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WORLD UNIVERSITYO F B A N G L A D E S H

orking Capital Management W

Group Members

Khondoker Amin UzzamanID: WUB01/11/33/1757

Maruf Ahmed ID: WUB01/11/33/1785

Tamanna AkterID: WUB01/11/33/1749

MD Jannatul FerdousID: WUB01/11/33/1765

Aklima Khanom JuiID: WUB01/11/31/1650

Sharna Yesmin

ID: WUB01/11/33/1760

Working capital management is one of the major issues of corporate finance. Thesuccess of any manufacturing company largely relies on the efficient managementof working capital. There are different theoretical developments and empiricalissues but there is no unified rule that can determine the optimal level of workingcapital. From the viewpoint of developing country like Bangladesh the role ofworking capital should be highly emphasized.

Introduction

The purpose of the study is to analyze the working capital management practicesof Square textile ltd. The main objectives of the study are as follows:

• To observe profitability and liquidity in case of working capital management.

• To observe the position of debt fund out of total fund.

• To know calculation, Method and technique applied on Working capitalmanagement

• To determine problems & provide suggestion which would help to improve thesituation.

Objectives of the Study

• The report is mainly based on secondary data that we have collected fromvarious sources. The major source of information was the Annual Report ofSome Company under study. The other sources include Internet. The details ofall the books and journals being used in this report are shown in thebibliography.

• The focus of this report is based on management of Working Capital. We havefocused on different organizational strategies that have been observed to findout the general working capital management practices.

Methodology of the Study

Scope of the Study

Concept of Working Capital Management

• Quantitative and qualitative

• Current assets

• Current liabilities

• Circulating capital

THEORETICAL OVERVIEW

Current Liabilities Current Assets

Bank Overdraft Cash and Bank Balance

Creditors Inventories: Raw-Materials

Work-in-progress

Finished Goods

Outstanding Expenses Spare Parts

Bills Payable Accounts Receivables

Short-term Loans Bills Receivables

Proposed Dividends Accrued Income

Provision for Taxation, etc. Prepaid Expenses

Short-term Investments

Structure of Working Capital The different elements or components of current assets and current liabilities constitute the structure of

working capital which can be illustrated in the shape of a chart as follows:

Structure of Current Assets and Current Liabilities

Circulation of Working Capital

Conceptual classification

• The above can be summarized as follows:

• Gross Working Capital = Total Current Assets

• Net Working Capital = Excess of Current Assets over Current Liabilities

• Working Capital Deficit = Excess of Current Liabilities over Current Assets.

Classification of Working Capital

Classification on the basis of financial reports

• Cash Working Capital

• Balance Sheet Working Capital

Classification on the Basis of Variability

• Temporary Working Capital

• Permanent Working Capital

Cont:

• Principles of Working Capital Management

• Principles of the risk variation

• Principle of equity pos

• Principle of cost of capital

• Principle of maturity of payment

Principles of Working Capital Management

• Nature of industry

• Demand of creditors

• Cash requirements

• General nature of business

• Time

• Volume of sales

• Terms of purchases and sales

• Inventory turnover

• Receivables turnover

Determinants of Working Capital

• Business cycle

• Variation in sales

• Production cycle

• Liquidity and profitability

• Profit planning and control

• Activities of the firm

Cont:

Working capital requirement depends upon the level of operation and thelength of operating cycle. Monitoring the duration of the operating cycle is animportant ingredient of working capital control. In this context, the followingpoints should borne in mind:

Control of Working Capital

Example – X Ltd. Expects its cost of goods sold for the forthcoming year to be Rs. 2 crore. The present operating cycle of the firm is 78 days. The firm plans to reduce its operating cycle to 73 days and desired cash balance is Rs. 5 lakh.

The expected working capital requirement would be,2 ,00,00,000 x 73 365 + 5,00,000 = Rs. 45,00,000

• The duration of the work-in-process depends on the length of manufacturingcycle, consistency in capacities at different stages, and efficient coordinationof various inputs.

• The duration of the finished goods depends on the pattern of production andsales. If production is fairly uniform throughout the year but sales are highlyseasonal or vice versa. The duration of finished goods tends to be long.

• The duration at the debtors stage depends on the credit period granted,discounts offered for prompt payment, and efficiency and rigour of collectionefforts.

Cont:

• It protects a business form the adverse effects of shrinkage in the values of currentassets.

• It is possible to pay all the current obligations promptly and to take advantage ofcash discounts.

• It ensures, to a greater extent, the maintenance of a company’s credit standing andprovides for such emergencies as strikes, floods, fires etc.

Adequacy of Working Capital

• It permits the carrying of inventories at a level that would enable abusiness to serve satisfactorily the needs of its customers.

• It enables a company to extend favorable credit terms to itscustomers.

• It enables a company to operate its business more efficientlybecause there is no delay in obtaining materials, etc., because ofcredit difficulties.

Cont:

The following points mention relating to various elements of working capital deserves:

• Inventory

• Raw material inventories

• Work-in-process inventory

• Finished goods inventory

• Cash and interest-bearing liquid assets

Source of Working Capital

Conventional generalizations relating to financing of working capital suggest that an amountequal to the basic minimum of current assets should be financed from long-term source andthat only seasonal needs of working capital should be financed from short-term sources.

