+
By:
Abhinav Bhansali (13020243001)
Ashwin Jacob (13020243004)
Apurva Mehta (13020243033)
Nilesh Dayalapvar (13020243031)...
Cash@Risk

• Necessary for any Business To sustain!!
• Managing working capital: for better
and for worse
A Narrow “Accounting” Definition of Working Capital can lead to unforeseen
risks
Definition
• “Working Capital is
Current ...
Concepts of Working Capital
Net Working Capital
Current Assets - Current Liabilities
Gross Working Capital
The firm’s inve...
Determinants of working capital
1.
2.
3.
4.
5.
6.
7.
8.

Nature of business
Production cycle
Business cycle
Production Pol...
Matching approach to asset
financing
Total Assets
$

Short-term
Debt
Fluctuating Current Assets

Permanent Current Assets
...
Conservative approach to asset financing
Total Assets
$

Short-term
Debt
Fluctuating Current Assets

Permanent Current Ass...
Aggressive approach to asset
financing
Total Assets
$

Short-term
Debt
Fluctuating Current Assets

Permanent Current Asset...
A firm has following data for year ending March
,2013
Management of Working Capital
• Working capital in general practice refer to
the excess of CA over CL.
• Management of wor...
Permanent & Temporary Working
Capital

Permanent current assets

TIME

The amount of
current
assets
required to meet a
fir...
Impact on Liquidity

ASSET LEVEL ($)

Policy A
Policy B
Policy C

25,000
OUTPUT (units)

Liquidity
High
Average
Low

Great...
Impact on Expected Profitability

Return on Investment
=
Net Profit
Total Assets
Let Current Assets =
(Cash + Rec. + Inv.)...
Impact on Risk

Policy
A
B
C

Risk
Low
Average
High

Policy A

ASSET LEVEL ($)

• Decreasing cash reduces
the firm’s abili...
Summary of the Optimal
Amount of Current Assets
SUMMARY OF OPTIMAL CURRENT ASSET ANALYSIS
Policy
A
B
C

1.

Liquidity
High...
Disadvantages of Redundant or Excess Working Capital
Idle funds, non-profitable for business, poor ROI.
Unnecessary purcha...
• Operating cycle concept
• Maximization of share holder’s wealth of a firm is
possible only when there are sufficient ret...
WIP

Raw
Materials

Cash

Operating Cycle in
Manufacturing firm

Debtors

SALES

Finished
Goods
Operating cycle of Non
Manufacturing Firm

Receivables
Cash

Stock of finished goods
Formula for calculating Operating
cycle for Manufacturing firm
OC = ICP+ARP
OC = Operating cycle
ICP = Inventory Conversio...
Understanding Quote to Cash - Definition
Definition

Implication

Quote to Cash The processes and activities
ranging from ...
Understanding Quote to Cash Improvement Areas
Improving the Quote to Cash process requires an integrated program, not a po...
Understanding Quote to Cash Improvement Areas
What are the benefits?
Marketing
& Sales

Order Entry

Billing /
Invoicing

...
Understanding Purchase to Pay Definition
By defining Purchase to Pay too narrowly companies will ignore the root causes of...
Understanding Purchase to Pay Improvement Areas
Improving the Purchase to Pay process requires an integrated Program rathe...
Understanding Purchase to Pay Improvement Areas
Where are the benefits?

Budgeting and
Forecasting
(Strategy)

Supplier
Or...
Understanding Order to Distribution Definition
By defining Order to Distribution too narrowly, companies will miss opportu...
Understanding Order to Distribution Improvement
Improving the Order to Distribution process requires an integrated Program...
Understanding Order to Distribution Improvement Areas
Where are the benefits?
Forecasting
(Strategy)

Order
Entry

Purchas...
PROFORMA - WORKING CAPTIAL ESTIMATES
1. TRADING CONCERN
STATEMENT OF WORKING CAPITAL REQUIREMENTS
Amount (Rs.)

Current As...
2. MANUFACTURING CONCERN
STATEMENT OF WORKING CAPITAL REQUIREMENTS
Amount (Rs.)
Current Assets
(i) Stock of R M( for ….mon...
Estimation of Current Assets
• Raw material inventory:
Budgeted production * Cost of raw mat * Avg inventory
holding perio...
Estimation of Current Liabilities
1. Trade creditors:
Budgeted yearly production * Raw material cost
per unit * Credit per...
TIME IS MONEY
 You can get money to move faster around the cycle or
reduce the amount of money tied up. Then, business wi...
If you

Then ......

