Presentation on factors affecting working capital decisions
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This presentation discusses factors that affect working capital decisions. It defines working capital as current assets minus current liabilities. It then lists and describes several factors that influence how much working capital is required, including the nature, size, earnings, dividend policy, credit policy, production policy, length of the working capital cycle, business cycles, price level changes, rate of growth, and rate of stock turnover of a business. The presentation was given by Ms. Komal Mahajan of the commerce department to provide an overview of working capital and the considerations that impact working capital needs.
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Factors affecting Working Capital
Working capital is a measure of a company's liquidity, operational efficiency, and its short-term financial health. To calculate the working capital, compare a company's current assets to its current liabilities, for instance by using the current ratio.
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Working capital refers to a company's short-term assets and liabilities involved in day-to-day operations. It is calculated as current assets minus current liabilities and represents the funds available for a company to purchase inventory and pay its short-term debts. Maintaining adequate working capital is important for business solvency, goodwill with creditors and customers, obtaining loans, and taking advantage of cash discounts. The working capital requirements of a business depend on factors like its industry, size, production processes, seasonality, credit and inventory policies, growth rate, and business cycles.
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Factors affecting Working Capital
Working capital is a measure of a company's liquidity, operational efficiency, and its short-term financial health. To calculate the working capital, compare a company's current assets to its current liabilities, for instance by using the current ratio.
Working capital
Working capital refers to a company's short-term assets and liabilities involved in day-to-day operations. It is calculated as current assets minus current liabilities and represents the funds available for a company to purchase inventory and pay its short-term debts. Maintaining adequate working capital is important for business solvency, goodwill with creditors and customers, obtaining loans, and taking advantage of cash discounts. The working capital requirements of a business depend on factors like its industry, size, production processes, seasonality, credit and inventory policies, growth rate, and business cycles.
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A business may experience cash flow problems if it does not have enough cash to pay its liabilities. Common causes include low profits, overinvestment, too much stock, allowing too much customer credit, or unexpected changes. To improve cash flow, a business should manage working capital effectively by focusing on reducing debtors, creditors, and stock levels. It can also choose appropriate short-term financing like a bank overdraft or bank loan to meet temporary cash shortfalls. Maintaining a good cash flow forecast helps identify risks so problems can be addressed early.
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Whatever be the size of the business, working capital is the life blood and controlling nerve centre of that business. Thus, working capital management is very significant facet of financial management. Both excessive as well as inadequate working capital positions are dangerous from the firm’s point if view. Excessive working capital implies idle funds which earn no profits for the firm while paucity of working capital not only impairs the firm’s profitability but also results in business operation interruptions and inefficiencies. An overall control over working capital can ensure a proper functioning of the business operations. Thus, it must be admitted that in real world situation efficiency with which working capital is managed in a firm is of great significance for its overall well being.
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The document discusses functional objectives and strategies as well as financial objectives and their influences. It defines key terms like profit, cash flow, and return on capital employed. It states that financial objectives are goals set by a business's finance department to achieve specific targets related to returns, costs, and cash flow. Financial objectives are influenced internally by corporate objectives and management priorities, and externally by competitors, financial markets, and economic conditions. The document provides examples of common financial objectives like return on capital employed targets and cash flow goals.
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Receivables management aims to promote sales and profits by funding receivables until the cost of funding exceeds returns. It increases total sales, profits, and helps meet competition. Maintaining receivables incurs interest, administrative, collection, and default costs. The size of receivables depends on credit sales, policies, trade terms, expansion plans, profits, and collection efforts. Credit policies encompass standards, periods, discounts, and collection programs. Credit evaluation checks customer worthiness through character, capacity, collateral, financial ratios, bank references, and experience.
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Whatever be the size of the business, working capital is the life blood and controlling nerve centre of that business. Thus, working capital management is very significant facet of financial management. Both excessive as well as inadequate working capital positions are dangerous from the firm’s point if view. Excessive working capital implies idle funds which earn no profits for the firm while paucity of working capital not only impairs the firm’s profitability but also results in business operation interruptions and inefficiencies. An overall control over working capital can ensure a proper functioning of the business operations. Thus, it must be admitted that in real world situation efficiency with which working capital is managed in a firm is of great significance for its overall well being.
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This document discusses receivables management. It defines receivables as money owed to a firm by customers from sales. Effective receivables management optimizes profits by balancing investment in receivables with sales levels and costs of maintaining receivables like capital costs and collection costs. Firms must determine appropriate credit policies including credit terms, credit limits, and collection efforts to maximize returns while minimizing bad debts and collection period. Tools like credit analysis, aging schedules, and ratio analysis help firms monitor receivables and collection performance.
Working capital
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Financial statements provide essential information about a company's financial performance and position over a period of time. The key financial statements are the income statement, balance sheet, statement of cash flows, and statement of retained earnings. Ratio analysis is used to evaluate a company's liquidity, asset management, debt management, and profitability by calculating financial ratios and comparing them over time and to other companies. While financial statement analysis provides useful insights, results must be interpreted carefully due to limitations such as differences in accounting treatments between companies.
