WORKING CAPITAL MANAGEMENT THE GOAL To manage the firm’s current assets and liabilities in such a...
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Transcript of WORKING CAPITAL MANAGEMENT THE GOAL To manage the firm’s current assets and liabilities in such a...
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
R.M.
F.GOODS
R CASHSALE
Tr.credit(1/2 mth) ½ mth
½ mth
½ mth
1 mth
W.I.P.W.I.P.
W/CAPITAL FINANCING
A. 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
1) Pre-Nationalisation
2) 1968- Dahejia Committee
3) 1969- Tandon Committee-WCL > 10 lacs1) Norms for holding of inventory/receivables
2) Methods of lending
3) Style of credit
4) Information system & follow up.
W/CAPITAL-FINANCING
4) 1979- CHORE COMMITTEE-(50 LAC)1) WCTL
2) PEAK AND NON PEAK LEVELS
3) DRAWEE BILLS
W/CAPITAL FINANCING
5) 1990- CAS ABOLISHED- CMA
6) 1992- JILANI COMMITTEE
7) 1993-VAZ COMMITTEE-DEREGULATIONS-PRUDENTIAL NORMS
8) 1997-KANNAN COMMITTEE-1) METHOD OF ASSESSMENT
2) LEVEL OF HOLDING
3) ONLY PRUDENTIAL NORMS.
W/CAPIAL FINANCING
9) CASH FLOW METHOD--RESOURCE FINANCING VS.
RECOURSE FINANCING
W/CAPITAL FINANCING
10) COMMERCIAL PAPERS
11) FCL / ECBs- BULLET PAYMENTS
THE PRESENT DAY PRACTICE ??
WORKING CAPITAL REQUIREMENTS
OTHER FACTORS DETERMINING WC:
a) Nature of business- cash flows
b) Corporate policy-growth/expansion
c) Seasonality of product
d) Dividend policy
e) Production policy
f) Manufacturing & process time
WORKING CAPITAL REQUIREMENTS
g) Market policy- competition.h) Taxation policy- payment schedulei) Business cycles-boom & depressionj) Miscellaneous factors:-
a) Terms of purchase/saleb) Price levels.c) Condition of supplyd) Faulty distribution channelse) Import policyf) Labour position etc.