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fm working capital management for mba

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it is useful for MBA 2nd semister students. they didn't know the proper information about the working capital management. so , that's why i prepare the some introduction part for this concept.

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fm working capital management for mba

  1. 1. f i n a n c i a l m a n a g e m e n t DSK PART – 1
  2. 2. f i n a n c i a l m a n a g e m e n t DSK WORKING CAPITAL MANAGEMENT Part –1: WORKING CAPITAL  Definition of WC  Why WC ....???  Objectives and Aspects of WC  Purpose and Need of WC  Components of WC  Concepts of WC  WC in case of Stable firm & Growing firm
  3. 3. f i n a n c i a l m a n a g e m e n t DSK INTRODUCTION: • Working Capital plays the crucial role in the business as the role of heart in the human body.
  4. 4. f i n a n c i a l m a n a g e m e n t DSK DEFINITION:  Working capital refers to funds required to be invested in the business for a short period usually upto one year.  It is also known Short-term capital or Circulating capital  “Working capital is the amount of funds necessary to cover the cost of operating the enterprise.” --- Acc.. to Shubin
  5. 5. f i n a n c i a l m a n a g e m e n t DSK WHY WC...??  The firm has to maintain cash balance to pay bills as they come due.  In addition, the company must invest in inventories to fill customer orders promptly.  And finally, company invests in accounts receivable to extend credit to customers.
  6. 6. f i n a n c i a l m a n a g e m e n t DSK OBJECTIVES OF WC: → To optimize investments in current assets. → To see that company meets its current liabilities obligation. → Manage current assets to see that the return on current assets is more than cost of capital. → Proper balance between current assets & current liabilities.
  7. 7. f i n a n c i a l m a n a g e m e n t DSK Example:
  8. 8. f i n a n c i a l m a n a g e m e n t DSK ASPECTS OF WC: There are many aspects of WCM which makes it important function of financial management.  Time  Investment  Credibility  Growth
  9. 9. f i n a n c i a l m a n a g e m e n t DSK PURPOSE OF WC:  To hold the stock of raw materials for such a period  To hold the stock of work in progress for process period  To hold the stock of finished goods for such a period  To grant credit to customers  To hold cash balances to meet the expenses
  10. 10. f i n a n c i a l m a n a g e m e n t DSK NEED FOR WC: ֍ Operating Cycle. ֍ Operating cycle in a Trading firm is the length of time required. Cash Inventory of FG Receivable s
  11. 11. f i n a n c i a l m a n a g e m e n t DSK ֍ Operating cycle in a Manufacturing firm is the length of time required ֍ Distinct Phases in Operating Cycle Cash Inventory of FG Inventory of WIP Inventory of RM Receivable s
  12. 12. f i n a n c i a l m a n a g e m e n t DSK Components of Operating Cycle:  Gross Operating Cycle: R W F D GOC RM storage period WIP holding period FG storage period Debtors Collection Period Gross Operating Cycle
  13. 13. f i n a n c i a l m a n a g e m e n t DSK  Net Operating Cycle: R W F D C NOC Creditors Collection Period Net Operating Cycle RMSP WIPHP FGSP DCP
  14. 14. f i n a n c i a l m a n a g e m e n t DSK How to Calculate Components of OC: Average RM Storage Period (in days) Average stock of RM Average Cost of RM Consumption per day Average WIP Holding Period ( in days) Average stock of WIP Average Cost of WIP per day Average FG Storage Period (in days ) Average stock of FG Average Cost of Goods Produced per day Average Debtors Collection Period ( in days) Average Trade Debtors Average Cost of Credit Sales per day Average Creditors Payment Period (in days) Average Trade Creditors Average Credit Purchases per day Average Time-Lag in Payment of exp’s (in days) Average Creditors for Expenses Average Expenses per day
  15. 15. f i n a n c i a l m a n a g e m e n t DSK How to Calculate Number of Operating Cycles in a year:- The no. Of Operating Cycles in a year may be calculated as follows: No.of days in a year No. of Operating Cycles in a year = Net Operating Cycle(in days)
  16. 16. f i n a n c i a l m a n a g e m e n t DSK Illustration-1: 1. RM Inventory Consumed during the year 60,00,000 2. Average stock of RM 10,00,000 3. Factory Cost of Goods Produced 1,05,00,000 4. Average stock of WIP 4,37,500 5. Office Cost of Goods Produced 1,14,00,000 6. Average stock of FG 9,50,000 7. Average trade debtors 11,25,000 8. Cost of Credit Sales 90,00,000 9. Average trade creditors 5,00,000 10. Expenses for the year 30,00,000 11. Average creditors for Expense 5,00,000 12. No.of working days in a year (assume 360days)
