Working capital management involves managing a company's current assets (cash, inventory, receivables) and current liabilities (payables, debt). There are various components of working capital like accounts receivable, cash, inventory, and accounts payable. Managing working capital effectively involves balancing the carrying costs of holding current assets versus the shortage costs of not having enough. Firms aim to minimize total costs by finding the optimal level of current assets. Cash management is important to ensure sufficient cash flow and liquidity while minimizing idle cash balances.

1. WORKING CAPITAL MANAGEMENT

2. Current Assets & Current Liabilities
are collectively known as
WORKING CAPITAL
Components of Working Capital
Accounts Receivable:
arise because of companies do not usually expect
customers to pay for their purchases immediately.
These unpaid bills are a valuable asset that companies
expect to be able to turn into cash in the near future.
TRADE CREDIT : Unpaid bills from sales to other companies.
CONSUMER CREDIT : Sales of goods to the final customers.
Cash & Marketable Securities:
Cash: Dollar Bills & Bank Deposits.
DEMAND DEPOSITS: Money in checking accounts that the firm can pay out immediately.
TIME DEPOSITS: Money in saving accounts that the firm can pay out only with a delay.
Marketable Securities: Commercial Paper & Tresury Bills

3. Components of Working Capital
Accounts Payable: Unpaid Bills
Outstanding payments due to other companies
One firm’s credit is another firm’s debit
NET WORKING CAPITAL
CURRENT ASSETS – CURRENT LIABILITIES
Generally called as
WORKING CAPITAL

4. CASH CONVERSION CYCLE =
(Inventory Period + Receivables Period) – Accounts Payable Period
CASH CONVERSION CYCLE
CASH
FINISHED
GOODS
RECEIVABLES INVENTORY

5. CASH CONVERSION CYCLE =
(Inventory Period + Receivables Period) – Accounts Payable Period
CASH CONVERSION CYCLE :
Period between firm’s payment for materials and collection on its sales
Inventory Period = Average Inventory / [Cost of Goods Sold / 365]
Receivables Period = Average Accounts Receivables / [Sales / 365]
Payable Period = Average Payable / [Sales / 365]

6. Working Capital Trade-off
Carrying Costs:
Costs of maintaining Current Assets; including opportinity cost of capital.
Investment in CASH & RECEIVABLES may cause an interest loss and
Investment in INVENTORY has opportinity cost of capital; storage & insurance costs
Shortage Costs:
Costs incurred from shortages in Current Assets
Shortage in CASH may incur unnecassary transaction costs of selling marketable securities and
Shortage in RECEIVABLES may cause to lose customers because of credit sales’ restrictions
Shortage in INVENTORY may have shut down production & unable to to fill orders promptly
Carrying Costs encourage firm to hold current assets to a MINIMUM
Shortage Costs encourage firm to hold current assets to a MAXIMUM
It’s an art to find the LEVEL of CURRENT ASSETS
that minimizes the sum of
Carrying Costs & Shortage Costs

7. Links between
LONG-TERM & SHORT-TERM fınancıng
Short-Term financing
Time
Long -Term financing
Seasonal
component of
required assets
Total
Capital
Requirement
STRATEGIES:
1. Matching Maturities: Long-Lived assets with long-term debt & Current Assets with short-term debt
2. Permanent Working Capital Requirements: A positive amount of WORKING CAPITAL
3. The Comforts of Surplus Cash:The firm is always a short-term lender (Relaxed Strategy)
Firm’s Total Capital Requirement: The Cost of Assets

8. TRACING CHANGES IN CASH & NWC
Cash Budgeting:
Forecasting future sources and uses of cash
Alerts for future cash needs & provides a standart
Three Common Steps to preparing Cash Budget
1. Forecast the sources of cash
3. Calculate whether the firm is facing a
cash shortage or plus
2. Forecast the uses of cash