Collect
receivables
(debtors) faster

You release cash from the
cycle

Collect
receivables
(debtors) ...
• Sales and costs and, therefore, profits do not
necessarily coincide with their associated cash
inflows and outflows.
• T...
Sources of Finance
• Spontaneous Sources of Finance
• Trade Credit:
• Bills Payable:
• Accrued Expenses-Short term
Financi...
• Bills Discounting: Short financial
Institute.
• Bills Rediscounting Schemes : Offer Bill
of Exchange to the RBI for redi...
• Working capital Finance from Banks
• Assessment of working capital
• Forms of Bank Credit:
• Cash credit:
• Bank Overdra...
Working capital management SIIB,PUNE
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Working capital management SIIB,PUNE

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  • Gross Working Capital = Total Current Assets
  • Raw WIP Materials Operating Cycle in Finished Cash Manufacturing firm Goods Debtors SALES
  • Working capital management SIIB,PUNE

    1. 1. + By: Abhinav Bhansali (13020243001) Ashwin Jacob (13020243004) Apurva Mehta (13020243033) Nilesh Dayalapvar (13020243031) Ritu Singh (13020243019) Srihrasha (13020243025)
    2. 2. Cash@Risk • Necessary for any Business To sustain!! • Managing working capital: for better and for worse
    3. 3. A Narrow “Accounting” Definition of Working Capital can lead to unforeseen risks Definition • “Working Capital is Current Assets minus Current Liabilities.” Implication Risk • “Working Capital is a Balance Sheet Issue.” • “Ignores operational drivers and opportunities (e.g., customer service, revenue growth, profit enhancement) A Business Process Definition of Working Capital can identify and avoid risks. Definition • Working Capital Management is the act of bringing under control all processes involving Receivables, Payables & Inventory through:    Quote-to-Cash Purchase-to-Pay Order-to-Delivery (Supply Chain) Implication • Working Capital Management is:      Determined by business owners and processes outside of Finance’s control A driver of revenue and expense A driver of cash flow A driver of customer service A driver of Shareholder Value 3
    4. 4. Concepts of Working Capital Net Working Capital Current Assets - Current Liabilities Gross Working Capital The firm’s investment in current assets Zero Working Capital The administration of the firm’s current assets and the financing needed to support current assets Inventories + Receivables - Payables
    5. 5. Determinants of working capital 1. 2. 3. 4. 5. 6. 7. 8. Nature of business Production cycle Business cycle Production Policy Credit Policy Growth and expansion Availability of Raw materials Profit level • • • Level of taxes Dividend policy Depreciation Policy 9. Price level changes 10. Operating efficiency
    6. 6. Matching approach to asset financing Total Assets $ Short-term Debt Fluctuating Current Assets Permanent Current Assets Fixed Assets Time Long-term Debt + Equity Capital
    7. 7. Conservative approach to asset financing Total Assets $ Short-term Debt Fluctuating Current Assets Permanent Current Assets Fixed Assets Time Long-term Debt + Equity capital
    8. 8. Aggressive approach to asset financing Total Assets $ Short-term Debt Fluctuating Current Assets Permanent Current Assets Fixed Assets Time Long-term Debt + Equity capital
    9. 9. A firm has following data for year ending March ,2013
    10. 10. Management of Working Capital • Working capital in general practice refer to the excess of CA over CL. • Management of working capital therefore is concerned with the problems that arise in attempting to manage the CA, the CL and the inter-relationship that exists between them. • The basic goal of WCM is to manage the CA & CL of a firm in such a way that a satisfactory level of WC is maintained. • Working Capital Management Policies of a firm have a great effect on its profitability, liquidity and structural health of the organization
    11. 11. Permanent & Temporary Working Capital Permanent current assets TIME The amount of current assets required to meet a firm’s long-term minimum needs AMOUNT AMOUNT Temporary current assets Permanent current assets TIME The amount of current assets that varies with seasonal requirements.
    12. 12. Impact on Liquidity ASSET LEVEL ($) Policy A Policy B Policy C 25,000 OUTPUT (units) Liquidity High Average Low Greater current asset levels generate more liquidity; all other factors held constant. Current Assets 0 Policy A B C 50,000
