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Presentation On Working Capital
Presentation On Working Capital
Working Capital
1
Introduction
2
These items are also referred to as
circulating capital
3
Definition
4
Funds thus, invested in current
assets keep revolving fast and are
constantly converted into cash and
this cash flow out again in exchange
for other current assets.
5
Working Capital is also known as
revolving or circulating capital or
short-term capital.
6
Concept of
working capital
7
Balance sheet concept
8
current assets > current liabilities =
net working capital/net current assets
9
The balance sheet definition of working
capital is an indication of the firm’s
‘LIQUID CASH’ in repaying its creditors.
10
…
In
fund flow analysis an increase in
working capital, represents
employment or application of funds
11
Operating cycle concept
Consists of three primary
activities:
Purchasing resources
Producing the product
Distributing (selling) the product
12
These activities create funds flows
that are both unsynchronized and
uncertain.
13
…
14
“Circulating capital means current assets of a
company that are changed in the ordinary
course of business from one form to another,
as for example, from cash to inventories,
inventories to receivables, receivable to cash”
……Genestenbreg
15
The firm has to maintain cash
balance to pay the bills as they come
due
16
And finally, the company invests in
accounts receivable to extend credit to
customers
17
TYPES OF WORKING CAPITAL
18
WORKING CAPITAL
BASIS OF BASIS OF
CONCEPT TIME
Seasonal Special
WC WC
Regular Reserve
WC WC 19
Basic formulae
20
Inventory conversion period
Avg. inventory
= ____________________
Cost of sales/365
21
Receivable conversion period
Accounts receivable
= ___________________
Annual credit sales/365
22
Payables deferral period
23
Cash conversion cycle
24
Importance of working capital
25
1.Risk and uncertainty involved in
managing the cash flows
26
Strategies to overcome the problem
Manage working capital investment or financing
by:
27
Arrange for availability of additional
short-term borrowing capacity
28
Working capital investment
Investment decision depends upon
type of products manufactured,
length of operating cycle,
the sales level,
inventory policies,
unexpected demand current assets
29
Three alternative working capital
investment policies
Policy C
Policy B
Policy A
t nerr u C
Sales ($)
30
Policy C represents conservative
approach
31
Difference between permanent &
temporary working capital
Time
33
Financing needs over time
Total Assets
$
Fluctuating Current Assets
Current Assets ($)
Fixed Assets
Time
34
Matching approach to asset financing
Total Assets
Short-term
Debt
$
Fluctuating Current Assets
Long-term
Permanent Current Assets Debt +
Equity
Capital
Fixed Assets
Time
35
Conservative approach to asset
financing
Total Assets
Short-term
Debt
$
Fluctuating Current Assets
Long-term
Permanent Current Assets Debt +
Equity
capital
Fixed Assets
Time
36
Aggressive approach to asset
financing
Total Assets
Short-term
Debt
$
Fluctuating Current Assets
Long-term
Permanent Current Assets Debt +
Equity
capital
Fixed Assets
Time
37
FACTORS DETERMINING
WORKING CAPITAL
1. Nature of the Industry
2. Demand of Industry
3. Cash requirements
4. Nature of the Business
38
…
5. Manufacturing time
6. Volume of Sales
8. Inventory Turnover
39
9. Business Turnover
40
13. Credit control
41
18. Operation efficiency
42
EXCESS OR INADEQUATE
WORKING CAPITAL
Everybusiness concern should have
adequate working capital to run its
business operations.
43
Inadequacy or shortage of working
capital is more dangerous from the
point of view of the firm
44
Disadvantages of Redundant or
Excess Working Capital
45
…
46
When there is excessive working
capital, Credit worthiness suffers
47
Disadvantages or Dangers of Inadequate or
Short Working Capital
48
Difficult for the firm to exploit favourable market
situations
49
Management of working capital
50
…
Working Capital Management
Policies of a firm have a great effect
on its profitability, liquidity and
structural health of the organization
51
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52
PRINCIPLES OF WORKING CAPITAL
MANAGEMENT / POLICY
53
PRINCIPLES OF
WORKING CAPITAL
MANAGEMENT
55
…
The length of the production cycle or
WIP, i.e., the time taken for
conversion of RM into FG
The length of the Sales Cycle during
which FG are to be kept waiting for
sales
56
Theamount of cash required to pay day-to-
day expenses of the business
57
The average period of credit to be
allowed by suppliers
58
…
59
PROFORMA - WORKING CAPTIAL
ESTIMATES
60
TRADING CONCERN
STATEMENTOF
STATEMENT OFWORKING
WORKINGCAPITAL
CAPITALREQUIREMENTS
REQUIREMENTS
Amt(Rs.)
Amt (Rs.)
Current Assets
Current Assets
(i) Cash
(i) Cash ----
----
(ii) Receivables
(ii) Receivables (( For…..Month’s
For…..Month’s Sales)
Sales) ----
----
(iii) Stocks
(iii) Stocks (( For……Month’s
For……Month’s Sales)
Sales) ----
----
iv)Advance Payments
((iv)Advance Payments ifif any
any ----
----
Less :: Current
Less Current Liabilities
Liabilities
61
(i) Creditors (For….. Month’s Purchases) -----
(ii) Lag in payment of expenses -----
64
STATEMENT OF WORKING CAPITAL
REQUIREMENTS
Amt (Rs.)
