Download - Working Capital Management
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WORKING CAPITAL MANAGEMENT
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Topics To Be Covered Concept Definitions Types Factors Affecting WK Requirements Operating Cycle Approach Dangers of Excessive and Inadequate
WK Practical Exercises
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Nature of Working Capital Managing the current assets, current
liabilities and their inter-relationships Current Assets:
Assets that can be converted into cash within 1 year ( marketable securities, cash, inventory, accounts receivables)
Current Liabilities: Obligations to be paid within a year from
current assets or earnings (accounts payable, bills, Bank OD, O/s Expenses)
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Contd.. Goal of WK management: to manage
the current assets and liabilities so that a satisfactory level of WK is maintained
WHY? To avoid insolvency To avoid bankruptcy Efficient business operations
Right mix of current assets and liabliites
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“The interaction between current assets and liabilities is the main theme of WK management”
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Concepts and Definitions
Gross Working Capital Net Working Capital
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Gross Working Capital
The current assets which represent the proportion of investment that circulates from one form to another in ordinary course of business
TOTAL CURRENT ASSETS
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Net Working Capital
NWK = CA – CL
Tool to measure the liquidity (like CR, Acid Test Ratio) Non-synchronous cash flows CA > CL More ability to meet obligations
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Net Working Capital (contd.)
That portion of current assets which is financed with long term funds CL represents short term sources of
finance If CA > CL then the excess is financed
by long term sources
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TRADE OFF BETWEEN PROFITABILITY AND RISK
Profits measured by revenues and costs
Risk of technical insolvency Probability that a firm will be unable
to meet its obligation as they become due
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Effect of level of CA and CLon Profitability-Risk Trade Off
Assumptions: We are dealing with a manufacturing
concern CA are less profitable than fixed
assets Short term funds are less expensive
than long term funds
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PROFITS RISK of insolvency
CA + _ _
CA _ + +
CL + + +
CL - _ _
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NEED FOR WORKING CAPITAL
Goal of FM : Share-holder Wealth Maximization
Profits Sales Time lag involved need for
WK
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OPERATING CYCLE/ CASH CYCLE
The continuing flow from cash to suppliers, to inventory, to accounts receivable and back into cash
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Operating cycle
RECEIVABLESCASH
INVENTORY
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Cash Cycle
The length of time necessary to complete the cycle of events
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TYPES OF WK
Permanent / Fixed WK Temporary / Fluctuating / Variable
WK
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CHANGES IN WK
Changes in Sales and Operating Expenses
Policy Changes Technological Changes
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DETERMINANTS OF WK
General Nature of Business Production Cycle Business Cycle Production Policy Credit Policy Growth and Expansion
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Vagaries in availability of raw materials
Profit Level Level of taxes Dividend policy Depreciation policy
Price level changes Operating efficiency
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DANGERS OF EXCESSIVE WK Accumulation of inventory – waste,
theft, loss Defective credit policy and slack
collection period – bad debts Complacency and inefficiency Affects dividend policy – speculative
profits in inventory tends to liberal dividend policy- future?
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INADEQUATE WK - PROBLEMS Stagnates growth Difficult to achieve target profit levels
and operational plans Operating inefficiency Inefficient utilization of fixed assets Inability to avail attractive opportunities
Buy raw materials at low rates Sell on credit to a big buyer
Loss of reputation- inability to meet obligations- tight credit terms