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1. Working capital management is important for any business to sustain itself and involves managing current assets and current liabilities.
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Every venture needs capital to meet all the business needs, be it gathering the resources or injecting capital into day-to-day activities. The capital required by a business or venture to meet its day-to-day expenses is known as the working capital. Working capital is often also known as short-term capital decisions.
Working capital revolves around two important components of a business, which are, current assets and current liability. The assets that is capable of being converted into cash within one year. Moreover, are extremely liquid, are called current assets of the business. For instance, bank balance, cash in hands, short-term investments, debtors, and prepaid expenses.
Another component of the working capital is the current liability. Current liabilities are the sum of amounts due to be paid within the span of a year. For instance, bank overdrafts, outstanding expenses, etc.
The net working capital is the difference between the current assets and the current liabilities of the company.
What is Working Capital?
The difference received after deducting the current liabilities from the current assets is known as the net working capital of the business. Working Capital is the measure of a venture's liquidity. It also denotes the operational efficiency of a venture. The better the working capital, the better is the business’ short-term financial health.
Concept of Working Capital
The concept of working capital is simple. It is the capital that a business uses to meet its daily expenses and is considered to be the most liquid part of the total capital. Working capital is also known as Net Working Capital (NWC).
This is derived by comparing the current assets with the current liabilities on the balance sheet. The difference derived is known as the working capital of the company.
• The working capital of a company reflects the difference between the venture's current assets and liabilities. It is also represented as NWC or Net Working Capital of the company.
• Net Working Capital (NWC) estimates the liquidity of the company.
• It also assesses the company's short-term financial health.
• The company's NWC is considered to be negative if the ratio of current assets to the current liabilities falls below one. In simpler terms, the ratio should be one or more to reflect the positive working capital.
• A positive Net Working Capital or NWC indicates the capability of the business to fund the future as well as the current operations. It is also an indicator of growth and expansion of business.
• It is always about balance. Therefore, a very high Net Working Capital might indicate excess inventories, which are not considered healthy for a business.
Reasons for additional working capital
Seasonal differences in cash flow are typical reason.
To fund obligations to suppliers, employees and the government while waiting for payments from customers.
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Presentation on types of capital budgeting decisions
Presentation on types of capital budgeting decisions
Presentation on factors affecting dividend decisions
Presentation on factors affecting dividend decisions
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Presentation on factors affecting capital structure decisions
Presentation on Accounting Treatment of Share Capital (Forfeiture and Surrender)
Presentation on Accounting Treatment of Share Capital (Forfeiture and Surrender)
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Presentation on Accounting Treatment of Share Capital (Subscription of capital)
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Presentation on factors affecting working capital decisions
- 1. PRESENTATION ON FACTORS AFFECTING WORKING CAPITAL DECISIONS Presented by: Ms. Komal Mahajan Asst. Prof. In Commerce
- 2. WORKING CAPITAL Working Capital refers to the excess of Current Assets over Current Liabilities. Current Assets Current Liabilities Cash in hand and bank balances Bills Payable Inventories Creditors Debtors Bank Overdraft Bills receivable Outstanding expenses Prepaid Expenses Provision for taxation Short term loans and advances Short term loans, deposits etc.
- 3. FACTORS AFFECTING WORKING CAPITAL DECISIONS • Nature of Business • Size of Business • Earnings of Business • Dividend Policy of Business • Credit Policy of Business • Production Policy of Business • Length off Working Capital Cycle • Business Cycles • Price Level Changes
- 4. NATURE OF BUSINESS Nature of Business Working Capital Required Public Utilities Low Trading and Financial High Manufacturing Sizeable
- 5. SIZE OF BUSINESS Size of Business Working Capital Required Small Low Large High
- 6. EARNINGS OF BUSINESS Earnings of Business Working Capital Required Less High More Low
- 7. DIVIDEND POLICY OF BUSINESS Dividend Policy of Business Working Capital Required Irregular Low Regular High
- 8. CREDIT POLICY OF BUSINESS Credit Policy of Business Working Capital Required Strict Low Liberal High
- 9. PRODUCTION POLICY OF BUSINESS Production Policy of Business Working Capital Required Steady High Unsteady Low
- 10. LENGTH OF WORKING CAPITAL CYCLE Length of Working Capital Cycle Working Capital Required Long High Short Low
- 11. LENGTH OF WORKING CAPITAL CYCLE
- 12. BUSINESS CYCLES Business Cycles Working Capital Required Boom High Depression Low
- 13. PRICE LEVEL CHANGES Price Level Changes Working Capital Required Inflation High Deflation Low
- 14. RATE OF GROWTH OF BUSINESS Rate of Growth of Business Working Capital Required High High Low Low
- 15. RATE OF STOCK TURNOVER Rate of Stock Turnover Working Capital Required High Low Low High
- 16. THANK YOU!