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Working Capital Management
This document discusses working capital management. It defines working capital as the capital needed for day-to-day business operations, including current assets like inventory and cash. It notes that working capital management involves identifying short-term capital needs and funding sources to increase profits while maintaining liquidity. The document outlines various aspects of working capital management like inventory management, receivables management, and cash management. It also provides an example to calculate the cash conversion cycle using information about annual sales, credit sales, cost of goods sold, payables, and inventories.
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Working Capital Management
- 1. Working Capital Management DrRaju Indukoori
- 2. Dr Raju Indukoori WorkingCapital It is the capital needed to meet day to day operations of a business entity which represents operating liquidity available to a firm along with fixed assets such as plant and equipment. working capital is considered a part of operating capital. 2
- 3. Dr Raju Indukoori Typesof Working Capital • Gross Working Capital • Net Working Capital – Working capital surplus (+ve) – Working capital deficit (-ve) 3
- 4. Dr Raju Indukoori Needfor Working Capital • Needed for smooth running of business • Gives good liquidity • Increases productivity • Enables to grab new and potential opportunities 4
- 5. Dr Raju Indukoori Compositionof Working Capital CURRENT ASSETS 1 Cash : Cash in Hand & Bank 2 Receivables 3 S T loans given 4 S T marketable securities 5 Advance payments 6 Tax paid in advance 7 Inventory CURRENT LIABILITIES 1 Bank OD 2 Payables 3 S T Loans taken 4 Interest payable 6 Provision for tax 7 Proposed dividend 5
- 6. Dr Raju Indukoori FactorsInfluencing Composition of WC • Nature of business • Size of the company • Nature of raw material used • Process technology used • Nature of finished goods • Seasonal fluctuations 6
- 7. Dr Raju Indukoori VIEWSOF WORKING CAPITAL • Static : Annual assessment • Dynamic : Continuous assessment 7
- 8.
- 9. Dr Raju Indukoori WORKINGCAPITAL MANAGEMENT It is the process of identifying short term capital requirements through estimations and funding them with an objective to increase profits and maintain sound liquidity position for the company. 9
- 10. Dr Raju Indukoori Scopeof WCM • Operating Cycle • Inventory Management • Receivables Management • Cash Management 10
- 11. Dr Raju Indukoori ObjectivesOf WC Management • Profitability • Liquidity 11
- 12. Dr Raju Indukoori OperatingCycle It determines how much time it would take to get the investment in working capital back. 12
- 13. Dr Raju Indukoori OperatingCycle DayPerSales Inventory PeriodConversionInventory DayPerSales Rceivables (DSO)PeriodCollectionAverage DayPerPurchases Payables PeriodDeferralPayables + - 13
- 14. Dr Raju Indukoori Evaluationof Working capital management • Liquidity • Availability of Cash • Inventory turnover • Credit extended to customers • Credit obtained from suppliers • Under trading and over trading 14
- 15. Dr Raju Indukoori RatioAnalysis • Current ratio • Quick / Acid-test ratio • Cash to current asset ratio • Sales to cash ratio • Average collection period • Inventory turnover 15
- 16. Dr Raju Indukoori Problem •Annual Sales :Rs 1,00,00,000 • Credit Sales :Rs 6,57, 534 • Cost of Goods sold :Rs 80,00,000 • Payables :Rs 6,57,534 • Inventories : Rs 20,00,000 Calculate Cash Conversion Cycle 16
- 17. Dr Raju Indukoori Solution CCC= ICP + RCP – PDP 67days = 73days + 24 days – 30 days 17
- 18.