wc & cash mgmt

7/28/2019 Wc & Cash Mgmt

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TOPIC: WORKING CAPITAL MANAGEMENT &MANAGEMENT OF CASH

SUBMITTED TOMRS SIJI ANSEL

PRESENTED BYANAND VISHNU. B NAIR


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INTRODUCTION

The capital requirement of a business can be dividedinto two main categories .

they are: a) fixed capital management

b) working capital management


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MEANING OF WORKING CAPITAL

The term working capital is commonly used for thecapital required for the day to day working in abusiness concern, such as purchasing raw material, formeeting daily expenditure on salaries, wages, rents,

advertising etc.


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DEFINITION OF WORKING CAPITAL

MANAGEMENT The sum of current assets is the working capital of the

business.- JS MILL

Any acquisition of the funds which increases thecurrent assets increases working capital, for they arethe one and the same.- BONNEVILLE


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NEED FOR WORKING CAPITAL There is always a time gap between sale of goods and

receipt of cash, especially in the case of credit sales.The firm may not have funds to manage the day to dayactivities till the cash is collected from the debtors. Tomanage this cash shortage period the firm maintainsthe working capital.

Thus working capital is required because of the timegap between the sales and actual realization of cash.This time gap is technically termed as OPERATINGCYCLE OF THE BUSINESS.


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OPERATING CYCLE OF A

MANUFACTURING CONCERN Operating cycle

CASH

RAWMATERIALS

ACCOUNTSRECEIVABLES

FINISHEDGOODS

WORK INPROGRESS


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A) ON THE BASIS OF CONCEPT

1) gross working capital

2) net working capital

B) ON THE BASIS OF PERIODICITY OF REQUIREMENTS

1) fixed or permanent working capital

2) temporary working capital


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ON THE BASIS OF CONCEPTA) GROSS WORKING CAPITAL

it refers to the investment in the total current assets.that is total of the current assets is the gross working

capital.B) NET WORKING CAPITAL(NWC)

NWC= current asset current liabilities

defined as portion of the current assets financed bythe long term funds


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ON THE BASIS OF PERIODICITY OF

REQUIREMENTSA) FIXED OR PERMANENT WORKING CAPITAL

It represents that part of the capital, which ispermanently locked up in the current assets to carry out

the business smoothly.OR

the minimum amount of investment in all current assetswhich is required at all times to carry out minimum levelof business activities.

Ex: minimum stock of raw materials, work in progress,finished goods, loose tools etc.


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B) TEMPORARY WORKING CAPITAL

This is also called variable working capital. Variableworking capital changes with increase or decrease in thevolume of business. In other words it represents theadditional current assets required at different times duringthe operating year.

for example, extra inventory has to be maintained duringpeek sales periods. On the other hand, investment ininventories, work in progress, receivables, etc will be lessduring the depression period.


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WORKING CAPITAL MANAGEMENT According to Smith KV- working capital management is

concerned with the problems that arise on attempting tomanage the current assets, the current liabilities and theinterrelationship that exist between them.

The basic objective of WC management is to manage thefirms current assets and current liabilities in such a way thata satisfactory level of WC is maintained. that is, the NWCshould neither be inadequate nor excessive. More over the

different components of WC are to be properly balanced. If the firms investment in various components of WC are not

properly balanced, that is, if the investment is notproportionate, even if the firm enjoys a high liquidity ratiothe firms liquidity position will be weak.


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DETERMINANTS OF WORKING

CAPITAL Nature of business Size of business unit Seasonal variations

Time consumed inmanufacturing Volume of sales Terms of purchase and

sales

Inventory turnover Receivables turnover Business cycle

Price level changes Growth and expansion of

business

Vagaries in the availabilityof raw materials Profit level Level of taxes Dividend policy

Depreciation policy Operation efficiency Labour intensive Vs capital

intensive industries


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Nature of business The amount of working capital is basically related to

the nature and volume of the business. In concernswhere to be used in the manufacture of a product is

very large in proportion to its total cost ofmanufacture, the requirements of working capital willbe very large. The concerns employing large amount offixed assets, like the public utility concerns will requireonly small amount of the working capital where as adepartmental store will require heavy investment inthe inventory and receivables, which is an increase inthe working capital of the concern.


