Presentation for Financial Management

1. ELCOME TO OUR PRESENTATION
WORLD UNIVERSITYO F B A N G L A D E S H
orking Capital ManagementW

2. Group Members
Khondoker Amin Uzzaman
ID: WUB01/11/33/1757
Maruf Ahmed
ID: WUB01/11/33/1785
Tamanna Akter
ID: WUB01/11/33/1749
MD Jannatul Ferdous
ID: WUB01/11/33/1765
Aklima Khanom Jui
ID: WUB01/11/31/1650
Sharna Yesmin
ID: WUB01/11/33/1760

3. Working capital management is one of the major issues of corporate finance. The
success of any manufacturing company largely relies on the efficient management
of working capital. There are different theoretical developments and empirical
issues but there is no unified rule that can determine the optimal level of working
capital. From the viewpoint of developing country like Bangladesh the role of
working capital should be highly emphasized.
Introduction

4. The purpose of the study is to analyze the working capital management practices
of Square textile ltd. The main objectives of the study are as follows:
• To observe profitability and liquidity in case of working capital management.
• To observe the position of debt fund out of total fund.
• To know calculation, Method and technique applied on Working capital
management
• To determine problems & provide suggestion which would help to improve the
situation.
Objectives of the Study

5. • The report is mainly based on secondary data that we have collected from
various sources. The major source of information was the Annual Report of
Some Company under study. The other sources include Internet. The details of
all the books and journals being used in this report are shown in the
bibliography.
• The focus of this report is based on management of Working Capital. We have
focused on different organizational strategies that have been observed to find
out the general working capital management practices.
Methodology of the Study
Scope of the Study

6. Concept of Working Capital Management
• Quantitative and qualitative
• Current assets
• Current liabilities
• Circulating capital
THEORETICAL OVERVIEW

7. Current Liabilities Current Assets
Bank Overdraft Cash and Bank Balance
Creditors Inventories: Raw-Materials
Work-in-progress
Finished Goods
Outstanding Expenses Spare Parts
Bills Payable Accounts Receivables
Short-term Loans Bills Receivables
Proposed Dividends Accrued Income
Provision for Taxation, etc. Prepaid Expenses
Short-term Investments
Structure of Working Capital
The different elements or components of current assets and current liabilities constitute the structure of
working capital which can be illustrated in the shape of a chart as follows:
Structure of Current Assets and Current Liabilities

8. Circulation of Working Capital

9. Conceptual classification
• The above can be summarized as follows:
• Gross Working Capital = Total Current Assets
• Net Working Capital = Excess of Current Assets over Current
Liabilities
• Working Capital Deficit = Excess of Current Liabilities over Current
Assets.
Classification of Working Capital

10. Classification on the basis of financial reports
• Cash Working Capital
• Balance Sheet Working Capital
Classification on the Basis of Variability
• Temporary Working Capital
• Permanent Working Capital
Cont:

11. • Principles of Working Capital Management
• Principles of the risk variation
• Principle of equity pos
• Principle of cost of capital
• Principle of maturity of payment
Principles of Working Capital Management

12. • Nature of industry
• Demand of creditors
• Cash requirements
• General nature of business
• Time
• Volume of sales
• Terms of purchases and sales
• Inventory turnover
• Receivables turnover
Determinants of Working Capital

13. • Business cycle
• Variation in sales
• Production cycle
• Liquidity and profitability
• Profit planning and control
• Activities of the firm
Cont:

14. Working capital requirement depends upon the level of operation and the
length of operating cycle. Monitoring the duration of the operating cycle is an
important ingredient of working capital control. In this context, the following
points should borne in mind:
Control of Working Capital
Example – X Ltd. Expects its cost of goods sold for the forthcoming year to be Rs. 2 crore. The
present operating cycle of the firm is 78 days. The firm plans to reduce its operating cycle to 73
days and desired cash balance is Rs.
5 lakh.
The expected working capital requirement would be,
2 ,00,00,000 x 73 365 + 5,00,000 = Rs. 45,00,000

15. • The duration of the work-in-process depends on the length of manufacturing
cycle, consistency in capacities at different stages, and efficient coordination
of various inputs.
• The duration of the finished goods depends on the pattern of production and
sales. If production is fairly uniform throughout the year but sales are highly
seasonal or vice versa. The duration of finished goods tends to be long.
• The duration at the debtors stage depends on the credit period granted,
discounts offered for prompt payment, and efficiency and rigour of collection
efforts.
Cont:

16. • It protects a business form the adverse effects of shrinkage in the values of current
assets.
• It is possible to pay all the current obligations promptly and to take advantage of
cash discounts.
• It ensures, to a greater extent, the maintenance of a company’s credit standing and
provides for such emergencies as strikes, floods, fires etc.
Adequacy of Working Capital

17. • It permits the carrying of inventories at a level that would enable a
business to serve satisfactorily the needs of its customers.
• It enables a company to extend favorable credit terms to its
customers.
• It enables a company to operate its business more efficiently
because there is no delay in obtaining materials, etc., because of
credit difficulties.
Cont:

18. The following points mention relating to various elements of working capital deserves:
• Inventory
• Raw material inventories
• Work-in-process inventory
• Finished goods inventory
• Cash and interest-bearing liquid assets
Source of Working Capital
Conventional generalizations relating to financing of working capital suggest that an amount
equal to the basic minimum of current assets should be financed from long-term source and
that only seasonal needs of working capital should be financed from short-term sources.

