Working Capital

Management
Management of Working Capital
Structure
• Understanding Working Capital Management
• Risk – Profitability Trade off
• Ratios related to working capital- Liquidity Ratios and Activity Ratios
• Cash conversion cycle
• Accounts receivable Management as a part of working capital
Management
• Cash Management as a part of working capital Management
• Inventory Management as a part of working capital Management
• Sources of Short term financing
Working Capital Management
Working capital (or short-term financial) management is the management of
current assets and current liabilities.
– Current assets include inventory, accounts receivable, marketable securities, and cash
– Current liabilities include notes payable, accruals, and accounts payable
– Firms are able to reduce financing costs or increase the funds available for expansion by
minimizing the amount of funds tied up in working capital
Estimation of Working capital Requirements
• Estimation of the working capital requirements is done by using the
cash conversion cycle approach
• The cash conversion cycle has three main components, as shown in
the following equation: (1) Inventory conversion period , (2) average
collection period, and (3) average payment period.
• CCC = ICP + ACP – APP ( WC= CA- CL)
• The objective is to minimize the period associated with the cycle –
How could that Happen??????- Discuss
Ratios Associated with WCM
• Liquidity Ratios- Current Ratio and Quick Ratio
• Turnover ratios- Working capital turnover, Inventory turnover, Debtors
turnover ratio and creditors turnover ratio
Risk – Profitability Trade off ( Effects of
changing ratios on profit and risk )
Accounts receivable Management
• Minimise the investment in current Assets ( reduce the average
collection period ) without losing sales
• Management of Accounts receivable involves looking at
• A) Credit Standards
• B) Credit Terms
• C) Credit Monitoring
Credit Standards
Assess the creditworthiness of the customer
and the decision as to whether to offer credit
or not ????
Impact of Relaxed and Tight credit standards
Credit Terms
• The terms on the basis of the sale is made
• Would basically involve two aspects : Cash discount and Credit Period
• Cash Discount is the percentage discount available on the price and
the credit period is the period within which the payment has to be
made
• Usually expressed as 5/ 10 net 30
Credit Monitoring
• Involves reviewing the receivables so as to ensure that the collections
are received as per credit terms
• An analysis of the average collection period and the aging schedule is
done
• An aging schedule as the name suggests categorises receivables as
per the age ( the period due from the date of origin )
• Speeding up collections minimises the blockage of funds in
receivables but at the same time collection costs go up
A comprehensive Numerical