9. DETAILS:
The Steps of Calculating Sources of Cash
1. Receivables at the start of period
2. Forecast Sales
3. Forecast Collections
• Sales in current period (%?)
• Sales in last period (%?)
TOTAL COLLECTIONS
4. Receivables at the end of period
5. Other sources of cash (Dispose of land, machine, stock)
Ending Accounts Receivable = Beginning Acc. Rec. + Sales - Collections

10. DETAILS:
The Steps of Calculating Uses of Cash
1. Payments for Accounts Payable
2. Labor, Administrative and Other Expenses
(Regular Business Expenses)
3. Capital Expenditures (Pay for long-lived assets)
4. Taxes, Interest and Dividend Payments
Prepare SOURCES & USES CASH LIST each period
Determine Short-Term Financing Requirements

11. DYNAMIC MATTRESS'S FINANCING PLAN
1. Quarter 2. Quarter 3. Quarter 4. Quarter TOTAL
Cash Inputs 86,5 80,3 121,0 128,0 415,8
Cash Outputs 131,5 95,3 95,0 93,0 414,8
Cash Balance 45,0 15,0 26,0 35,0 1,0
Marketable Securities 5,0 5,0
Bank Loan 2% 40,0 8,6 31,4 40,0
Interest Payment 0,8 1,6 0,6 3,0
Stretch 5% 15,8 15,8 0
Cash Balance 45,0 15,0 26,0 32,0 2,0
Additions to Cash
Balance 3,0 3,0

12. QUESTIONS:
1. Cash or Marketable Securities enough or expand?
2. Does plan cahnge Current & Quick Ratios?
3. Hidden costs to stretching payables?
4. Does plan leave DYNAMIC in good financial shape for 2005?
5. What about log-term financing and capital expenditures?
6. Can the firm’s operating and investment plans be adjusted to
make the short-term financing problem easier?
SHORT-TERM FINANCING PLANS MUST BE DEVELOPED BY
TRIAL & ERROR !...

13. SOURCES OF SHORT-TERM FINANCING
Bank Loans:
Line of Credit: Aggrement by a bank that a company may borrow at
any time up to an established limit.
Revolving Credit Aggrement: If the firm wants to be sure it will able
to borrow; it can enter a RCA. ( RCA usually last for a few years and formally commit the
bank to an aggreed limit. A committment fee is required on any unused amount.)
Term Loans: Conditional Credit (Loans are paid when the goods are sold)
Syndicate Credit: Banks combined to provide cash
Commercial Paper:
Short-Term unsecured notes issued by firms

14. SOURCES OF SHORT-TERM FINANCING
Secured Loans:
Accounts Receivables Financing
1. Some companies solve their financing problem by borrowing on
the strength of their current assets!...
When a loan is secured by receivables, the firm assigns the receivables
to the bank.
The risk of default on the receivables is therefore borne by the firm
2. Others solve it by selling their current assets!...
An alternative procedure is to sell the receivables at a discount
to a financial institution known as FACTOR and let it collect the
money.
Once the firm has sold receivables, the factor bears all the
responsibility for collecting on the accounts!...
Inventory Financing
Bank also lend on the security of inventory; but they are choosy
about the inventory they will accept!...

15. THE COST OF BANK LOANS
Simple Interest
1. Simple Interest: The interest rate on bank loans frequently is
quoated on APR
2. Discount Interest : The interest rate on bank is often calculated on a
discount basis.
3. Interest with Compensating Balances: Occasionally, bank loans
require the firm to maintain some amount on balance at the bank,
which is called as Compensating Balance.
The reason is that borrower must pay interest on full amount borrowed
but has access only part of the funds.
In each case; the face value of the interest has to be
converted to effective interest rate in order to learn the actual
burden on the loan.

16. WHAT IS CASH
MANAGEMENT??????

17. CASH MANAGEMENT
implies that all the business
generated revenues are effectively
controlled and utilized in the best possible
manner to result in gains for the
organization.

