WORKING CAPITAL MANAGEMENT

THE GOAL

To manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained.

The study of working capital management involves the study of inter-action between current assets & current liabilities.

Working Capital Management-concepts.

• Gross Working Capital means Total Current Assets.

• Net working Capital means Current Assets less Current Liabilities.

(NWC is the portion of w/c financed by long-term sources)

W/Capital Management

• NWC is treated as a measure of liquidity--Greater the NWC- greater the Solvency.

. NWC has bearing on profitability and risk. -Greater the NWC- less risk-prone the firm

is. -Lower the NWC-lower liquidity and higher

risk.

W/CAPITAL MGMT.-NWC

TRADE –OFF BETWEEN PROFITABILITY & RISK.

LOWER NWC- HIGHER PROFIT-HIGHER RISK

HIGHER NWC- LOWER PROFIT-LOWER RISK

W/CAPIAL-ESTIMATION

• COLUMNAR METHOD-

Elements of cost presented vertically

Items of current assets & current liabilities

Horizontally.

. EQUIVALENT PRODUCTION UNITS-

of different elements of cost.

W/CAPITAL FINANCING

• BALANCE SHEET APPROACH

• OPERATING CYCLE APPROACH:-

REQUIRMENTS OF EACH ITEM OF WOKRING CAPITAL CALCULATED IN TERMS OF QUANTITY AND VALUED AS UNDER:-

W/CAPITAL FINANCING

• RAW MATERIALS- at cost of raw materials procured.

• W-I-P – at Cost of Production

• Finished goods- Cost of Sales.

• Receivables- Sales.

W/C-OPERATING CYCLE

CASH

R.M.

F.GOODS

R CASHSALE

Tr.credit(1/2 mth) ½ mth

½ mth

½ mth

1 mth

W.I.P.W.I.P.

W/CAPITAL FINANCING

A. INVENTORY HOLDING PERIOD(R.MATERIAL)

average raw material

average cost of materials consumed per day(o/stock +purchases – cl.stock / 365)

W/CAPITAL- FINANCING

• INVENTORY HOLDING

PERIOD( WIP)

average WIP

average cost of finished goods manufactured per day( O/WIP + material consumed + wages + mfg. Overheads –C/WIP / 365)

W/CAPITAL-FINANCING

• INVENTORY HOLDING PERIOD

( FINISHED GOODS)

average inventory of FG

average cost of finished goods sold per day

( O/FG + cost of FG manufactured + admn. & selling exps. – C/FG / 365)

W/CAPITAL-FINANCING

• RECEIVABLES PERIOD

average accounts receivable

average credit Sales per day

(annual credit sales/365)

W/CAPITAL-FINANCING

• ACCOUNTS PAYABLE PERIOD

average accounts payable

average credit purchase per day

(annual credit purchase / 365)

W/CAPITAL -FINANCING

1) Pre-Nationalisation

2) 1968- Dahejia Committee

3) 1969- Tandon Committee-WCL > 10 lacs1) Norms for holding of inventory/receivables

2) Methods of lending

3) Style of credit

4) Information system & follow up.

W/CAPITAL-FINANCING

4) 1979- CHORE COMMITTEE-(50 LAC)1) WCTL

2) PEAK AND NON PEAK LEVELS

3) DRAWEE BILLS

W/CAPITAL FINANCING

5) 1990- CAS ABOLISHED- CMA

6) 1992- JILANI COMMITTEE

7) 1993-VAZ COMMITTEE-DEREGULATIONS-PRUDENTIAL NORMS

8) 1997-KANNAN COMMITTEE-1) METHOD OF ASSESSMENT

2) LEVEL OF HOLDING

3) ONLY PRUDENTIAL NORMS.

W/CAPIAL FINANCING

9) CASH FLOW METHOD--RESOURCE FINANCING VS.

RECOURSE FINANCING

W/CAPITAL FINANCING

10) COMMERCIAL PAPERS

11) FCL / ECBs- BULLET PAYMENTS

THE PRESENT DAY PRACTICE ??

WORKING CAPITAL REQUIREMENTS

OTHER FACTORS DETERMINING WC:

a) Nature of business- cash flows

b) Corporate policy-growth/expansion

c) Seasonality of product

d) Dividend policy

e) Production policy

f) Manufacturing & process time

WORKING CAPITAL REQUIREMENTS

g) Market policy- competition.h) Taxation policy- payment schedulei) Business cycles-boom & depressionj) Miscellaneous factors:-

a) Terms of purchase/saleb) Price levels.c) Condition of supplyd) Faulty distribution channelse) Import policyf) Labour position etc.