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Management of current assets
A measure of both a company's efficiency and its short-term financial health.
WC is the amount of funds necessary to cover the cost of operating the enterprise.
Understanding Working Capital Management and Financing
Meaning of Working Capital
Working capital is a financial metric which represents operating liquidity (how much in liquid assets a company has available to build its business). Gross Working Capital is firm’s investment in Current Assets. Net Working Capital = Current Assets − Current Liabilities Net working capital is the portion of current assets financed with long term funds. POSITIVE working capital The management of working capital involves managing inventories, accounts receivable and payable and cash; i.e. OPERATING CYCLE
Current assets are assets can be converted into cash within a short period (normally within an accounting year) Cash + Bank balance + Debtors + Bills Receivable + Short Term Investment + Inventory + Prepaid Expenses + Accrued Incomes
accrued or outstanding expenses. to be paid in the ordinary course of business. within a year. advances. Sundry creditors. short term loans. bank overdraft. provision for taxation. at their inception. accounts payable. dividend payoffs.Current Liabilities Current Liabilities are those which are intended. Bills Payable. 5 .
.Types Gross working Capital Net – normally referred to as WC Financial concept / goingconcern concept Accounting concept Useful in determining the ROR 6 Qualitative concept – indicates margin of protection available for short-term creditors.
Exercise and video 7 .
TATA MOTORS 2010 details 9 .
13 1. Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs) Mar '07 Mar '08 Mar '09 Mar '10 410.219.75 95.629.238.63 9.776.00 410.651.676.513.949.260.242.47 2.86 165.07 4.056.671.929.63 25.87 2.69 107.51 234.38 0.645.254.036.741.04 180.909.00 0.04 138.00 0.05 143.44 25.41 25.77 14.660.150.528.651.87 2.092.93 15.811.49 12.92 132.33 244.207.79 116.488.334.710.622.132.821.30 132.16 2.851.216.54 49.86 7.46 2.00 410.00 0.61 8.00 410.095.57 11.206.37 52.480.620.510.87 136.75 79.528.46 4.204.00 410.83 10 .55 13.961.56 7.757.741.425.056.030.168.65 193.00 0.Balance Sheet of Canara Bank Mar '06 Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks.381.00 0.860.132.91 6.33 4.35 2.61 12.79 10.060.68 7.517.82 1.00 0.24 10.83 202.00 0.072.74 4.69 219.80 264.500.60 4.440.00 8.892.505.821.701.17 4.09 47.02 12.916.00 0.86 2.23 142.04 1.25 13.80 156.11 7.00 410.589.337.718.19 13.57 57.46 1.955.35 2.062.627.440.00 410.70 98.87 305.861.00 410.00 410.914.438.69 219.859.00 0.00 410.278.95 1.933.364.00 2.99 3.684.86 165.225.79 15.974.39 4.56 116.11 113.12 243.195.00 0.53 2.961.829.98 10.25 6.63 36.00 6.18 45.574.38 2.95 2.00 0.909.40 169.885.26 3.719.00 9.37 1.353.73 21.00 0.977.23 7.90 69.03 180.39 110.00 0.608.645.00 0.19 197.09 7.994.47 171.80 264.42 186.45 154.803.61 1.299.129.99 688.
Types On the basis of Concept On the basis of Time Gross Working Capital Net Working Capital Permanent or Fixed Temporary or Variable Regular Reserve Seasonal Special 11 .
Understanding Working Capital Management and Financing Permanent and Temporary WC Permanent WC . Temporary or Fluctuating Working Capital Permanent 12 TIME . Temporary WC – to support changing production or sales activities.Minimum level of current assets required by the firm always.
Advantages of Adequate Working Capital Write 5 points 13 .
wages and other day-to-day commitments Exploitation of favorable market conditions Ability to face crisis Quick and regular return on investments High morale 14 .Advantages of Adequate Working Capital Solvency of the business Goodwill Easy Loans Cash Discounts Regular supply of raw materials Regular payment of salaries.
return. 15 . and share price. Excessive Inadequate Idle inventory Poor credit policy – Bad debts Higher speculative and NOT real profits Stagnates growth Ineffective use of fixed assets Tighter credit terms Working capital management affects the company’s risk.Understanding Working Capital Management and Financing Balanced WC Position Both excessive and inadequate levels are dangerous.
Determinants of Working Capital Write 5 points 16 .
Determinants of Working Capital Nature of business Sales and demand Conditions Credit Policy Availability of Credit Operating Efficiency Price level changes Scale of operations Production policy Seasonal Variations Length of WC cycle Business Cycle 17 .
Principles of Working Capital Management Principle of Risk Variation Principle of Maturity of payments Principle of Cost of Capital Principle of Equity position 18 .
