Accrued Expenses O Expenses which have been incurred but not yet due and hence not yet paid also. O The longer the payment-period, the greater is the amount liability towards employees or the funds provided by them. O The most important items of accruals are wages & salaries, interest and taxes. O No interest is payable on accrued expenses.
    • 57. Deferred Incomes O Incomes received in advance before supplying goods and services. O Usually no interest is charged for such amount if they make the supply on time. O Firms having good reputation in the market can demand deferred incomes.
    • 58. Commercial Paper O These are short term unsecured promissory notes with fixed maturity period. O Only a company which is listed on the stock exchange, has a net worth of at least Rs. 10crores and a maximum permissible bank finance of Rs. 25 crores can issue C.P not exceeding 30 % of its working capital. O The maturity period of C.P. in India, mostly ranges from 91 to 180 days.
    • 59. Commercial Banks O Commercial banks are the most important source of short-term capital. They provides:- O Loans O Cash credits O Overdrafts O Purchasing and Discounting of bills
    • 60. Public Deposits O Acceptance of fixed deposits from the public by all type of manufacturing and non-bank financial companies in the private sector. O They are unsecured , more risky, less liquid and without any tax advantage. O
    • 61. Long-term Financing O Permanent current assets or working are supposed to be financed by long-term source of finance.
    • 62. Shares O Most important source for raising the permanent or long-term capital. O Can issue equity shares and preference shares
    • 63. Debentures O It is an instrument issued by the company acknowledging its debt to its holder. O Debenture holders are creditors of the firm. O Fixed interest is paid to debenture holders.
    • 64. Public Deposits O Are the fixed deposits accepted by a business enterprise directly from the public.
    • 65. Ploughing Back of Profits O It means the reinvestments by the concern of its surplus earnings in its business. O Internal source of finance.
    • 66. Loans from Financial Institutions O FIs such as Commercial banks, LIC, Industrial Finance Corporation Of India, State Financial Corporations, State Industrial Development Corporations etc provide short term, medium term and long term loans.
    • 67. Analysis and control of working capital 1. Ratio Analysis 2. Funds flow Analysis 3. Budgeting
    • 68. Ratio Analysis O Ratio is simple arithmetical expression of relationship of one number to another. i. Current Ratio ii. Acid test Ratio iii. Absolute Liquid Ratio iv. Inventory Turnover Ratio v. Receivables Turnover Ratio vi. Payables Turnover Ratio
    • 69. vii. Working Capital Turnover Ratio viii. Working Capital Leverage
    • 70. Funds Flow Analysis O Technical devise to study the sources from which additional funds are derived and uses of these funds. O It consists of 1) Preparing schedule of changes in working capital 2) Statement of application of funds
    • 71. Working Capital Budget O A budget is a financial / quantitative expression of business plans and policies to be pursued in the future period of time.
    • 72. Approaches for financing Working Capital Approaches for Financing Working Capital Matching or Hedging Approach Conservative Approach Aggressive Approach
    • 73. Matching or Hedging Approach O It is the process of matching maturing of debt with the matching of financial needs. O Permanent current asset is financed by long term sources and temporary working capital is financed by short term sources.
    • 74. Hedging Approach Fixed assets Permanent current assets Temporary current Assets Assets Time Short-term financing Long-term financing
    • 75. Conservative Approach O According to this approach, a firm depends more on long-term funds for financing needs O The firm finances its regular or permanent current assets and a part of temporary or variable current assets with long term source of funds.
    • 76. Conservative Approach Short-term financing Long-term financing Time Assets Temporary Current Assets Permanent CA Fixed Assets
    • 77. Features of conservative approach i. Liquidity is higher ii. Risk is minimized iii. The cost of financing is relatively more as interest has to be paid even on seasonal requirements for the entire period.
    • 78. Aggressive Approach O A firm is said to be aggressive, when it uses more sort-term funds than warranted by the hedging approach or matching approach. O A firm’s finances are a part of its regular or permanent current assets with short-term sources of funds. O Under this more risk but it will prove to have more returns.
    • 79. Aggressive Approach Permanent CA Fixed Assets Temporary CA Short-term Financing Long-term financing Time Assets
    • 80. Features i. More risky ii. Less costly iii. More profitable
    • 81. Trade-off between Profitability, Risk and Liquidity Liquidity Profitability
    • 82. The Liquidity Versus Profitability O There is a trade off between liquidity and profitability, gaining more of one ordinarily means giving up some of the other.
    • 83. Liquidity O Having enough money in the form of cash, or near-cash assets, to meet your financial obligations. O Assets can be converted into cash
    • 84. Profitability O A measure of the amount by which a company’s revenues exceed its relevant expenses.
    • 85. O ‘Liquidity’ as being on one end of a straight line and ‘Profitability’ on the other end of the line. O There is a trade-off between liquidity and profitability.
    • 86. O The items on the asset side of a company's balance sheet are listed in order of liquidity (easily converted in to cash) eg. Cash, marketable Security, Accounts Receivable, Inventory, Fixed Assets.
    • 87. O We go from the top of the list to the bottom, the liquidity decreases. But from the top to bottom, the profitability increase. O In other words the most profitable investment for company is normally in its fixed assets O The least profitable investment is cash.
    • 88. Committee Recommendations 1) Dehejia Committee 2) Tandom Committee 3) Chore Committee 4) Marathe Committee 5) Chakravarty Committee 6) Kannan Committee Report
    • 89. Dehejia Committee O National Credit council constituted committee under the leadership of Shri V.T. Dehejia in 1968. O To determine the extend to which credit needs of industry and trade are likely to be inflated and how much trends could be checked

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