    13. 13. Impact on Expected Profitability Return on Investment = Net Profit Total Assets Let Current Assets = (Cash + Rec. + Inv.) Return on Investment = Net Profit Current + Fixed Assets Policy A B C Profitability Low Average High As current asset levels decline, total assets will decline and the ROI will rise.
    14. 14. Impact on Risk Policy A B C Risk Low Average High Policy A ASSET LEVEL ($) • Decreasing cash reduces the firm’s ability to meet its financial obligations. More risk! • Stricter credit policies reduce receivables and possibly lose sales and customers. More risk! • Lower inventory levels increase stockouts and lost sales. More risk! Policy B Policy C Current Assets 0 25,000 OUTPUT (units) 50,000 Risk increases as the level of current assets are reduced.
    15. 15. Summary of the Optimal Amount of Current Assets SUMMARY OF OPTIMAL CURRENT ASSET ANALYSIS Policy A B C 1. Liquidity High Average Low Profitability Low Average High Risk Low Average High Profitability varies inversely with liquidity. 2. Profitability moves together with risk. (risk and return go hand in hand!)
    16. 16. Disadvantages of Redundant or Excess Working Capital Idle funds, non-profitable for business, poor ROI. Unnecessary purchasing & accumulation of inventories over required level . Excessive debtors and defective credit policy, higher incidence of B/D. Overall inefficiency in the organization. When there is excessive working capital, Credit worthiness suffers. Due to low rate of return on investments, the market value of shares may fall.
    17. 17. • Operating cycle concept • Maximization of share holder’s wealth of a firm is possible only when there are sufficient return from the operations • Successful sales activity is necessary for earning profit sales do not convert into cash immediately • There is invisible time lap between the sale of good and receipt of cash • The time taken to convert raw material into cash is known as operating cycle • Conversion of cash into raw material • Conversion of raw material into work in progress • Conversion of Work in progress into finished goods • Conversion of finished good into Sales ( Debtors and cash )
    18. 18. WIP Raw Materials Cash Operating Cycle in Manufacturing firm Debtors SALES Finished Goods
    19. 19. Operating cycle of Non Manufacturing Firm Receivables Cash Stock of finished goods
    20. 20. Formula for calculating Operating cycle for Manufacturing firm OC = ICP+ARP OC = Operating cycle ICP = Inventory Conversion period ARP = Account Receivable Period ICP = Average Inventory Cost of good sold /365 ARP = Average Account Receivable Sales/365
    21. 21. Understanding Quote to Cash - Definition Definition Implication Quote to Cash The processes and activities ranging from issuing a sales quote through collecting the cash which resulted from the delivery of products and services. Quote to Cash is:  Controlled by processes outside of Finance  A driver of revenue and expense  A driver of cash flow  A driver of customer service  A driver of Shareholder Value
    22. 22. Understanding Quote to Cash Improvement Areas Improving the Quote to Cash process requires an integrated program, not a point solution. Companies can be evaluated against the Top 10 Best Practices 1- A well defined Executive driven Sales and Marketing Strategy 2- Established working capital Targets and Metrics 3- 80/20 Prioritization Rule with a focus on high value accounts 4- Risk Assessment and Control to minimize company’s exposure 5- Proactive Collection program to contact key accounts 6- Integrated Systems for all revenue management processes 7- Dispute Management to eliminate discrepancies at the source 8- Customer Master File integrity 9- Automation of low value, high volume transactions 10- Reconciliation Program focused on past due accounts
    23. 23. Understanding Quote to Cash Improvement Areas What are the benefits? Marketing & Sales Order Entry Billing / Invoicing Cash Application Collections COST CASH FLOW PRODUCTIVITY • Time required per FTE  Improved DSO  # of transaction to process transactions  Increased per FTE (invoice, collections) • Streamline processes collection rate  % Electronic  Reduced bad debt transaction (EDI, Others,…)  First time match rate Dispute Management CUSTOMER SERVICE  Cycle time actual vs. target (dispute resolution)  Exception and Discrepancy Key Performance Indicators  Delivery lead time vs. agreed lead time  Delivery quantity vs. actual quantity
