Financial Management
Working Capital
Dr. Rajendra Patil,
BGIMS
Group Members
Vaishnavi Amkar 02
Vishal Chaudhari 12
Prasad Mayekar 53
Pratik Modi 56
Agenda
No. Topic Name
1 Working Capital Vaishnavi
2 Working Capital Financing Pratik
3 Receivable Management Vishal
4 Inventory Management Prasad
INTRODUCTION
SECTION I
Nature
Technically, working capital management is an integral part
of the overall financial management.
In the management of working capital, the time factor is not
at all crucial as a decision variable.
The goal of working capital management is to manage the
firm’s current assets & liabilities in such a way that a
satisfactory level of working capital is maintained.
• Working capital is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities and
the interrelationship that exists between them.
• Working Capital management should aim at striking a balance
between PROFITABILITY v/s LIQUIDITY, such that there is an
optimum amount of short term assets.
• Three basic measures of a firm’s overall liquidity are –
• (i) Current Ratio
• (ii) Acid-Ratio
• (iii) Net Working Capital
Trade-Off Between Profitability And Risk
PROFITABILITY RISK
Profitabilility implies The term Risk is the
relationship between probability that a firm will
revenues & costs. become insolvent.
Increase in the Working Increase in the Working
Capital reduce the Capital also reduce the Risk
profitability due to the due to rise in the assets
cash outflow. inflow.
Effect of the Level of assets on The
Profitability-Risk Trade -off
Example
Liabilities Amount (lakhs) Assets Amount (lakhs)
Equity Capital 6000 Fixed Asset 8600
Long-term Debt 4800 Current Asset 5400
Current Liabilities 3200
14000 14000
NWC = 2200 (5400-3200) Profit = 1140
(2% on 5400 +12% on 8600)
Current Asset = 5400 = 0.386
Total Assets 14000
Effect of Increase Ratio:
1) An ↑ in ratio of current assets to total assets will lead to
decline in profitability, because current asset are assumed to
be less profitable than fixed assets.
2) An ↑ in the ratio will be that the risk of insolvency would also
decline, because assuming no change in liabilities will
increase NWC.
Example
Liabilities Amount (lakhs) Assets Amount (lakhs)
Equity Capital 6000 Fixed Asset 8000
Long-term Debt 4800 Current Asset 6000
Current Liabilities 3200
14000 14000
NWC = 2800 (6000-3200) Profit = 1080
(2% on 6000 +12% on 8000)
Current Asset = 6000 = 0.429
Total Assets 14000
Effect of Decrease Ratio:
1) An ↓ in ratio of current assets to total assets will lead to
increase in profitability due to increase in fixed asset which
give higher returns.
2) An ↓ in the ratio will be that the risk of insolvency would also
increase, because current asset decline without reduction in
current liability.
Comparison
Particulars Initial Value After increase After decrease
(+) (-)
(1) (2) (3) (4)
Ratio of current asset to total asset 0.386 0.429 0.343
Profits on total assets Rs.1140 Rs.1080 Rs.1200
Net Working Capital Rs.2200 Rs.2800 Rs.1600
SECTION II
PLANNING OF WORKING
CAPITAL
Operating Cycle
A need for working capital in the form of
current assets to deal with the problem arising
out of the lack of immediate realisation of
cash against goods sold.
T h e c o n t i n u i n g fl o w f r o m c a s h t o s u p p l i e r s , t o
i n v e n t o r y, t o a c c o u n t s r e c e i v a b l e a n d b a c k
i n t o c a s h i s w h a t i s c a l l e d t h e O p e r a t i n g Cy c l e .
Phase 3 Receivables
Cash
Phase 2
Inventory
Phase 1
DETERMINANTS OF WORKING CAPITAL
Nature of Business
Production Cycle
Business Cycle
Production Policy
Credit Policy
Growth and Expansion
Availability of Raw Material
Profit Level
Operating Efficiency
Types of Working Capital
Permanent / Fixed
It is a minimum level of WC on a continuous & uninterrupted
basis.
Working Temporary
Capital Permanent
Time
Types of Working Capital
Temporary/Fluctuating
It is needed to meet seasonal as well as unforeseen
requirements.
Temporary
Working
Capital
Time Permanent Permanent
Working Capital Financing
Working Capital Financing
Trade credit
Bank credit
Commercial Papers
Factoring
Trade Credit
Cost of Trade credit
= (Discount/1-Discount) * {360/(credit period-
discount period)}
Forms of Bank credit
Cash credit/ overdraft
Loans
Purchase/discount bills
Letter of credit
Working capital term loans
Commercial Papers
EffectiveInterest yield
={(Face value-Net amount realised) * (360
/maturity period)}
Factoring
Functions of a factor.
