Demo presentation

18
Working Capital Management By: Prof. Saptarshi Mukherjee

Transcript of Demo presentation

Page 1: Demo presentation

Working Capital Management

By:Prof. Saptarshi Mukherjee

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Financial Management

Long Term Financing-Capital Budgeting -Dividend Policy-Capital Structure

Short Term Financing-Current Assets-Current Liabilities

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Current Assets:

- Inventories (Raw Material/Work In Process/Finished Goods)

- Cash & Bank Balance - a/c Receivables (Trade Debtors)

- Loans & Advances Current Liabilities:

- Short term borrowings from banks

- a/c Payables (Sundry Creditors) -Trade Advances -Outstanding expenses

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Gross Working Capital = Sum of all current Assets

Net Working Capital =Current Assets – Current Liabilities

Net working capital can be either + or -

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Importance of management of WC

How much to invest in CA (more or less)

&

How should one finance CA (Sources & Liquidity)

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Characteristics/Nature of CA- Short life Span- Swift transformation in to other assets forms

Raw Materials

WIP

Finished Goods

a/c Receivables

Cash

Wages/Salaries/OH

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PURCHASE COLLECTIONCr.SALE

Inventory Conversion Period (ICP)

(RMCP+WIPCP+FGCP)

Receivable Conversion Period (RCP)

Gross Operating Cycle

Creditor Deferral Period (CDP)

Net Operating Cycle (NOC)

Operating Cycle:

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Factors/determinants of Working Capital Requirements

-Nature of business

-Market & Demand conditions

-Technology & manufacturing policy

-Credit Policy for Debtors

-Availability of credit from supplier

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1. From the following data, compute the duration of the operating cycle for each year & comment on the increase/decrease

Particulars Year 1 Year 2Stocks Raw Materials 20,000 27,000 WIP 14,000 18,000 FG 21,000 24,000Purchase of RM 96,000 1,35,000Cost of goods sold 1,40,000 1,80,000Sales 1,60,000 2,00,000Debtors 32,000 50,000Creditors 16,000 18,000

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BANK FINANCING FOR WC:

1.Overdrafts (OD)/Cash Credit

2.Letter of credit

3.Loans

1.OVERDRAFTS (OD)

-Borrower is allowed to withdraw funds in excess of the balance in his current a/c up to certain limit specified by bank

- Amount is repaid partially or fully as when he desires.

- Interest is charged only on running balance or not on limit

sanctioned.

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2. LETTER OF CREDIT

- It is an indirect form of financing compared to previous ones

- Risk is owed by the bank. It honors the obligation made by its customer, if he fails do so.

- Bank opens a LOC in favor of its customer for some specific purchase.

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3.LOANS- They are fixed amounts given against security - Interest is charged on entire amount irrespective of how

much he borrows - Loans are payable in periodic installments or on

demand.

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Sources of WC financing:- Commercial Banks- Accruals - Trade Credit- Public deposits - Inter corporate deposits- Factoring- Commercial Papers- Rights debentures for WC- Short term loans from financial institutions

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Accruals:-Wages are paid on a monthly, fortnightly or monthly basis& tax is payable quarterly, half yearly or annually -Accruals are those which firm owes to its employees & to govt.

Trade Credit:-It is important source of WC finance, presenting 25%-50% of short-term financing - It is credit extended by the supplier of goods/services.

Accruals & Trade Credit are termed as spontaneous sources of finance.

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Public deposits - They are unsecured deposits from public-No security is offered against public deposits

Inter corporate Deposits- Deposits made by one company with another company, normally for 6 months

Short term loans from financial institutions-Loans are given for a period of 1 year & can be renewed for 2 consecutive years, provided the original eligibility criteria are satisfied.- LIC,GICI & UTI give to manufacturing firms. -Totally unsecured

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Commercial Papers- Generally large firms with considerable financial strength are able to issue CP.-CP is either placed with investor or sold through dealers-Maturity period- 15 to 365 days-Sold at a discount from its face value & redeemed at its face value.

Rights debentures for WC-Public limited companies can issue “rights” debenture to their shareholders- It follows certain guidelines

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Factoring

Client

(Seller)

Client

(Factor)

Client

(Buyer)

PO

Pays balance amount

Repays up to 80%

Sends invoice copy

Fixes customer limit

Follow up

Pays

Deliver goods & invoice with notice to

pay the factor

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