Current Assets
(i) Stock of R M(month’s consumption -----
(ii)Work-in-progress (for…months)
(a) Raw Materials -----
(b) Direct Labour -----
(c) Overheads -----
65
iii) Stock of Finished Goods ( for …month’s
sales)
(a) Raw Materials -----
(b) Direct Labour -----
(c) Overheads -----
(iv) Sundry Debtors ( for …month’s sales)
(a) Raw Materials -----
(b) Direct Labour -----
(c) Overheads -----
(v) Payments in Advance (if any) -----
(iv) Balance of Cash for daily expenses-----
66
(vii) Any other item
Less : Current Liabilities
(i) Creditors (For….. Month’s Purchases) -----
(ii) Lag in payment of expenses ----
(iii) Any other -----
WORKING CAPITAL ( CA – CL ) xxxx
Add : Provision / Margin for Contingencies---
67
Points to be remember
1.Profits should be ignored because
68
2. If nothing is mentioned in the problem,
take 100% of the value as WIP
69
70
Accounts Payable Value Addition
Raw WIP
Materials
Accounts SALES
Receivable
71
Time & Money Concepts in
Working Capital Cycle
72
TIME IS MONEY
73
As a consequence, you could reduce the cost
of bank interest or you'll have additional free
money available to support additional sales
growth or investment
74
If you Then ......
Collect receivables (debtors) You release cash from the cycle
faster
76
2. Cash vs Profit
77
The net result is that cash receipts often lag cash
payments and, whilst profits may be reported, the
business may experience a short-term cash shortfall
78
Calculating Cash Flows
Project cumulative positive net cash
flow over several periods and,
conversely, a cumulative negative
cash flow
79
Forecasting and tabulating all
significant cash inflows
80
CASH MANAGEMENT STRATEGIES
Cash Planning
81
Managing Cash flow
Estimates of receipts and payments of
cash
82
Methods of Accelerating Cash
Flow
Decentralized collections
83
Methods of Decelerating Cash
outflow
Paying on the last date
84
Centralization of Payments
85
Adjusting Payroll Funds (Reducing
frequency of payments)
Inter-bank transfers
86
MANAGEMENT OF RECEVABLES
87
Receivables contribute a significant
portion of current assets
88
Further, there is a risk of BAD DEBTS
89
OBJECTIVES
Is to take sound decision as regards to
investment in Debtors.
90
“ to promote sales and profits until that
point is reached where the return on
investment in further funding of
receivables is less than the cost of funds
raised to finance that additional credit”
91
Guidelines for Effective Receivables
Management
92
3. Make sure that these practices are clearly
understood by staff, suppliers and customers
93
7. Continuously review these limits
when you suspect tough times
are coming or if operating in a
volatile sector
95
MANAGEMENT OF INVENTORIES
• Managing inventory is a juggling act.
96
INVENTORIES INCLUDE
RAW MATERIALS,
WIP
FINISHED GOODS
97
FACTORS INFLUENCING
INVENTORY MANAGEMENT
Lead Time
Cost of Holding Inventory
Material Costs
Ordering Costs
Cost of Under stocking
Cost of Overstocking
98
Stock Levels
Reorder Level
Maximum Level
Minimum Level
Safety Level / Danger Level
Variety Reduction
Materials Planning
99
Service Levels
Quantity Discounts
100
Inventory
Management
Techniques
101
INVENTORY MANAGEMENT
TECHNIQUES
102
The first question relates to
ECONOMIC ORDER
QUANTITY
103
ECONOMIC ORDER QUANTITY
[ EOQ ]
104
There are two types of costs
involved in this model
ordering costs
carrying costs
105
•The EOQ is that level of inventory
which MINIMIZES the total of
ordering and carrying costs
106
ORDERING COSTS CARRYING COSTS
Requisitioning Warehousing
107
Transportation Clerical Staff
108
Quantity Discounts & EOQ
109
When quantity discounts are
available then price per unit is
influenced by the order
quantity
110
To determine the optimum lot
size with price discounts,
the procedure adopted
111
Determine the normal EOQ
assuming no discount. Call it Q*
112
3. If Q* < minimum order size required
for quantity discount compute the
change in profit as a result of
increasing Q* to P
113
SELECTIVE CONTROL OF
INVENTORY
Different classification methods
114
Classification Basis
ABC Value of items
[Always Better consumed
Control ]
SDE Procurement
[ Scarce, Difficult, Easy Difficulties
]
117
•Know the stock turn for all major
items of inventory
118
Sell off outdated or slow moving
merchandise - it gets more difficult to sell
the longer you keep it
119
MANAGEMENT OF ACCOUNTS
PAYABLE
122
Current Ratio Current Assets
Current Liabilities
123
THANK YOU..!!
124