WORKING CAPITAL MANAGEMENT THE GOAL To manage the firm’s current assets and liabilities in such a...
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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.
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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)
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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.
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W/CAPITAL MGMT.-NWC
TRADE –OFF BETWEEN PROFITABILITY & RISK.
LOWER NWC- HIGHER PROFIT-HIGHER RISK
HIGHER NWC- LOWER PROFIT-LOWER RISK
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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.
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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:-
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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.
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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.
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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)
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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)
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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)
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W/CAPITAL-FINANCING
• RECEIVABLES PERIOD
average accounts receivable
average credit Sales per day
(annual credit sales/365)
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W/CAPITAL-FINANCING
• ACCOUNTS PAYABLE PERIOD
average accounts payable
average credit purchase per day
(annual credit purchase / 365)
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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.
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W/CAPITAL-FINANCING
4) 1979- CHORE COMMITTEE-(50 LAC)1) WCTL
2) PEAK AND NON PEAK LEVELS
3) DRAWEE BILLS
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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.
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W/CAPIAL FINANCING
9) CASH FLOW METHOD--RESOURCE FINANCING VS.
RECOURSE FINANCING
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W/CAPITAL FINANCING
10) COMMERCIAL PAPERS
11) FCL / ECBs- BULLET PAYMENTS
THE PRESENT DAY PRACTICE ??
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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
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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.