    24. 24. Understanding Purchase to Pay Definition By defining Purchase to Pay too narrowly companies will ignore the root causes of profit leakage and process inefficiencies A narrow definition • The steps and processes from raising a purchase order to paying an invoice An extended definition • The steps and processes from defining and agreeing on a need to buy, selecting the best supplier, through the actual payment of that supplier and the tracking of that expenditure against a budget Implications : The Purchase to Pay Cycle is    A comprehensive program rather than a point solution Controlled by business owners and processes outside of Finance A driver of profitability, cash flow, customer service and ultimately Shareholder Value
    25. 25. Understanding Purchase to Pay Improvement Areas Improving the Purchase to Pay process requires an integrated Program rather than a point solution. The following are the top 10 high level best practices against which companies may be evaluated 1- Executive driven adherence to strong purchasing principles 2- Strategic alliances and preferred vendor programs 3- Integrated systems, including on-line requisition and procurement 4- Requester-focused ordering; Purchasing-focused sourcing 5- Purchasing involvement in budgeting and planning of total spend 6- Performance tracking, spend analysis and process measurement 7- Automation/Outsourcing of small value, high volume transactions 8- AP and Purchasing as information providers to decision makers 9- Co-ordinated Purchasing, Receiving and Payable processes 10-Authorization managed at budget-holder level
    26. 26. Understanding Purchase to Pay Improvement Areas Where are the benefits? Budgeting and Forecasting (Strategy) Supplier Originating Selection and Requirements Negotiation PURCHASING COST - 3% to 5% by consolidating expenditure on preferred suppliers and changing buying habits • Volume rebate • Price discount Ordering and Contracting CASH FLOW + 10% to 25%  Better negotiated terms (including term discounts)  Increased early payment discount effectiveness  Reduce premature payment Receiving and Evaluating PRODUCTIVITY + 25% to 50%  Transactions processed, automated match rate within payables  Rework reduction, by preventing root cause of discrepancies Payment Processing Continuous improvement CUSTOMER SERVICE Improved Quality and Customer Service  Approval cycle time reduction, improve visibility of requisition  Reduce void checks and duplicate payment
    27. 27. Understanding Order to Distribution Definition By defining Order to Distribution too narrowly, companies will miss opportunities to gain full inventory reduction opportunities as well as minimizing profit leakage and process inefficiencies A narrow definition • The processes and steps from receiving a customer order to distributing the ordered product to the customer An extended definition • Working with customers to understand their production/customer forecasts to plan your own operations, thus making the “supply chain” more effective and efficient Implications : The Order to Distribution Cycle is  A comprehensive program and not a point solution  Operates on processes outside of finance, and even the business (customers & suppliers)  A driver of profitability, cash flow, customer service and ultimately Shareholder Value
    28. 28. Understanding Order to Distribution Improvement Improving the Order to Distribution process requires an integrated Program rather than a point solution. The following are high level best practices against which companies may be evaluated 12345678- Executive driven adherence to strong supply chain objectives High Customer Service Levels and accurate available-to-promise Inventory Levels, in accordance with corporate targets Strategic alliances with both suppliers and customers Integrated systems, including sales, inventory, shipping, & purchasing Performance tracking, and process measurement High Data Integrity, inventory accuracy, Bill of Materials, lead times Co-ordinated supply chain processes - forecasting, purchasing, planning, manufacturing and shipping 9- Balanced production, based on capacity constraints 10Product rationalization, reducing low margin, low selling products