Measurement

• Measuring

The most common measures for working capital are in table 3. Number of daysinventories means how many days it takes to turn over the value of entireinventory. Number of days accounts receivable and payable tell how long inaverage it takes to get payment and pay invoices. Current ratio is ratio betweenshort-term assets and liabilities. A value under one could mean liquidityproblems. Quick ratio is similar but takes account of the fact that it may take timeto convert inventory into cash. (Planware 2010)

Method and technique applied

Ratio Formula

Number of Days

Inventories

Inventories • 365

Cost of Sales

Number of Days

Accounts

Receivable

Accounts Receivable • 365

Sales

Number of Days

Accounts

Payable

Accounts Payable • 365

Purchases

Current Ratio Total Current Assets

Total Current Liabilities

Quick Ratio Total Current Assets – Inventory

Total Current Liabilities

Working Capital Ratio Inventory + Receivables – Payables

Sales

Net Liquid Balance Cash and Cash Equivalents + Short-term Investment –

Short-term

Debt + Commercial Paper Payable + Long-term Debt a

Year Term

Working Capital

Requirement

Accounts Receivable + Inventories –

Accounts Payable + Accrued Expenses +

Other Payable Hill et al. (2010) used simpler

formula:

Accounts Receivable + Inventories –Accounts Payable

Cont:Table 3. Key working capital ratios (Planware 2010, Deloof 2003, Chiou&Cheng 2006)

• When speaking about the working capital management strategies, it is necessary to note whichdefinition of working capital is used. If the narrower definition is used, working capitalmanagement means inventory management, receivables management and payablesmanagement. With broader net working capital definition current asset and current liability aremanaged.

Strategies

Figure 2. Net working capital levels, a) positiv e b) zero c) negative. (Meszek&Polweski

Different firms require different working capital management strategies. Net working capital can be positive, zero, or negative, as seen in figure 2. (Meszek&Polweski 2006)

According to Meszek&Polweski (2006), net working capital strategies can be divided to aggressive, moderate and conservative strategies. Liability

strategy (LS) is defined as

(1)

where SL=short-term liabilities (current liabilities) and TA=total assets.

Assets strategy (AS) is defined as

(2)

where CA=current assets.

Significance of Working Capital Management Funds are needed in every businessfor carrying on day-to-day operations. Working capital funds are regarded as thelife blood of a business firm. A firm can exist and survive without making profitbut cannot survive without working capital funds.

Evaluation, good side and bad side

Working capital is very essential for success of a business and, therefore, needs

efficient management and control. Each of the components of the working capital

needs proper management to optimize profit.

Importance of Working Capital Management

For smooth running an enterprise, adequate amount of working capital isvery essential. Efficiency in this area can help, to utilize fixed assets gainfully,to assure the firm’s long- term success and to achieve the overall goal ofmaximization of the shareholders, fund. Shortage or bad management ofcash may result in loss of cash discount and loss of reputation due to non-payment of obligation on due dates.

Cont:

The danger of excessive working capital are as follows:

• Heavy investment in fixed assets

• Reckless purchase of materials

• Speculative tendencies

• Liberal credit

• Carelessness

Cont:

Paucity of working capital is also bad and has the following dangers:

• Implementation of operating plans becomes difficult and a concern may notachieve its profit target.

• It is difficult to pay dividend due to lack of funds.

• Bargaining capacity is reduced in credit purchases and cash discount could notbe availed.

• An enterprise looses its reputation when it becomes difficult even to meet day-to- day commitments.

Paucity of working capital

• Growth may be stunted. It may become difficult for the enterprise to undertakeprofitable projects due to non-availability of working capital.

• Implementation of operating plans may become difficult and consequently theprofit goals may not be achieved. Cash crisis may emerge due to paucity ofworking funds. Optimum capacity utilization of fixed assets may not be achieveddue to non-availability of the working capital.

• The business may fail to honor its commitment in time, thereby adverselyaffecting its credibility. This situation may lead to business closure.

CONSEQUENCES OF UNDER ASSESSMENT OFWORKING CAPITAL

Excess of working capital may result in unnecessary accumulation ofinventories. It may lead to offer too liberal credit terms to buyers andvery poor recovery system and cash management. It may makemanagement complacent leading to its inefficiency. Over-investment inworking capital makes capital less productive and may reduce return oninvestment

CONSEQUENCES OF OVER ASSESSMENT OFWORKING CAPITAL

• Amount of articles about working capital management during the time frame(1990-2010) studied is not high. Originality of articles is generally low. Qualityalso can be considered being low (with few exceptions) since articles have notgot much citations and many of the articles are nearly replicates of earlierarticles. It seems that basic methods for working capital management havebeen invented earlier and articles in this time frame do not present anymassive breakthroughs.

Over three fourths of the 15 articles Assignment working capitalmanagement practices of sample firms or Assignment relation between workingcapital management and profitability.

DISCUSSION AND CONCLUSIONS

WORKING CAPITAL MANAGEMENT ACCORDING TO RECENT LITERATURE

Figure 17 . Working capital management according to recent literature. ( WC=working Capital

• This is a assignment about working capital management using bibliometricmethods. Assignment is limited to articles that deal with the whole workingcapital topic, not its single sub-area like inventory management. Time frame ofthe Assignment was chosen to be 2002–2014.

• Working capital is usually defined as current assets minus current liabilities;this definition is also called “net working capital”. Narrower but less useddefinition for working capital is inventory + accounts receivable – accountspayable which emphasizes operating efficiency of a firm. Research has shownthat working capital management has clear effect to profitability of a firm.

SUMMARY