Professional Documents
Culture Documents
management
Introduction
Financial management
Scope / elements
Investment decision
Financing decision
Dividend decision
Investment decision
Investment
decision
Capital
budgeting
Working
capital
management
Working capital
management
The management of working capital is
Finance decisions
How should the firm manage its
cash?
To whom should the firm grant
credit?
How much inventory should the firm
keep?
What should be the firms current
debt?
Thus ..
Working Capital is a financial metric which
Used in
Production
Process
Generates
Accrued
Direct
Labour and
materials
Working
Capital
cycle
Inventory
Via Sales Generator
Accounts
receivable
Collection
process
Accrued Fixed
Operating
expenses
Used to
purchase
Cash and
Marketable
Securities
Used to
purchase
External Financing
Return on Capital
Suppliers
Of Capital
Fixed
Assets
Components of working
capital
The working capital cycle is made up of
Importance of working
capital
The goal of working capital management is to
Contd..
It is important we work out the right level of
1.
Contd
To Forecast the optimum working capital
feel that
Current assets should be considered as
working capital as the whole of it helps to earn
profits &
Management is concerned with the total
current assets as they constitute the total
funds available for operational purposes.
Contd..
Economists like Lincoln & Saliers argue that:
In the long run what matters is the surplus of
primary activities:
Purchasing resources
Producing the product
Distributing the product
Contd..
If the firm is to maintain liquidity and function
Permanent Working
Capital
This refers to that minimum amount of
Temporary Working
Capital
The amount of such working capital keeps on
On the basis
of concept
Gross working
capital
On the basis
of time
Net working
capital
Permanent or
fixed working
capital
Regular
working
capital
Reserve
working
capital
Temporary or
variable
working
capital
Seasonal
working
capital
Special
working
capital
(2)Scale of
Operations
There is a direct link between the working
3)Business Cycle
The need for the working capital is affected
(4)Seasonal Factors:
Some goods are demanded throughout the year while
(5)Production Cycle
Production cycle means the time involved in
(6)Credit Allowed:
Those enterprises which sell goods on cash
8)Operating Efficiency
Operating efficiency means efficiently completing the
10)Growth Prospects
Growth means the development of the scale
11)Level of
Competition:
High level of competition increases the need
(12)Inflation
Inflation means rise in prices. In such a
Working capital
investment
The size and nature of investment in current
Sales ($)
Policy A
It represents an aggressive approach.
Under this policy the company holds a
CurrentAssets
Assets
Current
(i)Cash
Cash
(i)
(ii)Receivables
Receivables((For..Months
For..MonthsSales)---Sales)---(ii)
(iii)Stocks
Stocks((ForMonths
ForMonthsSales)----Sales)----(iii)
(iv)AdvancePayments
Paymentsififany
any
(iv)Advance
Less::Current
CurrentLiabilities
Liabilities
Less
(i)Creditors
Creditors(For..
(For..Months
MonthsPurchases)Purchases)(i)
(ii)Lag
Lagininpayment
paymentof
ofexpenses
expenses
(ii)
WORKINGCAPITAL
CAPITAL((CA
CACL
CL))
xxx
WORKING
xxx
Add::Provision
Provision //Margin
Marginfor
forContingencies
Contingencies
Add
NETWORKING
WORKINGCAPITAL
CAPITALREQUIRED
REQUIRED
NET
-----------------------------------_
-----_
---------
XXX
XXX
1. MANUFACTURING CONCERN
-------------------------------------------------
--------XXX
COMPUTATION OF WORKING
CAPITAL
A number of methods are used to determine working
Contd..
+ yearly wages *50%* Avg holding period
Debtors
Cost of goods produced (ie RM+ Wages+