1. The chapter provides an overview of working capital management concepts, including definitions of net and gross working capital. It discusses the significance of managing current assets and liabilities.
2. There are tradeoffs between liquidity, profitability, and risk depending on the classification of working assets as permanent or temporary and the choice of short-term vs long-term financing.
3. Managers must consider the interdependence of current asset levels and financing structure, with more conservative choices in one area allowing for more aggressive choices in the other.
Working capital Management notes for MBA students to prepare for exam. The file contains ample theory and solved problems on working capital management
Working capital Management notes for MBA students to prepare for exam. The file contains ample theory and solved problems on working capital management
In simple language working capital can be described as the funds required by an enterprise to finance its day-to-day operations. The working capital of a business is calculated by deducting current liabilities from current assets. Hence, an enterprise has a working capital surplus if its current assets are more than current liabilities. On the other hand, if the current assets are less than current liabilities, the business has a working capital deficiency.
Working capital management — factors determining working capital — estimation of working capital —inventory management techniques — receivables management — management of cash and marketable securities — techniques of cash management — committees on working capital and their findings and recommendations.
Managing balance sheet liquidity & long term funding Dr Rajeev Jain
Managing balance sheet liquidity and long term funding
• Do the company have the right cash management processes?
• The importance of accurately forecast company cash flow with liquidity management
• Looking at your balance sheet frequently: Do the company has sufficient funding sources?
• Ensuring the right balance of credit and non-credit service utilisation for funding process
• Learning about rebuilding the balance sheet and turning their problem into growth
• Establishing long term stability and security of our funding in turn helps protect our liquidity position in the crisis
• Building necessary tools and methods to achieve properly structured balance sheet
• Managing complex situations precisely through flexible values (general direction), values with longer lifespan than goals or objectives and past and present corporate actions
In simple language working capital can be described as the funds required by an enterprise to finance its day-to-day operations. The working capital of a business is calculated by deducting current liabilities from current assets. Hence, an enterprise has a working capital surplus if its current assets are more than current liabilities. On the other hand, if the current assets are less than current liabilities, the business has a working capital deficiency.
Working capital management — factors determining working capital — estimation of working capital —inventory management techniques — receivables management — management of cash and marketable securities — techniques of cash management — committees on working capital and their findings and recommendations.
Managing balance sheet liquidity & long term funding Dr Rajeev Jain
Managing balance sheet liquidity and long term funding
• Do the company have the right cash management processes?
• The importance of accurately forecast company cash flow with liquidity management
• Looking at your balance sheet frequently: Do the company has sufficient funding sources?
• Ensuring the right balance of credit and non-credit service utilisation for funding process
• Learning about rebuilding the balance sheet and turning their problem into growth
• Establishing long term stability and security of our funding in turn helps protect our liquidity position in the crisis
• Building necessary tools and methods to achieve properly structured balance sheet
• Managing complex situations precisely through flexible values (general direction), values with longer lifespan than goals or objectives and past and present corporate actions
Presentation of Yves de Naurois during the 11th Annual Fund Compliance & Risk Management Conference hosted by ESAFON in Luxembourg on the 18th of June 2013.
In this presentation Yves is using his experience in advising UCITS funds to steer the topic of conversation around Updating Risk & Collateral Management for UCITS using EPM Techniques.
Relationship between working capital management nd profitabilitySoumitra Kansabanik
A statistical study has been conducted on few companies in FMCG sector to understand the relationship between working capital management and profitability
Program : BA(Hons) Accounting & Finance - Year 3 - Final Year
Module : International Corporate Reporting - Final Year Assessment
Subject : IAS 37 Provisions, Contingent Liabilities, Contingent Assets
Sources of Funds:
Transactions which result in an increase in the amount of fund or working capital are called sources of fund.
The following are the sources of funds:
Funds from operations, operating profit or trading profit.
Non operating incomes.
Refund of Income Tax (received).
Issue of Shares for cash or for any other current asset.
Issue of debentures for cash or for any other current asset.
Long term and medium term loans borrowed.
Long term or medium term deposits accepted.
Sale of long term investments for cash or for any other current asset.
Sale of fixed assets for cash or for any other current asset.
This chapter included, Meaning and concepts of working capital Management , Operational environment for working capital Management and Determinants of working capital
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2. 2
OOvveerrvviieeww ooff WWoorrkkiinngg
CCaappiittaall MMaannaaggeemmeenntt
Working Capital Concepts
Working Capital Issues
Financing Current Assets:
Short-Term and Long-Term Mix
Combining Liability Structure
and Current Asset Decisions
3. 3
WWoorrkkiinngg CCaappiittaall CCoonncceeppttss
NNeett WWoorrkkiinngg CCaappiittaall
Current Assets - Current Liabilities.
GGrroossss WWoorrkkiinngg CCaappiittaall
The firm’s investment in current assets.
WWoorrkkiinngg CCaappiittaall MMaannaaggeemmeenntt
The administration of the firm’s current assets and
the financing needed to support current assets.
4. 4
SSiiggnniiffiiccaannccee ooff WWoorrkkiinngg
CCaappiittaall MMaannaaggeemmeenntt
In a typical manufacturing firm, current
assets exceed one-half of total assets.
Excessive levels can result in a substandard
Return on Investment (ROI).
Current liabilities are the principal source of
external financing for small firms.
Requires continuous, day-to-day managerial
supervision.
Working capital management affects the
company’s risk, return, and share price.
