policies of working capital

1. 

2. 

4. 
 Working capital is said to be all short term ,or current
assets cash, marketable securities and account s
receivable.
 CURRENT ASSETS .
 CASH.
 ACCOUNTS RECIEVEABLES.
 INVENTORY.
 MARKETABLE SECURITIES ETC.
 ACCOUNTS PAYABLES.
WORKING CAPITAL

5. 
 Net working capital is calculated by Lessing current
liabilities from current assets. If the organization or entity
has less current assets then that of their current liabilities
then the organization will face the working capital deficit.
Formula
Net working capital
Current assets
minus –
Current liabilities.
NET WORKING
CAPITAL

6. 
 A traditional measure of a organization’s liquidity
and potential for growth . Net operating working
capital is calculated by taking the current assets
required in operations and subtracting non-interest
bearing liabilities.
Formula
NOWC
Current assets
minus–
Non interest bearing current liabilities
NET OPERATING
WORKING CAPITAL

7. 
 The time between the collection from costumers and
payment for working capital
Formula
Cash conversion cycle
Inventory conversion period
+
average collection period
minus -
payables deferral period.
CASH CONVERSION
CYCLE

8.  CASH AND MARKETABLE
SECURITIES.
When we use the word” cash” we
means the currency notes issued
by central banks. But in the
corporate treasurers language cash
mean currency notes demand
deposits and marketable
securities.
 CURRENCY
With the invasion of credit cards
the importance of cash declined.
The word currency is used for the
bank notes and metal currency
issued by the central bank.
CASH AND
EQUIVLENTS

9. 
 Inventory includes all
 Raw material
 Work in process
 Finished goods etc.
INVENTORY

10. 
 FOR THE RECORDING AND MAINTAINING THE
ACCURATE RECORD OF INVENTORY
COMPANIES USES THE FOLLOWING
APPROACHES.
 MATERIAL ACCOUNTING
MAY INCLUDE THE FOLLOWING
 ECONOMIC ORDER COSTING.
 INVENTORY LEVEL .
 COSTING FOR MATERIAL.
 COSTING FOR MATERIAL ISSUED.
 SPOILED & DEFECTIVE PRODUCTION.
INVENTORY RECORDING
AND MAINTAINING

11. 
 The quantity of material purchased at which order
cost and carrying cost are minimum or equal.
EOQ
1
𝟐𝑨𝑹×𝑶𝑪
𝑪𝑪
2 NUMBER OF ORDERS= AR/EOQ
3 FREQUENCY OF ORDER = 360/NUMBER OF ORDERS
AR IS ANNUAL REQUIRMENT OC IS ORDER COST CC IS CARRYING COST

12. EXAMPLE
ANAUAL REQUIRMENT = 360,000
PER UNIT COST = RS. 5
ORDER COST = 72
CARRYING COST = 80 PERCENT PER UNIT =RS. 4
(1) 𝑬𝑶𝑸 =
𝟐(𝟑𝟔𝟎𝟎𝟎𝟎)×𝟕𝟐
𝟒
𝟓𝟏𝟖𝟒𝟎𝟎𝟎𝟎
𝟒
𝟏𝟐𝟗𝟔𝟎𝟎𝟎𝟎
EOQ = 3600 UNITS
EXAMPLE OF EOQ

13. 
(2) NUMBER OF ORDERS = AR/EOQ
360000/3600
NUMBER OF ORDERS = 100 ORDERS.
NUMBER OF ORDERS

14. 
) FREQUENCY OF ORDER = 360/NO OF ORDERS
360/100
FREQNCY OF ORDER=3.6
FREQUENCY OF
ORDER

15. EOQ TOTAL CARRYING
COST
TOTAL ORDER COST TOTAL
3600 EOQ/2 × C.C
3600/2 × 4
7200
AR/EOQ × O.C
360000/3600 × 72
7200
14400
TOTAL COSTING OF
EOQ

16. 
 Consumption pattern is said to be the time used by
an organization for the consuming of stock to
produce the finished goods.
Following are the levels used
1.Order level = maximum consumption × lead time.
2.Minimum level = Order level-(average consumption ×
lead time)
3.Maximum level=[ Order level – (minimum
consumption × lead time)]+EOQ
CONSUMPTION
PATTERN

17. 
 Order level = maximum consumption × lead time
= 800 ×7
ORDER LEVEL= 5600.
ORDER LEVEL

18. 
 order level
 -
 (average consumption × lead time)
=5600-(900×7)
MINIMUM ORDER = 700.
MINIMUM ORDER

19. 
 MAXIMUM LEVEL
 [ Order level
 –
 (minimum consumption × lead time)]
 +
 EOQ
=[5600-(800×7)]+2940
MAXIMUM LEVEL = 2940.
MAXIMUM LEVEL

20. 
 DANGER LEVEL
AVG CONSUMPTION
×
TIME FOR EMERGENCY NEED
= 900×1
 DANGER LEVEL =900.
DANGER LEVEL

21. 
 RESTRICTED POLICY
In restricted policy, the estimation of current assets for
achieving targeted revenue is done very aggressively
without considering for any contingencies and
provisions for any unforeseen event. After deciding,
these policies are forcefully implemented in the
organization without tolerating any deviations. In the
diagram, point R represents the restricted policy which
attains the same level of revenues with lowest current
assets.
TYPES OF POLICIES

22. 
RELAXED POLICY
 Relaxed policy is just the opposite of restricted policy. In
this policy, the estimation of current assets for achieving
the targeted revenue is prepared after careful
consideration of uncertain events such as seasonal
fluctuations, sudden change in level of activities or sales
etc. After the reasonable estimates also, a cushion to avoid
any unforeseen circumstances is left to avoid the
maximum possible risk. In the diagram, it represents the
point Rx which uses highest level of current assets for
achieving the same level of sales.
TYPES OF POLICIES

23. 
 MODERATE POLICY
 Moderate policy is a balance between the two policies i.e.
restricted and relaxed. It assumes characteristics of the
both the policies. To strike a balance, moderate policy
assumes risk which is lower than restricted and higher
than conservative. In profitability front also, it lies
between the two.
 The biggest benefit of this policy is that it has reasonable
assurance of smooth operation of working operating
capital cycle with moderate profitability.
MODERATE POLICY

24. 
 CASH POLICY
 Do not invest funds in NON LIQUID investment
vehicles.
 No investment duration shall exceed the forecasting
period. If you are willing to tie up cash in somewhat
NON LIQUID investments, then at least keep from
making investments
TREATMENT FOR
WORKING CAPITAL

25. 
 ACCOUNTS RECIEVABLES POLICIES
 Do not allow the sales staff to offer terms to
customers that exceed a specific number of days
without prior approval by a senior manager.
 The maximum credit offered a customer should be
the half of sales
TREATMENT FOR
WORKING CAPITAL

26. 
INVENTORY POLICIES
 Review inventory on hand. It is exceedingly difficult
to adopt rules that will minimize inventory, but
consider this policy to bring excessive inventory
levels to the attention of management.
 Adopt just-in-time purchasing on qualified raw
materials and merchandise
TREATMENT FOR
WORKING CAPITAL

27. 
 ACCOUNTS PAYABLE POLICIES
 Do not pay accounts payable early. Adopt a
monitoring system that highlights any payment
made earlier than the due date required by the
supplier.
 Don’t allow purchases exceeding the department
budget.
TREATMENT FOR
WORKING CAPITAL

28. 

29. 