18. BASIC OBJECTIVES OF CASH
MANAGEMENT

19. To ensure availability of
cash as per payment
schedule
And To minimize the amount of idle cash

20. CLASSIFICATION OF CASH
FLOWS

21. • Operational cash flows
• Priority cash flows
• Discretionary cash flows
• Financial cash flows

22. MOTIVES FOR HOLDING
CASH BALANCES

23. • Transaction motive
• Precautionary motive
• Speculative motive
• Future requirements
• Compensating balances

24. COST-BENEFIT ANALYSIS OF
CASH MANAGEMENT

25. Since the basic purpose of any cash
management system is to reduce the cost. Cost
involved in cash management system like any
other system can be broadly divided in to fixed
cost and variable costs. Fixed costs of
maintaining any system may be like depreciation
on hardware used, fixed employee cost

26. the variable cost of cash management
system normally depends on the
volume of funds handled by the company

27. MANAGEMENT OF LIQUIDITY

28. LIQUIDITY is defined as the ability of the
organization to realize value in money, the most liquid of
assets. It refers ability to pay in cash, the obligations that
are due. it has 2 concepts quantitative as well as
qualitative, quantitative includes the quantum, structure
and utilization of liquid assets where as qualitative
concept is the ability to meet all the present and potential
demands on cash in manner that minimizes cost and
maximizes the value of the firm.

29. REASONS FOR CASH SURPLUS
• Profitability from operations
• Low capital expenditure
• Absence of profitable avenues of
investment
• Sale of a part of a business
• Raising of funds from issue of stock and
bonds for long term capital projects,
temporary funds is not used
• Conservative dividend distribution policy

30. REASONS FOR CASH FLOW PROBLEMS
• Continuous operation losses
• Higher inflation rate
• Non recurring expenditures
• Higher seasonal or cyclical sales
• Over trading
• Continuous growth of business
• Inefficient working capital management

31. MODELS OF CASH
MANAGEMENT

32. Miller-Orr cash management
model

33. The Miller and Orr model of cash
management is one of the various cash
management models in operation. It is an
important cash management model as well. It
helps the present day companies to manage
their cash while taking into consideration the
fluctuations in daily cash flow. As per the
Miller and Orr model of cash management
the companies let their cash balance move
within two limits - the upper limit and the
lower limit

34. Application of Miller and Orr Model of Cash
Management
The Miller and Orr model of cash management is widely
used by most business entities. However, in order for it
applied properly the financial manages need to make
sure that the following procedures are followed:
• Finding out the approximate prices at which the salable
securities could be sold or bought
• Deciding the minimum possible levels of desired cash
balance
• Checking the rate of interest
• Calculating the SD (Standard Deviation) of regular

35. BAUMOLS EOQ MODEL

36. • Baumol Model of Cash Management
The Baumol model of cash management is one of many
by which cash is managed by companies. It is
extensively used and highly useful for the purpose of
cash management.
Use of Baumol Model
The Baumol model enables companies to find out their
desirable level of cash balance under certainty.
Relevance
At present many companies make an effort to reduce the
costs incurred by owning cash. They also strive to spend
less money on changing marketable securities to cash.
The Baumol model of cash management is useful in this
regard.

37. Assumptions There are certain assumptions or ideas
that are critical with respect to the Baumol model of cash
management
The particular company should be able to change the
securities that they own into cash, keeping the cost of
transaction the same.
• Under normal circumstances, all such deals have
variable costs and fixed costs.
• The company is capable of predicting its cash
necessities
• They should be able to do this with a level of certainty
• The company should also get a fixed amount of money.
They should be getting this money at regular intervals.

38. • The company is aware of the opportunity cost
required for holding cash. It should stay the
same for a considerable length of time.
• The company should be making its cash
payments at a consistent rate over a certain
period of time. In other words, the rate of cash
outflow should be regular.

39. HOW TO MANAGE CASH

40. • Setting cash balance
• Cash cycle
• Zero balance account
• Money market banking
• Petty cash imprest system