Operations Management Short-Term Scheduling Operations Management Short-Term Scheduling.
Short Term Fin.
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Transcript of Short Term Fin.
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Introduction
Short term financial management is differing from thelong term financial management in terms of thetiming of cash.
Short term financial decisions typically involve cashflow within a year or within the operating cycle of thefirm.
The long term financial decisions like buying capitalequipments or issuing debentures involve cash flowover an extended period of time.
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Roles of a finance managerNegotiating favourable
credit termsArranging short term
finances
Controlling the cashmovement
Administeringaccounts receivables
Monitoring theinvestment in
inventories
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The working capital needs of afirm are influenced by numerousfactors:
1. Nature ofBusiness
2. Seasonalityof operations
3. Productionpolicy
4. Marketconditions
5. Conditionof supply
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Assets
Fixed assets
Current assets
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.Assets
Temporary current assets
Sales or required inventory build-up may be seasonal
Additional current assets are needed during the
peak time The level of current assets will decrease as sales occur
Permanent current assets Firms generally need to carry a minimum level of
current assets at all times
These assets are considered permanent because the
level is constant, not because the assets arent sold
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Current asset cycle
AccountsReceivable
Finished Goods
Cash
Work in process
Wages, salaries,factory overheads
Raw materials
Suppliers
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Company policies
1) Conservative Policy ( f lexible) Investment in current assets is high Huge balance of cash & marketable securities Larger inventories
Grants generous terms of credit
2) Restrictive Policy (aggressive) Investment in current assets is low
Low balance of cash & marketable securities Smaller inventories Stiff terms of credit
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Operating and cash cycle
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Short term finance management canbe divided into:
Inventory managementCash and liquidity management
Credit management
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Inventory Management
There are 3 type of inventories:- Raw materials Work in progress Finished goods
Inventories represent the 2nd largest asset category for manufacturing companies. The proportion of inventory to total assets generally varies between 15-30%.
Recent advancements in field of inventory management. Material requirement planning Just in Time Electronic data interchange and bar coding
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Cash and Liquiditymanagement
Cash the most liquid asset is of vital importance to thedaily operations of business firms.
Desired level 1-4% of assets, life blood of the business enterprise
Better cash levels can be achieved by speedingcollections and delaying disbursements.
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Investment of surplus fundsReady cash segment
Reserve for
company's cashaccount
Meant to augmentcash resources tomeet unanticipatedoperational needs
Must be highly liquid
Controllable cashsegment
Part of investment
which is meant forknowable outflowslike taxes, dividendetc
Investments must bematched in size and
maturity to knownfuture outflows
Free cash segment
Part of investment
which is neithermeant for unforeseencash requirementsnor to meet knownfuture outflows
Investment is done
only to generateincome
It is not concernedwith liquidity ormaturity
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Credit management
Trade credit management is divided into the followingbroad areas :
Credit policy Credit analysis
Credit period
Control of accounts receivables
Cash discount
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Room for improvement
Management of receivables must be accorded the importance itdeserves.
Credit policies need to be articulated in explicit terms and
revised periodically There should be better coordination between sales, production
and finance departments
Firms granting credit should examine the published statement ofprospective customer with great rigour, references must be
examined and necessary follow up should be taken A well defined collection program must be developed
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Working Capital Financing
Accruals
Trade credit
Working capital advance by commercial banks Regulation of bank finance
Inter corporate deposits
Short-term loans from financial institutions
Commercial paper
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Lupin Piramal
Current ratio 1.76 1.2
Acid test ratio 1.04 0.95
Debt-equity ratio 0.86 1.02
Debt to total asset 0.31 0.27
Interest coverage ratio 14.9 9.3
Receivable turnover ratio 5.32 6.88
Receivable turnover (in days) 68.8 53
Payable turnover ratio 3.36 3.84
Payable turnover (in days) 109 95
Inventory turnover ratio 3.27 6.88
Inventory turnover (in days) 111.6 53
Operating cycle(in days) 180 106
Cash cycle (in days) 71 11
Total asset turnover ratio 0.95 0.91
Gross profit margin 17.17 18.14
Pretax margin 16.05 10.5
Net profit margin 13.28 9.82
Rate of returns 12.6 8.2
Rate of equity 35.21 21.33
ROI 18.11 15.43
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Operating Cycle
0
20
40
60
80
100
120
140
160
180
lupin piramal
recievable turnover (in days)
inventory cycle (in days)
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Cash Cycle
0
20
40
60
80
100
120
140
160
180
200
Piramal healthcare Lupin
operating cycle (in days)
account payable period (in days)
Cash cycle
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Findings
Both the Companies have a healthy cash flow despitespending on acquisitions and capacity expansions duringthe year.
Many of the pharmaceuticals have started re-looking attheir working capital cycles and decided to reduce theirinventory levels.
Entry into new fields has influenced financial performanceof companies
Piramal Custom manufacturing business Lupin Lean marketing mechanism.
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Working capital(rate of increase)
Debt-equity ratio
CA out of total CA
and loans andadvances
Accounts receivable(in days)
Lupin
Increased by 20%
Decreased from65% to 62%
76.8%
69
Piramal
Increased by 15.5%
Increased from66% to 102%
54.5%
53
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