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Size of the organization The bigger the size higher will be the requirement of

the working capital and vice versa. This is becauselarger organizations are required to carry heavieramounts of inventory and the expenditure for carryingout the day to day affairs require large funds.


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Seasonal variations In the case of concerns like sugar mill, cotton product

manufacturers, oil mills etc. have to carry heavyamount of working capital during the seasons whenthe raw materials for the product are available. thusthe seasonal concerns require large amounts ofworking capital during the seasons.


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Time consumed in the

manufacturing The longer the period of the manufacture, higher will

be the requirement of the working capital.ex: construction companies.


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Volume of sales This is the most important factor affecting the size and

components of the working capital. A firm maintainscurrent assets because they are needed to support theoperational activity, which result in the sales. Thevolume of sales and size of the working capital aredirectly related to each other. as the sales increasethere is an increase in the investment in the working

capital, because the cost of operations, investment inthe inventories and receivables goes up.


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Terms of purchase and sales If the credit terms are more liberal, then the

requirement of working capital will be less. That is ifthe credit terms are liberal the firm will be able to

invest more in the inventory with less cash. Also, thefirm will get more time for repayment to the suppliersof goods. Thus if there is liberal credit tems by thesupplier, then the requirement of the working capital

will be less. Again, if the firm is enjoying good creditrelationship with the bank, the requirement of theworking capital will be less.


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Inventory turnover If the inventory turnover is high then the requirement

of the working capital will be less. By applying betterinventory control, the firm will be able to reduce itsinvestment in the stock.


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Receivables turnover Faster the rate of conversion of the receivables into

cash, lesser will be the requirement of the WC. Aprompt collection of the receivables will result in thelow working capital requirement.


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Business cycle During the boom period of the business will be piling

up the stock so as to sell more and get the maximumprofit. Therefore the requirement of WC will be high.

The expansion of the business may result in theinflation, which again will increase the burden ofmaintaining more amount of WC. During depression,there is a reduction in the volume of business onaccount of loss of demand. Because of the in theinventories and the receivables, which usuallyaccompanies decline in sales, the firm may experienceshortage of WC.


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Price level changes During the periods of rising price levels, the amount of

WC to be maintained will be higher, because tomaintain same level of the current assets the firm will

be required to invest more. But, if the firm also rises itsprice level of its products, it will not feel severeworking capital problem.


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Growth and expansion of the

business The growing concerns require more amount of WC

than others, which have already reached a saturationstage. Towards the expansion programs and to acquire

more amount of stock ot will have to maintain higheramounts of the WC.


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Vagaries in the availability of raw

materials The availability and non availability of the raw

materials can also affect the requirement of WC. Thereare some materials, which cannot be procured easily.

To maintain smooth production, therefore, the firmmay compelled to purchase and stock them in hugequantities, much more than what is actually needed inthe particular period of time.


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Profit level Firms that are able to generate higher amounts of

profit will require only lesser amounts of WC. This isbecause, higher the profit the margin the margin

would improve the prospects of generating moreinternal funds thereby there by reducing thedependence on external sources for WC. The net profitis considered as a source of WC as long as they areearned in cash. But availability of profit for theworking capital purpose would depend on the profitappropriations for taxation, dividend, reserves anddepreciation.


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Level of taxes Tax is a short term liability payable in cash. Adequate

amount should therefore be set apart as a provision fortax payment. This is an important aspect of WC

planning.


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Dividend policy Dividend is also an appropriation from the profit. The

payment of dividend reduces the cash level and thus itadversely affects WC. Therefore when the firm is not in

a position to drain away its cash resources in the formof dividend, bonus shares are issued. Thus dividendpolicy is significant element in determining the levelof WC in an organization.


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Depreciation policy Depreciation doesnt lead to an out flow of cash. But it is an

appropriation from the profits. Therefore it indirectlyaffects the WC of an organization. When there is a higherrate of depreciation to be provided, it reduces profit and

therefore the tax liability is also reduced. When the profiton account, the level of dividend also diminishes. Thushigher depreciation reduces cash out go and thus improvesthe WC position.Also, if the capital expenditure is lesser than the amount

provided by way of depreciation, then the WC position willimprove. But if capital expenditure is greater thandepreciation then the firm must borrow from outsideresources which will adversely affects WC.


