11/5/2011

Welcome to Our Seminar on

Working Capital Management

by Mr AR Parasuraman
Commencement Time 9.45 am Please have Tea/ Coffee
Indian Academy of Management

Phone: 022-3040 3400 E-mail: indianacademy@vsnl.net website: www.indianacademy.org

WHAT IS WORKING CAPITAL

WORKING CAPITAL=CURRENT ASSETS CURRENT LIABILITIES WORKING CAPITAL IS THE FUNDS THAT ARE NEEDED FOR CARRYING ON THE DAY TO DAY OPERATIONS.

11/5/2011

DETERMINANTS OF WC
NATURE OF BUSINESS SEASONALITY PRODUCTION POLICY MARKET CONDITION CONDITIONS OF SUPPLY

INGREDIENTS OF WORKING CAPITAL CONTROL

Service Cost Security Liquidity

11/5/2011

SERVICE
The service function can be seen as progression of cash through other forms of current asset, back into cash The cash at the end of the working capital cycle should exceed the input at the beginning

OPERATING CYCLE
THE PROGRESSION OF CASH THROUGH RAW MATERIALS,FINISHED GOODS,DEBTORS ,CASH AND BACK INTO THE CYCLE IS CALLED OPERATING CYCLE.

11/5/2011

OPERATING CYCLE ANALYSIS

DURATION OF THE OPERATING CYCLE IS GIVEN BY: O=R+W+F+D-C O=DURATION OF OPERATING CYCLE R=RAW MATERIALS AND STORES STORAGE PERIOD W=WORK IN PROCESS PERIOD F=FINISHED GOODS STORAGE PERIOD

OPERATING CYCLE ANALYSIS

D=DEBTORS COLLECTION PERIOD C=CREDITORS PAYMENT PERIOD

11/5/2011

OPERATING CYCLECOMPONENTS
R=AVG INV OF RM &STORES/AVG RM & STORES CONSUMED PER DAY. W=AVG.WIP INV/AVG COST OF PROD PER DAY F=AVG FINISHED GOODS INV/AVG COST OF GOODS SOLD PER DAY D=AVG DEBTORS/AVG CREDIT SALES PER DAY C=AVG CRS/AVG CR PURCHASES/DAY

COST
The cost of the funds that are invested in working capital will depend upon from where the funds are sourced from. If the funds that are blocked in working capital are internally generated funds the costs will be the higher of the following 1. The interest or the dividends the internally generated funds would have commanded in the external money market 2. The returns foregone from the marginal investment opportunity

11/5/2011

COST
If the funds that are invested in working capital are externally generated funds the cost will be the higher of the following 1. The interests or the dividends that are actually paid on the externally sourced funds 2.Returns foregone from the marginal investment opportunity

SECURITY
Stock-Theft,Loss, Deterioration,Control of consumption Debtors-Integrity,Ability,Inclination,Bad debts Cash-Theft,Fraud,Embezzlement

11/5/2011

LIQUIDITY
Liquidity is the ability of an organisation to meet the short term payment obligations as and when they arise

WHY LOW INVENTORY

High cost of holding inventories Interest rates Cash flow problems Greater volatality in Business cycle Lower inflation less scope for speculative profits

11/5/2011

INVENTORY CONTROL TECHNIQUES

ABC analysis EOQ Levels Review of slow, non moving ,obsolete items Budgets Ratios Perpetual inventory systems

MANAGING DEBTORS
Credit policies Collection Policies Collection efforts Credit risk evaluation Payment terms Follow ups Legal action

11/5/2011

COLLECTION TECHNIQUES
Letters Telephone calls Personal visits Collection agencies Legal action

GOALS OF CASH MANAGEMENT

Lessen cash tied up with in the system Should not lessen the activities Should not increase risk Should increase Organisational Profitability Should increase Organisational Liquidity

11/5/2011

STEPS IN CASH MANAGEMENT

Cash Planning Cash Collection Cash Mobilisation Cash Disbursements Covering Cash Shortages Investing Surplus Cash

CASH PLANNING
Anticipating cash inflows Anticipating cash outflows Break up into days weeks and months Develop comprehensive cash budget showing anticipated liquidity at future dates Simulate alternative liquidity positions if key variables change

10

11/5/2011

CASH COLLECTION
Getting cash into the organisation as soon as possible Shorten the time between the date on which the customer remit the payment and the date on which those funds clear the banking system and are availiable with the corporate unit

CASH MOBILISATION
Having an adequate MIS Cash Transfer system Clear responsibility for the making of cash transfer decisions Minimum Foreign exchange Transaction costs Minimum risk of loss because of devaluations

11

11/5/2011

COVERING CASH SHORTAGES

Determining how much cash must be transferred from other affiliates to cover short to medium term cash deficits Amount of borrowings Cost of borrowings In case of multinational firms the currency in which loans are denominated and in which it must be repaid Determining how the surplus cash will be invested

CASH DISBURSEMENTS
Planning procedures for distributing cash Avoiding early payment Maximising float-The time it takes for your own cheques to clear back to your bank Selection of a disbursement bank that will give a wide range of services and bank credit

12

11/5/2011

MANAGING CREDITORS
Advances Statutory Essential Dependent Average payment period Negotiations Cash flows

WORKING CAPITAL FINANCING

Trade credit Loans and advances from banks and financial institutions Public deposits Inter corporate deposits Debentures Commercial paper Factoring

13

11/5/2011

RATIOS
Inventory turnover ratio Average collection period Average payment period Current ratio Quick ratio Profit as a % of sales

14