Principle of Risk Variation Larger investment in Current Assets with less dependence on short-term borrowings increases liquidity. reduces risk TRADE OFF has to be made. Cost of Assets 19 Sales .
Next Class…. Chore.) 20 . Operating cycle Cash cycle Levels of working capital investment Planning of working capital investment – – – introduction need computation of working capital W. Marathe committee reports. & banking policy (Tandon.C.
Operating cycles TASK Draw operating cycle of RADIO station ADVERTISING Co Insurance Co. 21 .
DANISH REZA MANUFACTURING CONCERN 22 .
Understanding Working Capital Management and Financing Operating Cycle 1. Manufacture of the product 3. Acquisition of resources 2. Sale of the product Gross Operating Cycle Oh ! That’s why we need working capital Inventory Conversion Period RMCP + WIPCP + FGCP Debtors Conversion Period Credit Sale Payables Purchases Payment Net Operating cycle Collection 23 .
Gross Operating Cycle GOC = ICP + DCP Inventory Conversion period – – – RMCP WIPCP FGCP RMCP = RM inventory x 360 RM Consumption 24 .
Gross Operating Cycle WIP period = WIP Inventory x 360 Cost of production FGCP = FG Inventory x 360 Cost of Goods sold 25 .
Gross Operating Cycle Debtors Conversion period Debtors x 360 Credit Sales Creditors deferral period Creditors x 360 Credit purchases 26 .
CDP Gross Operating Cycle Inventory Conversion Period RMCP + WIPCP + FGCP Debtors Conversion Period Credit Sale Payables Purchases Payment Net Operating cycle Collection 27 .Looking back Cash Conversion Cycle or NOC = GOC .
Question from the book…. 28 .
Understanding Working Capital Management and Financing Hedging (or Maturity Matching) Approach A method of financing where each asset would be offset with a financing instrument of the same approximate maturity Short-term financing Assets Long-term financing Fixed assets 29 TIME .
Understanding Working Capital Management and Financing Conservative Approach Firm can reduce risks associated with short-term borrowing by using a larger proportion of long-term financing. Short-term financing Assets Long-term financing Fixed assets 30 TIME .
Issues in WC Management Time Investment Critically Growth 31 .
Liquidity Vs Profitability Risk – Return Trade Off Working Capital Policy Sales EBIT Current Asset Fixed Asset Conservative 1500000 150000 500000 500000 Moderate 1500000 150000 400000 500000 Aggressive 1500000 150000 300000 500000 Total Asset 1000000 900000 800000 32 Calculate Return on Total Asset CA/FA ratio .
67% 0.75% 0.8 18.6 33 .Solution Conservative Sales EBIT CA 1500000 150000 500000 Moderate 1500000 150000 400000 Aggressive 1500000 150000 300000 FA TA 500000 1000000 500000 900000 500000 800000 Return on TA CA/FA 15% 1 16.
Working Capital Levels Level of Current Asset Current Asset to Fixed Asset Ratio = CA/FA Higher CA/FA ratio indicates – – Conservative Policy Average Policy Aggressive Policy High liquidity Lower risk Profitability and Solvency (Risk.return trade off) Current Assets Fixed Assets Output 34 .
Cost Trade-off Cost of Liquidity Cost of Illiquidity Total Cost Cost of liquidity Minimum Cost Cost of illiquidity 35 Optimum level of Current Asset .
Estimating WC needs Current Assets holding period Ratio of Sales Ratio of Fixed Investment 36 .
TANDON Committee Report (July 1974) CHORE Committee Report (March 1979) MARATHE Committee Report (1982) 37 .
short term loans from FIs.C.. public deposits. W. advance by commercial banks. commercial papers factoring 38 .C. right debentures for W. ICDs. Regulation of bank finance.Next Class Financing and control of working capital Sources of finance – – – – – – – – – – Accruals Trade credit.
39 . Flexibility and Informality.Financing Working Capital Trade Credit – deferral of payment – – Cash discount Easy availability.
Bank Credit Overdraft or Cash credit Bill Discounting Term Loan Letter of Credit Hypothecation – against movable property (inventories) without the transfer of ownership or possession Pledge – transfer of physical possession Lien Mortgage – Secured and unsecured lending 40 . Flexibility and Informality.Understanding Working Capital Management and Financing Financing Working Capital Trade Credit – deferral of payment – Cash discount – Easy availability.
41 .) Commercial Papers – Unsecured money market instrument with fixed maturity of 15 to a year – Issued by large corporations with good credit ratings – Sold at a discount with a promise to pay the face value at maturity. Factoring – Sale of receivables at a discount to a ‘factor” to obtain funds.Understanding Working Capital Management and Financing Financing Working Capital (Cont.
Meaning of Working Capital Operating Cycle Permanent and Temporary working Capital Financing mix Financing alternatives 42 .Understanding Working Capital Management and Financing Looking Back..
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