    29. 29. Understanding Order to Distribution Improvement Areas Where are the benefits? Forecasting (Strategy) Order Entry Purchasing Requirements Master Planning OPERATING COST CASH FLOW -3% to -5% + 10% to 25% • Improved productivity  Improved inventory will reduce labor hours management (FTE and overtime) • Improved forecasting and  Improved forecasting  Calculated inventory management will require less “remanufacturing and balancing” of product purchasing lot sizes between warehouses  Reduced leadtimes (transportation costs) • Elimination of distribution costs will reduce operating costs Production Scheduling Warehousing & Distribution Continuous improvement ADMINISTRATION CUSTOMER SERVICE PRODUCTIVITY Improved Quality and + 10% to 15% Customer Service  Increased information  Cycle time reduction sharing resulting in reduced lead times  Administrative time spent more effectively  Better order fill rates managing important increase customer items rather than “firesatisfaction and fighting” customer retention
    30. 30. PROFORMA - WORKING CAPTIAL ESTIMATES 1. TRADING CONCERN STATEMENT OF WORKING CAPITAL REQUIREMENTS Amount (Rs.) Current Assets (i) Cash (ii) Receivables ( For…..Month’s Sales)---(iii) Stocks ( For……Month’s Sales)----(iv)Advance Payments if any Less : Current Liabilities (i) Creditors (For….. Month’s Purchases)(ii) Lag in payment of expenses WORKING CAPITAL ( CA – CL ) Add : Provision / Margin for Contingencies NET WORKING CAPITAL REQUIRED --------------------_ xxx ----XXX
    31. 31. 2. MANUFACTURING CONCERN STATEMENT OF WORKING CAPITAL REQUIREMENTS Amount (Rs.) Current Assets (i) Stock of R M( for ….month’s consumption) (ii)Work-in-progress (for…months) (a) Raw Materials (b) Direct Labour (c) Overheads (iii) Stock of Finished Goods ( for …month’s sales) (a) Raw Materials (b) Direct Labour (c) Overheads (iv) Sundry Debtors ( for …month’s sales) (a) Raw Materials (b) Direct Labour (c) Overheads (v) Payments in Advance (if any) (iv) Balance of Cash for daily expenses (vii)Any other item Less : Current Liabilities (i) Creditors (For….. Month’s Purchases) (ii) Lag in payment of expenses (iii) Any other WORKING CAPITAL ( CA – CL )xxxx Add : Provision / Margin for Contingencies NET WORKING CAPITAL REQUIRED ----------------- ----------------------------------------------------XXX
    32. 32. Estimation of Current Assets • Raw material inventory: Budgeted production * Cost of raw mat * Avg inventory holding period/ 12 months / 365 • Work in Progress Inventory: Budgeted production * Estimated work in progress cost per unit * Avg time span of WIP Inventory / 12 months / 365 • Finished goods inventory: Budgeted production * Cost of goods produced per unit* Finished goods holding period / 12 months / 365 • Debtors: Budgeted credit in sales * Cost of sales per unitexcluding depreciation * Avg debt collection period / 12 months/365
    33. 33. Estimation of Current Liabilities 1. Trade creditors: Budgeted yearly production * Raw material cost per unit * Credit period allowed by creditors / 12 months / 365 2. Debtors: Budgeted yearly production* Direct labour cost per unit * Avg time lag in payment of wage / 12 months / 365 3. Overheads: Budgeted yearly production* Overhead cost per unit * Avg time lag in payment of overheads / 12 months / 365
    34. 34. TIME IS MONEY  You can get money to move faster around the cycle or reduce the amount of money tied up. Then, business will generate more cash or it will need to borrow less money to fund working capital.  As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment.  Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales.
    35. 35. If you Then ...... Collect receivables (debtors) faster You release cash from the cycle Collect receivables (debtors) slower Your receivables soak up cash Get better credit (in terms of duration or amount) from suppliers Shift inventory (stocks) faster You increase your cash resources Move inventory (stocks) slower You consume more cash You free up cash
    36. 36. • Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. • The net result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. • For this reason it is essential to forecast cash flows as well as project likely profits. • Bear in mind that more businesses fail for lack
    37. 37. Sources of Finance • Spontaneous Sources of Finance • Trade Credit: • Bills Payable: • Accrued Expenses-Short term Financing • Inter corporate loans & Deposits : Surplus Funds –Short term • Commercial Papers : Unsecured promissory note • Funds Generated from operations:
    38. 38. • Bills Discounting: Short financial Institute. • Bills Rediscounting Schemes : Offer Bill of Exchange to the RBI for rediscount. • Factoring : Is a method of Financing whereby a firm sells its trade at a discounting to FI.
    39. 39. • Working capital Finance from Banks • Assessment of working capital • Forms of Bank Credit: • Cash credit: • Bank Overdraft: • Bills Discounting: • Bills Acceptance: • Line of credit : • Bank Guarantees:

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