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Operating efficiency The management can improve the WC position

through operating efficiency. By efficient utilization ofthe resources, the management can reduce the wastage

and ensure full utilization of the capacity of the plant.Operating efficiency accelerates the process ofconversion of the raw materials- finished goods- cash.It thus reduces the pressure on the WC by the

generation of internal funds.


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Labour intensive Vs capital

intensive industries. In labour intensive industries, larger WC is required

because of the regular payment of wages and moretime taken in manufacturing process. On the other

hand in the case of capital intensive industries requirelesser amount of WC because of the heavy investmentin fixed assets and shorter manufacturing periods.


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MANAGEMENT OF CASH


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INTRODUCTION Cash is the most liquid asset that a business owns. It

includes money and instruments such as cheques,money orders, bank drafts all other assets, which can

be converted into cash in no time. Cash is the mostimportant factor in financial management. It is animportant current asset for the operations of thebusiness. Every activity in an organization revolves

around cash. But the supply of cash is scarce and it cannot be raised as one likes it. Therefore cashmanagement is important.


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SIGNIFICANCE OF CASH

MANAGEMENT Cash management is one of the key areas of WC

management. Apart from being the most liquid asset,cash is the most common denominator to which all

current assets can be converted into. The significanceof cash management can be understood from the factthat significant current assets like inventory andreceivables will eventually be converted into cash. The

difficulty in the estimation of cash f lows and lack ofconfidence between the cash inflows and cashoutflows adds to the significance of cash management.


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MEANING OF CASH MANAGEMENT Cash management is to maintain a sound cash

position to keep the firm sufficiently liquid and to usethe excessive cash, if any in a productive manner.


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CASH PLANNING Cash planning is the process of predicting cash inflows and

out flows of the firm over the forthcoming period so as todetermine surplus or shortage of cash. cash planninginvolves cash controls as well. If there is excess cash inflow,

the firm can invest it more profitably and incase of theshortage in the cash inflows , the firm can make adequateprovision for the same. Thus, with the help of cashplanning, the firm can anticipate imbalances in the cashinflow and outflow and thereby can reduce the chances of

the idle cash balance or shortfall in the cash. Cash planning may be done on daily, weekly or monthly

basis. The period and frequency of cash planning dependson the size and nature of the firm.


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MOTIVES FOR HOLDING CASH TRANSACTION MOTIVE: holding of cash to meet the routine cashrequirements to finance the transactions which a firm carries on in theordinary course of its business.

PRECAUTIONARY MOTIVE: a firm may have to pay cash for thepurposes which can not be predicted or anticipated. The more is thepossibility of such contingencies, more is the amount of cash kept bythe firm for meeting them.

COMPENSATION MOTIVE: in banks, usually clients are required to

maintain a minimum balance of cash with them. This will help thebank to earn interest and thus compensate the for the free services thatare provided.

SPECULATIVE MOTIVE: to take advantage of the unexpectedopportunities, typically outside the normal course of the business.

Therefore, such motives are purely speculative in nature.


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ADVANTAGES OF AMPLE CASH

BALANCE Protection against inefficiency.

To avail cash discount.

Maintenance of goodwill. Increase in efficiency.

Exploitation of business opportunities.

Good relation with banks.

Overcoming abnormal situation.


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There are two basic objectives of cash management they are:

1) MEETING CASH DISBURSEMENTS.2) MINIMIZING THE FUNDS LOCKED UP AS CASH

BALANCES


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MEETING CASH DISBURSEMENTS The basic objective of cash management is to meet the

payments in time. It means that the firms shouldalways have sufficient cash to meet the various

requirements of a firm. If there is not sufficient cashbalance the entire business activity will stop. thereforeit is aptly said, cash is the oil to lubricate the everturning wheels of business, and without it the process

grinds to stop.


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MINIMIZING THE FUNDS LOCKED

UP AS CASH BALANCES. The other objective of cash management is to

minimize the amount locked up as cash balances. Thiscalls for efficient cash management. If cash balance is

high, it leads to the problem of idle cash balance. onthe other hand shortage in cash balances may result inthe failure of firm to meet payment schedules, which

will affects the firms reputation.


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CONCLUSIONWe can see that WC management and cash

management are two sides of a coin. But WCmanagement has short term objectives while cash

management has long term objectives in priority andboth assures liquidity of the firm. Similarly we can saythat WC management is a part of cash managementbecause WC itself is cash.

wc & cash mgmt

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