5. 5
SSuummmmaarryy ooff tthhee OOppttiimmaall
AAmmoouunntt ooff CCuurrrreenntt AAsssseettss
SSUUMMMMAARRYY OOFF OOPPTTIIMMAALL CCUURRRREENNTT AASSSSEETT AANNAALLYYSSIISS
PPoolliiccyy LLiiqquuiiddiittyy PPrrooffiittaabbiilliittyy RRiisskk
AA HHiigghh LLooww LLooww
BB AAvveerraaggee AAvveerraaggee AAvveerraaggee
CC LLooww HHiigghh HHiigghh
1. Profitability varies inversely with
liquidity.
2. Profitability moves together with risk.
(risk and return go hand in hand!)
9. 9
FFiinnaanncciinngg CCuurrrreenntt AAsssseettss::
SShhoorrtt--TTeerrmm aanndd LLoonngg--TTeerrmm MMiixx
SSppoonnttaanneeoouuss FFiinnaanncciinngg:: Trade credit, and
other payables and accruals, that arise
spontaneously in the firm’s day-to-day
operations.
Based on policies regarding payment for
purchases, labor, taxes, and other expenses.
We are concerned with managing non-spontaneous
financing of assets.
10. 10
HHeeddggiinngg ((oorr MMaattuurriittyy
MMaattcchhiinngg)) AApppprrooaacchh
AA mmeetthhoodd ooff ffiinnaanncciinngg wwhheerree eeaacchh aasssseett wwoouulldd bbee ooffffsseett wwiitthh
aa ffiinnaanncciinngg iinnssttrruummeenntt ooff tthhee ssaammee aapppprrooxxiimmaattee mmaattuurriittyy..
Short-term financing**
TIME
DOLLAR AMOUNT
Long-term financing
CCuurrrreenntt aasssseettss**
FFiixxeedd aasssseettss
11. 11
HHeeddggiinngg ((oorr MMaattuurriittyy
MMaattcchhiinngg)) AApppprrooaacchh
** Less amount financed spontaneously by payables and accruals.
**** In addition to spontaneous financing (payables and accruals).
Short-term financing**
TIME
DOLLAR AMOUNT
Long-term financing
CCuurrrreenntt aasssseettss**
FFiixxeedd aasssseettss
12. 12
FFiinnaanncciinngg NNeeeeddss aanndd
tthhee HHeeddggiinngg AApppprrooaacchh
Fixed assets and the non-seasonal portion
of current assets are financed with long-term
debt and equity (long-term profitability
of assets to cover the long-term financing
costs of the firm).
Seasonal needs are financed with short-term
loans (under normal operations
sufficient cash flow is expected to cover the
short-term financing cost).
13. 13
SSeellff--LLiiqquuiiddaattiinngg NNaattuurree
ooff SShhoorrtt--TTeerrmm LLooaannss
Seasonal orders require the purchase of
inventory beyond current levels.
Increased inventory is used to meet the
increased demand for the final product.
Sales become receivables.
Receivables are collected and become cash.
The resulting cash funds can be used to pay
off the seasonal short-term loan and cover
associated long-term financing costs.
15. 15
RRiisskkss vvss.. CCoossttss TTrraaddee--OOffff
((CCoonnsseerrvvaattiivvee AApppprrooaacchh))
LLoonngg--TTeerrmm FFiinnaanncciinngg BBeenneeffiittss
Less worry in refinancing short-term obligations
Less uncertainty regarding future interest costs
LLoonngg--TTeerrmm FFiinnaanncciinngg RRiisskkss
Borrowing more than what is necessary
Borrowing at a higher overall cost (usually)
RReessuulltt
Manager accepts less expected profits in
exchange for taking less risk.
16. 16
RRiisskkss vvss.. CCoossttss TTrraaddee--OOffff
((AAggggrreessssiivvee AApppprrooaacchh))
Firm increases risks associated with short-tteerrmm bboorrrroowwiinngg bbyy
uussiinngg aa llaarrggeerr pprrooppoorrttiioonn ooff sshhoorrtt--tteerrmm ffiinnaanncciinngg..
Short-term financing
TIME
DOLLAR AMOUNT
Long-term financing
CCuurrrreenntt aasssseettss
FFiixxeedd aasssseettss
17. 17
CCoommppaarriissoonn wwiitthh aann
AAggggrreessssiivvee AApppprrooaacchh
SShhoorrtt--TTeerrmm FFiinnaanncciinngg BBeenneeffiittss
Financing long-term needs with a lower interest
cost than short-term debt
Borrowing only what is necessary
SShhoorrtt--TTeerrmm FFiinnaanncciinngg RRiisskkss
Refinancing short-term obligations in the future
Uncertain future interest costs
RReessuulltt
Manager accepts greater expected profits in
exchange for taking greater risk.
19. 19
CCoommbbiinniinngg LLiiaabbiilliittyy SSttrruuccttuurree
aanndd CCuurrrreenntt AAsssseett DDeecciissiioonnss
The lleevveell ooff ccuurrrreenntt aasssseettss and the
mmeetthhoodd ooff ffiinnaanncciinngg tthhoossee aasssseettss are
iinntteerrddeeppeennddeenntt.
A ccoonnsseerrvvaattiivvee ppoolliiccyy of “high” levels of
current assets allows a more aaggggrreessssiivvee
method of financing current assets.
A ccoonnsseerrvvaattiivvee method of financing
(all-equity) allows an aaggggrreessssiivvee ppoolliiccyy
of “low” levels of current assets.