  17. 17. f i n a n c i a l m a n a g e m e n t DSK  From the above following information of Company , Calculate --- 1. Gross Operating Cycle 2. Net Operating Cycle 3. No.of Operating Cycles in a year
  18. 18. f i n a n c i a l m a n a g e m e n t DSK Concepts Of WC: WC On the basis of Concept Gross working capital Net working capital On the basis of Time Permanent working capital Temporary working capital
  19. 19. f i n a n c i a l m a n a g e m e n t DSK On the basis of Concept/Value: Gross W/C: It refers to the firm’s investment in current assets. CA includes – stock of rawmaterial, WIP, FG’s, etc. In the form of Equation , Gross W/C can be shown below:- CASH Inventories i. Raw-materials ii. Work-in-progress iii. Finished Goods Short term Marketable securities and other current assets Gross Working Capital
  20. 20. f i n a n c i a l m a n a g e m e n t DSK  Net W/C: It refers to diff b/w current assets and current liabilities. CL includes – trade creditors , bills payable, o/s exp’s, etc. Net Working Capital is a Qualitative Concept, which indicates: i. Liquidity position of the firm ii. Part of current assets which should be financed with long-term funds
  21. 21. f i n a n c i a l m a n a g e m e n t DSK  In the form of an equation , Net Working Capital has been shown below:  Example: A company buys stocks of raw material for cash. It implies that company is financing raw material stock from its internal sources. Suppose, the company gets a two months credit for the same purchase. It implies the stock is financed by creditors. Gross Working Capital (or) current Assets Current Liabilities LESS Net Working Capital
  22. 22. f i n a n c i a l m a n a g e m e n t DSK Difference b/w Gross WC & Net WC : Gross working capital Net working capital 1. Quantitative in nature 1. Qualitative in nature 2. It indicates total sum of current assets 2. It expressed as current assets minus current liabilities 3. It is suitable for companies 3. It is suitable for sole trading & partnership 4. It is a concept very popular in financial management 4. It is a concept very popular in accounting system 5. It cannot reveal the true financial position of company 5. It is very useful to find out true financial position of the company
  23. 23. f i n a n c i a l m a n a g e m e n t DSK On the basis of Time: Time Permanent / fixed WC Regular wc Reserve wc Temporary WC Seasonal wc Special wc
  24. 24. f i n a n c i a l m a n a g e m e n t DSK Permanent Working Capital: It refers to a certain minimum level of current assets, which is essential for firm to carry on its business irrespective of the level of operations.
  25. 25. f i n a n c i a l m a n a g e m e n t DSK Characteristics of PWC:  Classified on the basis of Time factor  Always remain in process  Size increases according to the Growth of enterprise  suitable for business, which is the same for all the year long  Constantly changes from one asset to another
  26. 26. f i n a n c i a l m a n a g e m e n t DSK Temporary Working Capital: It refers to the amount of working capital over and above the fixed minimum amount of WC, which is required to meet seasonal and other temporary requirements.
  27. 27. f i n a n c i a l m a n a g e m e n t DSK Working Capital in case of a Stable firm  In case of a Stable firm , the Permanent working capital is stable over time and takes the shape of a Horizontal line. while temporary working capital is fluctuating – sometimes increasing and sometimes decreasing.
  28. 28. f i n a n c i a l m a n a g e m e n t DSK Amountofworkingcapital Level of temporary working capital Level of permanent working capital Time Y X Temporary working capital line Permanent working capital line Working capital in case of Stable Firm Diagram
  29. 29. f i n a n c i a l m a n a g e m e n t DSK  In case of a Growing firm , the Permanent working capital may also keep on increasing over time to support a rising level of activity and hence PWC line may not always be Horizontal. while Temporary working capital is fluctuating – sometimes increasing and sometimes decreasing. Working Capital in case of a Growing firm
  30. 30. f i n a n c i a l m a n a g e m e n t DSK Working capital in case of a Growing Firm Diagram Amountofworkingcapital Time Y X Temporary working capital line Permanent working capital line
  31. 31. f i n a n c i a l m a n a g e m e n t DSK Prepared by ... Sravan Kumar . D

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