Financial Management

(PGDM: 2021-23)

Session-5: Working Capital Management

Sriranga Vishnu
Faculty (F&A Area)
 Management of Inventory
• Inventory- Raw Materials, WIP, Finished Goods, Supplies

• Goals of Inventory Management-

– To ensure uninterrupted supply of raw materials

– To maintain buffer stock of raw-materials for periods of short

supply and price rise

– To maintain adequate inventory for smooth sales

– To minimize the ordering and carrying costs

– To control investment in Inventory and keep it at optimum level

 Management of Inventory
• Inventory Management and Control Techniques:
– Red-line Method

– Two-bin Method

– Economic Order Quantity (EOQ)

– Just-in-time (JIT) Systems

– Outsourcing

– VED Analysis (Vital, Essential, Desirable)

– FNSD Analysis (Fast, Normal, Slow, Dead)

– ABC Analysis (Value of items)

 Management of Cash
• Cash – its needs

• Reasons for Holding Cash:-

– Business Transactions

– Compensation to banks for providing loans

– Precautionary motives- Cash flow fluctuations

– Speculative motives – for bargain purchases

 Management of Cash
• Advantages of holding cash :-
– Trade Discounts

– Good Credit Ratings – Quick ratio

– Benefitting from favorable business opportunities such as

special offers

– Meet contingencies

• Cash Budget: Cash inflows and outflows

 Management of Cash
• Cash Management Techniques:-

• Cash Flow Synchronization- Coinciding inflows with

outflows

• Speed-up Check clearing process

• Payment by electronic methods – wire transfers (RTGS)

• Acceleration of Receipt– Wire transfer; Auto debit

• Float – Difference between firm’s balance and Bank’s bal.

 Management of Receivables
• Monitoring Receivables Position – DSO

• Ageing Schedule – How long A/c Receivables are outstanding

• Default Rate

• Setting Prudent Credit Policy:-

– Credit Terms ( 2/10, net 30)

– Credit Period

– Credit Standards – Customers’ worthiness

– Collection Policy – regularity, responsibility, case-by-case approach

– Cash Discounts for prompt payments

 Management of Receivables
• Factoring:-
• Factoring is a contract between the firm and the factor

• It is method of converting a non-productive, inactive asset

(receivables) into a productive asset (cash) by selling the
receivables to a company that specializes in their collection
and administration
 Management of Receivables
• Factoring:-
• It involves ‘sale’ of book debts. The client receives advance
cash against expected debt collection
• It provides flexibility as regards credit facility to the client.
The client can receive cash immediately or periodically or on
the due date
• Factoring is a unique mechanism which not only provides
credit to the client but also undertakes the total management of
client’s book debts
 Working Capital Finance
• Short-term sources:-

• Trade Credit

• Accrued Expenses and Deferred Revenue

• Bank Borrowings

• Factoring of receivables

• Commercial Paper