19. Measurement
• Measuring
The most common measures for working capital are in table 3. Number of days
inventories means how many days it takes to turn over the value of entire
inventory. Number of days accounts receivable and payable tell how long in
average it takes to get payment and pay invoices. Current ratio is ratio between
short-term assets and liabilities. A value under one could mean liquidity
problems. Quick ratio is similar but takes account of the fact that it may take time
to convert inventory into cash. (Planware 2010)
Method and technique applied

20. Ratio Formula
Number of Days
Inventories
Inventories • 365
Cost of Sales
Number of Days
Accounts
Receivable
Accounts Receivable • 365
Sales
Number of Days
Accounts
Payable
Accounts Payable • 365
Purchases
Current Ratio Total Current Assets
Total Current Liabilities
Quick Ratio Total Current Assets – Inventory
Total Current Liabilities
Working Capital Ratio Inventory + Receivables – Payables
Sales
Net Liquid Balance Cash and Cash Equivalents + Short-term Investment –
Short-term
Debt + Commercial Paper Payable + Long-term Debt a
Year Term
Working Capital
Requirement
Accounts Receivable + Inventories –
Accounts Payable + Accrued Expenses +
Other Payable Hill et al. (2010) used simpler
formula:
Accounts Receivable + Inventories – Accounts Payable
Cont:
Table 3. Key working capital ratios (Planware 2010, Deloof 2003, Chiou&Cheng 2006)

21. • When speaking about the working capital management strategies, it is necessary to note which
definition of working capital is used. If the narrower definition is used, working capital
management means inventory management, receivables management and payables
management. With broader net working capital definition current asset and current liability are
managed.
Strategies
Figure 2. Net working capital levels, a) positiv e b) zero c) negative. (Meszek&Polweski
Different firms require different working capital management strategies. Net working capital can be positive, zero, or
negative, as seen in figure 2. (Meszek&Polweski 2006)
According to Meszek&Polweski (2006), net working capital strategies can be divided to aggressive, moderate and conservative strategies. Liability
strategy (LS) is defined as
(1)
where SL=short-term liabilities (current liabilities) and TA=total assets.
Assets strategy (AS) is defined as
(2)
where CA=current assets.

22. Significance of Working Capital Management Funds are needed in every business
for carrying on day-to-day operations. Working capital funds are regarded as the
life blood of a business firm. A firm can exist and survive without making profit
but cannot survive without working capital funds.
Evaluation, good side and bad side
Working capital is very essential for success of a business and, therefore, needs
efficient management and control. Each of the components of the working capital
needs proper management to optimize profit.

23. Importance of Working Capital Management
For smooth running an enterprise, adequate amount of working capital is
very essential. Efficiency in this area can help, to utilize fixed assets gainfully,
to assure the firm’s long- term success and to achieve the overall goal of
maximization of the shareholders, fund. Shortage or bad management of
cash may result in loss of cash discount and loss of reputation due to non-
payment of obligation on due dates.
Cont:

24. The danger of excessive working capital are as follows:
• Heavy investment in fixed assets
• Reckless purchase of materials
• Speculative tendencies
• Liberal credit
• Carelessness
Cont:

25. Paucity of working capital is also bad and has the following dangers:
• Implementation of operating plans becomes difficult and a concern may not
achieve its profit target.
• It is difficult to pay dividend due to lack of funds.
• Bargaining capacity is reduced in credit purchases and cash discount could not
be availed.
• An enterprise looses its reputation when it becomes difficult even to meet day-
to- day commitments.
Paucity of working capital

26. • Growth may be stunted. It may become difficult for the enterprise to undertake
profitable projects due to non-availability of working capital.
• Implementation of operating plans may become difficult and consequently the
profit goals may not be achieved. Cash crisis may emerge due to paucity of
working funds. Optimum capacity utilization of fixed assets may not be achieved
due to non-availability of the working capital.
• The business may fail to honor its commitment in time, thereby adversely
affecting its credibility. This situation may lead to business closure.
CONSEQUENCES OF UNDER ASSESSMENT OF
WORKING CAPITAL

27. Excess of working capital may result in unnecessary accumulation of
inventories. It may lead to offer too liberal credit terms to buyers and
very poor recovery system and cash management. It may make
management complacent leading to its inefficiency. Over-investment in
working capital makes capital less productive and may reduce return on
investment
CONSEQUENCES OF OVER ASSESSMENT OF
WORKING CAPITAL

28. • Amount of articles about working capital management during the time frame
(1990-2010) studied is not high. Originality of articles is generally low. Quality
also can be considered being low (with few exceptions) since articles have not
got much citations and many of the articles are nearly replicates of earlier
articles. It seems that basic methods for working capital management have
been invented earlier and articles in this time frame do not present any
massive breakthroughs.
Over three fourths of the 15 articles Assignment working capital
management practices of sample firms or Assignment relation between working
capital management and profitability.
DISCUSSION AND CONCLUSIONS

29. WORKING CAPITAL MANAGEMENT ACCORDING TO
RECENT LITERATURE
Figure 17 . Working capital management according to recent literature. (WC=working Capital

30. • This is a assignment about working capital management using bibliometric
methods. Assignment is limited to articles that deal with the whole working
capital topic, not its single sub-area like inventory management. Time frame of
the Assignment was chosen to be 2002–2014.
• Working capital is usually defined as current assets minus current liabilities;
this definition is also called “net working capital”. Narrower but less used
definition for working capital is inventory + accounts receivable – accounts
payable which emphasizes operating efficiency of a firm. Research has shown
that working capital management has clear effect to profitability of a firm.
SUMMARY