working capital mgmt

Working Capital Management:

Working Capital Management Group 1 Lionel Ankitha Ramesh Taufique Priya Bharath Vineet

WC:

WC Current assets – Current liabilities L iquid assets Allows to avail of unexpected opportunities. Positive WC Increase in WC

WC Management:

WC Management Decisions relating to WC Management of CA and CL WCD Short term assets and liabilities GOAL

Why important?:

Why important?

Why need?:

Why need? Operating or cash cycle

Concepts:

Concepts Gross working capital Net working capital

TYPES OF WORKING CAPITAL :

TYPES OF WORKING CAPITAL WORKING CAPITAL BASIS OF CONCEPT BASIS OF TIME Gross Working Capital Net Working Capital Permanent / Fixed WC Temporary / Variable WC

Permanent Working Capital:

Permanent Working Capital The amount of current assets required to meet a firm’s long-term minimum needs. Permanent current assets TIME DOLLAR AMOUNT

Temporary Working Capital:

Temporary Working Capital The amount of current assets that varies with seasonal requirements. Permanent current assets TIME DOLLAR AMOUNT Temporary current assets

Slide 10:

A company’s operating cycle typically consists of three primary activities : Purchasing resources , Producing the product and Distributing (selling) the product. Operating cycle concept

Slide 11:

THE WORKING CAPITAL CYCLE (OPERATING CYCLE) Accounts Payable Cash Raw Materials W I P Finished Goods Value Addition Accounts Receivable SALES

Slide 12:

Inventory conversion period Avg. inventory = _________________ Cost of sales/365 Receivable conversion period Accounts receivable = ___________________ Annual credit sales/365 Payables deferral period Accounts payable + Salaries, etc = ___________________________ (Cost of sales + selling, general and admn. Expenses)/365

Problem on operating cycle:

Problem on operating cycle calculate the operating cycle of a company from following information. raw material consumption per annum 842000 Annual cost of production 1425000 Annual cost of sales 1530000 Annual sales 1950000 Average value of current assets held: raw materials 124000 work in progress 72000 finished goods 122000 debtors 260000 Credit period 30 days Year = 365 days

Resource flows for a manufacturing firm :

Resource flows for a manufacturing firm Fixed Assets Production Process Generates Inventory Via Sales Generator Accounts receivable Used in Accrued Direct Labour and materials Accrued Fixed Operating expenses Cash and Marketable Securities Suppliers Of Capital External Financing Return on Capital Collection process Used to purchase Used to purchase Used in Working Capital cycle

Objectives:

Objectives Optimizing and Reducing Always be in a position Manage Maintain proper balance

Components of WC:

Components of WC CA Cash & bank balances Temporary investments Shot-term advances Prepaid expenses Receivables Inventory of raw materials, stores and spares Inventory of work-in-progress Inventory of finished goods

Slide 17:

CL Creditors Outstanding expenses Short-term borrowings Advances received against sales Taxes and dividends payable Other liabilities maturing within a year

Factors determining WC:

Factors determining WC Nature of business Manufacturing cycle Production process Business cycle Seasonal variations Scale of operations Inventory policy Credit policy Accessibility to credit Business standing Growth of business Market conditions Supply situation Environment factors

Conservative Approach:

Conservative Approach Firm can reduce risks associated with short-term borrowing by using a larger proportion of long-term financing. TIME DOLLAR AMOUNT Long-term financing Fixed assets Current assets Short-term financing

Slide 20:

Firm increases risks associated with short-term borrowing by using a larger proportion of short-term financing. TIME DOLLAR AMOUNT Long-term financing Fixed assets Current assets Short-term financing Aggressive Approach

Matching approach:

Matching approach Long-term funds = fixed assets + total permanent assets Shot-term funds = total temporary current assets

Zero WC approach:

Zero WC approach Latest trend in working capital management Current assets = Current liabilities Excess investment in current asset is avoided

Slide 23:

Sources of working capital Long term sources Internal Tax provison Divedend provison External Bank over draft Cash credit Trade deposits Public deposits Bills discounting Short term loan Internal Retained profit Provison for depreciation External Share capital Long term loans Debantures Short term sources Trade credit Sundry creditors Bills payable Notes payable Spontaneous sources Negotiated sources Working capital financing sources http://www.youtube.com/watch?v=MI_DwjxuS1s&feature=related

PROFORMA - WORKING CAPTIAL ESTIMATES :

PROFORMA - WORKING CAPTIAL ESTIMATES 1. TRADING CONCERN STATEMENT OF WORKING CAPITAL REQUIREMENTS Amount (Rs.) Current Assets ( i ) Cash ---- (ii) Receivables ( For…..Month’s Sales)---- ---- (iii) Stocks ( For……Month’s Sales)----- ---- (iv)Advance Payments if any ---- Less : Current Liabilities ( i ) Creditors (For….. Month’s Purchases)- ---- (ii) Lag in payment of expenses -----_ WORKING CAPITAL ( CA – CL ) xxx Add : Provision / Margin for Contingencies ----- NET WORKING CAPITAL REQUIRED XXX

1. MANUFACTURING CONCERN :

1. MANUFACTURING CONCERN STATEMENT OF WORKING CAPITAL REQUIREMENTS Amount (Rs.) Current Assets ( i ) Stock of R M( for ….month’s consumption) ----- (ii)Work-in-progress (for…months) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads ----- (iii) Stock of Finished Goods ( for …month’s sales) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads ----- (iv) Sundry Debtors ( for …month’s sales) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads ----- (v) Payments in Advance (if any) ----- (iv) Balance of Cash for daily expenses ----- (vii)Any other item ----- Less : Current Liabilities ( i ) Creditors (For….. Month’s Purchases) ----- (ii) Lag in payment of expenses ----- (iii) Any other ----- WORKING CAPITAL ( CA – CL ) xxxx Add : Provision / Margin for Contingencies ----- NET WORKING CAPITAL REQUIRED XXX