Professional Documents
Culture Documents
Working Capital
Management
Introduction
Working capital is required for the day to day transactions
of the organization. In simple speaking, working capital
means the firm's investment in short term assets.
1. Gross Concept: Total funds invested in current assets
like cash, marketable securities, inventories and accounts
receivables. Financial analysts use this concept.
2. Net Concept: Current asset minus current liabilities.
Accountants use this concept.
Net working capital = CA- CL
1. Sales Volume
2. Working capital policy
3. Credit policy
4. Nature and size of the firm
5. Cost of input materials
6. Access to the money market
7. Cash conversion cycle
8. Technology Employed
9. Predictability of cash in flows
10. Others
10
Relaxed
Moderate
Restricted
Current
Assets
Levels (Rs)
Current Assets
|
50000
Outputs (units)
|
100000
11
12
Temporary current
assets
Assets
($)
Permanent current assets
Fixed Assets
Time Period
Long Term
financing
13
Marketable securities
14
Assets
($)
Time Period
15
16
Time Period
17
B. Cash Management
18
Significance of cash
19
1.Easy in payment
2. Possible to get trade discount
3. High credit rating
4. Easy to get new loan
5. Exploitation of business opportunities
6. Overcome threats and challenges
7. Dividend payment
8. Others
But excessive cash holding is costlier to the firm.
1.Transaction Motive
2. Precautionary Motive
3. Speculative Motive
22
23
25
Marketable securities
The short term securities which are easily
convertible into cash are marketable
securities. In case when firm has excess
cash, can purchase such securities. In
case when the firm face cash problem, can
liquidate such securities. e.g. Treasury
bills, certificate of deposits, commercial
paper, bankers acceptance, Eurodollar
CDs and others.
Cash budgeting
26
Steps
1.Cash receipts ( cash sales, collections, and
other receipts)
2.Cash disbursements ( cash purchases,
payments, and others)
3. Net cash flows ( differences between total
cash receipts and disbursements)
4. Ending cash ( net cash flows plus
beginning cash balance)
28
Jan
Feb .
Cash receipts $XXX XXG
Less: Disburse XXA XXH
Net cash flow XXB XXI
Add: Beginning XXC XXD XXJ
Ending bal
XXD XXJ
Less: Min. bal XXE XXK
Cum. Financing .
XXL
Cum. Surplus XXF .
Nov
Dec
XXM XXT
XXN XXU
XXO XXV
XXP XXQ
XXQ XXW
XXR XXY
XXS
.
.
XXZ
C. Receivables Management
30
Credit Policy
31
32
Aging Schedule
33
Aging Schedule
34
Age of Account
0-10
11-30
31-60
61-90
Above 90
Total
Amount
60,000
40,000
66,000
26,000
8,000
200,000
%
30
20
33
13
4
100
37
Analyzing Approaches
38
1.
Format
Current
change
New
39
Gross sales
Less: Disc.
Net sales
Less: Prod. cost
Less: F. cost
Profit before
Credit cost and
taxes
Less: credit
Related costs:
Rec. carrying cost
Coll. cost
Bad debts
Profit bef. Taxes
Less: Taxes
Net Income
D. Inventory Management
40
Introduction
Various types of materials and goods
held by the firm for reselling purpose are
inventories.
Types
1. Raw Materials
2. Work-in-progress
3. Finished goods
Motives
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43
44
1.
2.
1.Formula Method
EOQ =
2
AO
Where,
C=Carrying costC
per unit
A=Annual Requirement
46
Cost
(Rs)
Ordering cost curve
Quantity
47
49
Reorder Level
The level at which reorder should be placed.
ROL=Lead Time Usage Rate
ROL=Lead Time Usage Rate + Safety Stock
ROL=Lead Time Usage Rate + Safety Stock - Goods
in Transit
Where,
Lead Time = Time taken to receive delivery after
placing an order.
Goods in Transit = Goods which have been ordered but
have not been received yet. GIT exist if lead time is
longer than time between two orders.
Time between two orders= 365 No of orders.
Other Formulas
50
1.
2.
3.
Quantity Discount
51
52
The End