Working Capital Management

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Working Capital Management

  1. 1. • WORKING CAPITAL MANAGEMENT • Meaning “ The excess of current assets over currents liabilities” also known as circulating, revolving or fluctuating capital • Components of Working Capital • TYPES 1. Gross working capital & net working capital 2. Permanent working & temporary working capital 3. Positive working & negative working capital 4. Balance sheet working cap & cash working cap • Methods of estimating working capital. 1. Conventional method- • cash inflows & cash outflows are matched together. Emphasis is on liquidity & its ratios. 1. Operating cycle method • It considers the production and other business operations. • It emphasis on profitability & liquidity of the firm • Factors determining WC requirements 1. Nature of business 2. Manufacturing cycle 3. Production process 4. Business cycle 5. Seasonal variations 6. Scale of operations 7. Inventory policy 8. Credit policy 9. Accessibility of credit 10. Business standing 11. Growth of business 12. Market conditions 13. Supply situations 14. Environment factors • 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
  2. 2. • 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- Ö2AO÷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. 1. Cash planning – It is a technique to plan for & use of cash. It involves cash forecasting and budgeting.
  3. 3. 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 • Centralization 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
  4. 4. • This is a statement prepared to determine the quality of the individual debtors. A comparative statement of individual for two periods will be prepared. The time period may be two periods in the same year or two years. • It may also be split in the period having a frequency of 30 days i.e., 0-30, 31-60, 61-90 days etc., Factoring • Ageing Schedule This is a statement prepared to determine the quality of the individual debtors. A comparative statement of individual for two periods will be prepared. The time period may be two periods in the same year or two years. It may also be split in the period having a frequency of 30 days i.e., 0-30, 31-60, 61-90 days etc.,

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