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WORKING CAPITAL MANAGEMENT. THE GOAL To manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. The study of working capital management involves the study of inter-action between current assets & current liabilities.
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WORKING CAPITAL MANAGEMENT THE GOAL To manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. The study of working capital management involves the study of inter-action between current assets & current liabilities.
Working Capital Management-concepts. • Gross Working Capital means Total Current Assets. • Net working Capital means Current Assets less Current Liabilities. (NWC is the portion of w/c financed by long-term sources)
W/Capital Management • NWC is treated as a measure of liquidity- -Greater the NWC- greater the Solvency. . NWC has bearing on profitability and risk. -Greater the NWC- less risk-prone the firm is. -Lower the NWC-lower liquidity and higher risk.
W/CAPITAL MGMT.-NWC TRADE –OFF BETWEEN PROFITABILITY & RISK. LOWER NWC- HIGHER PROFIT-HIGHER RISK HIGHER NWC- LOWER PROFIT-LOWER RISK
W/CAPIAL-ESTIMATION • COLUMNAR METHOD- Elements of cost presented vertically Items of current assets & current liabilities Horizontally. . EQUIVALENT PRODUCTION UNITS- of different elements of cost.
W/CAPITAL FINANCING • BALANCE SHEET APPROACH • OPERATING CYCLE APPROACH:- REQUIRMENTS OF EACH ITEM OF WOKRING CAPITAL CALCULATED IN TERMS OF QUANTITY AND VALUED AS UNDER:-
W/CAPITAL FINANCING • RAW MATERIALS- at cost of raw materials procured. • W-I-P – at Cost of Production • Finished goods- Cost of Sales. • Receivables- Sales.
W/C-OPERATING CYCLE CASH 1 mth R.M. Tr.credit (1/2 mth) R CASH SALE ½ mth ½ mth F.GOODS W.I.P. W.I.P. ½ mth
W/CAPITAL FINANCING • INVENTORY HOLDING PERIOD(R.MATERIAL) average raw material average cost of materials consumed per day(o/stock +purchases – cl.stock / 365)
W/CAPITAL- FINANCING • INVENTORY HOLDING PERIOD( WIP) average WIP average cost of finished goods manufactured per day( O/WIP + material consumed + wages + mfg. Overheads –C/WIP / 365)
W/CAPITAL-FINANCING • INVENTORY HOLDING PERIOD ( FINISHED GOODS) average inventory of FG average cost of finished goods sold per day ( O/FG + cost of FG manufactured + admn. & selling exps. – C/FG / 365)
W/CAPITAL-FINANCING • RECEIVABLES PERIOD average accounts receivable average credit Sales per day (annual credit sales/365)
W/CAPITAL-FINANCING • ACCOUNTS PAYABLE PERIOD average accounts payable average credit purchase per day (annual credit purchase / 365)
W/CAPITAL -FINANCING • Pre-Nationalisation • 1968- Dahejia Committee • 1969- Tandon Committee-WCL > 10 lacs • Norms for holding of inventory/receivables • Methods of lending • Style of credit • Information system & follow up.
W/CAPITAL-FINANCING • 1979- CHORE COMMITTEE-(50 LAC) • WCTL • PEAK AND NON PEAK LEVELS • DRAWEE BILLS
W/CAPITAL FINANCING • 1990- CAS ABOLISHED- CMA • 1992- JILANI COMMITTEE • 1993-VAZ COMMITTEE-DEREGULATIONS-PRUDENTIAL NORMS • 1997-KANNAN COMMITTEE- • METHOD OF ASSESSMENT • LEVEL OF HOLDING • ONLY PRUDENTIAL NORMS.
W/CAPIAL FINANCING • CASH FLOW METHOD- -RESOURCE FINANCING VS. RECOURSE FINANCING
W/CAPITAL FINANCING • COMMERCIAL PAPERS • FCL / ECBs- BULLET PAYMENTS THE PRESENT DAY PRACTICE ??
WORKING CAPITAL REQUIREMENTS OTHER FACTORS DETERMINING WC: • Nature of business- cash flows • Corporate policy-growth/expansion • Seasonality of product • Dividend policy • Production policy • Manufacturing & process time
WORKING CAPITAL REQUIREMENTS g) Market policy- competition. h) Taxation policy- payment schedule i) Business cycles-boom & depression j) Miscellaneous factors:- • Terms of purchase/sale • Price levels. • Condition of supply • Faulty distribution channels • Import policy • Labour position etc.