Financing trade debts
Adminstrative of sales Ledger
Provision of collection facility
Credit control and credit restriction
Management of cash
Motives for holding cash
Transaction
Speculative
compensating
Objectives of Cash Management
Meeting payment schedule
Minimising funds commited to cash balances
Factors Determining cash needs
Synchronisation of cash flows
Short Costs
Excess cash balance costs
Procurement and management
Uncertainty and cash management
• Short Costs
▪ Transaction
▪ Borrowing costs
▪ Loss of cash discount
▪ Cost associated with deterioration of the credit rating
▪ Penalty costs
A- B- C- D- E- F- G- H- I-
Cash management: Basic Strategies
A-Mat. Ordered; B-Mat. Received; C- Payments
D- Cheque clearance ; E- Goods Sold ;
F- Customer mails Payments ; G- Payments ;
H- Cheques deposited ; I – Funds collected.
Minimum Operating Cash
Streching Accounts Payables
Efficient Inventory-Production Management
Speeding Collection of Accounts Receivable
Combined Cash Management Strategies
Cash Management Techniques /Processes
Speedy Cash Collections
Prompt payments by customers
Early Conversion of payments into cash
Concentration Banking
Objective of Receivable Management
Objective of Receivable Management
Trade Credit Management
Credit Time
Marketing Tool
Risk
Types of Cost:
Collection Cost
Capital Cost
Delinquency Cost
Default Cost
Benefits
Increase Sales
Anticipated Profit
Sales Expansion
Protection against Competition
On Ground :-
High Investment High Interest Rate High
Cost of Working Capital
Credit Policy
Benefit & Cost Trade off
Decision-
How much Time
How Much Credit
Dimension -
Credit Standard
Credit Analysis
Credit Standard
Types-
Tight
Liberal
It covers
Collection Cost
Average Collection Period
Cost of Investment in account receivable
Level of Bad debts
Level of Sales
Credit Analysis
Process Step-
Obtaining Credit Information
Internal
External
▪ Financial Statement
▪ Bank Reference
▪ Trade Reference
▪ Credit Bureau
Analysis of Credit Information
Quantitative
Qualitative
Credit Terms
Definition
Components
Credit Period
Cash Discount
Cash Discount Period
Collection Policy
Degree of Effort
Strict
Lenient
Type of Collection Effort
Letter
Telephone
Personal
Collection Agency
Legal Action
INVENTORY MANAGEMENT
TYPES OF INVENTORIES
WHO HOLDS INVENTORIES OF WHICH
TYPE?
WHY IT IS IMPORTANT ?
DECISIONS REGARDING INVENTORIES
RESPONSIBILITY OF FINANCIAL MANAGER
INVENTORY MANAGEMENT
PROCESS OR MOVEMENT INVENTORIES
AVERAGE OUTPUT X TIME REQIRED
ORGANISATION INVENTORIES
NEED FOR INVENTORIES
INVENTORY MANAGEMENT
PRICING OF RAW MATERIALS
FIFO , LIFO , WEIGHTED AVERAGE
VALUATION OF STOCK
FIXED MANUFACTURING OVERHEAD
COSTS
DIRECT COSTING – PERIOD COSTS
ABSORPTION COSTING – PRODUCT COSTS
INVENTORY MANAGEMENT
MONITORING AND CONTROL
ABC ANALYSIS
ANNUAL USAGE VALUE
CLASS NO. OF ITEMS %ITEMS %USAGE
VALUE
A 5 25 68.3
B 5 25 21.4
C 10 50 10.3
INVENTORY MANAGEMENT
JUST IN TIME INVENTORY CONTROL
SUPPLIER RELATION , GEOGRAPHICALLY
CONVENIENT , TRANSPORTATION
CRITERIA FOR JUDGING INVENTORY
SYSTEM
COMPREHENSIBILITY , ADAPTABILITY ,
TIMELINESS
INVENTORY MANAGEMENT
INVENTORY MANAGEMENT IN INDIA
HIGH INVENTORY , LENGTHY IMPORT
PROCEDURES , INFLATION , DELIVERY
SCHEDULES OF SUPPLIERS , QUALITY OF
MATERIALS
FSN ANALYSIS
FAST , SLOW , NON-MOVING ITEMS
INVENTORY MANAGEMENT
AREAS OF IMPROVEMENT
EFFECTIVE COMPUTERISATION
REVIEW OF CLASSIFICATIONS
IMPROVED CO-ORDINATION
DEVELOPMENT OF RELATIONSHIPS
DISPOSAL OF OBSOLETE / SURPLUS
INVENTORIES
