Wcm

WORKING CAPITAL MANAGEMENT FINANCIAL MANAGEMENT--II Prof. Sitangshu Khatua XISS, RANCHI

WCM • •

GROSS W.C.= TOTAL OF ALL CA NET W.C./ NET CA= CA – CL

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OBJECTIVES: Liquidity Vs. Profitability Conservative Vs. Aggressive Static view of W.C. Dynamic view of W.C.

5. 6. 7. 8.

1 2 3 4 5 6 7 8 9 10 11

Net sales Operating PBIT Net FA CA Total Asset(3+4) Net Op. Profit margin= 2/1

T.O. of FA= 1/3 T.O. of CA=1/4 T.O. of TA=1/5 Rate of Ret of TA=6*9 Ratio of CA to FA= 4/3

Conservative policy

Aggressive policy

Rs.50 L Rs.5 L Rs.10 L Rs.8 L Rs.18L 10 % 5 6.25 2.78 27.8% 80%

Rs.50L Rs.5 L Rs.10 L Rs.5 L Rs.15 L 10% 5 10 3.33 33.3% 50%

Factors Affecting W.C. • • • • • • •

Nature of Business Nature of Raw material Production policy/ technology used Nature of finished goods Degree of competition in the market Paying habits of customers Degree of synchronization of cash inflow & outflow

Interdependence of Components of W.C. • • • • 5. 6. 7.

W.C. Policy What the ratio of CA to sales should be? What the ratio of short term to long term financing should be? 3 types of policy Conservative Moderate Aggressive

Operating Cycle Approach to W.C. Management •

Raw Material Storage Period 2. Annual consumption of raw material 3. Average daily consumption of raw material= 1/360 4. Average stock of raw material= ( opening stock + closing stock)/2 4. Raw material storage period= 3/2=n1days

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Conversion Period

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Annual cost of production= Opening stock of WIP + consumption of raw material+ other manufacturing cost like wage, sal etc. + Depreciation – closing WIP Average daily cost of production=1/360 Average stock of WIP= (opening WIP + closing WIP)/2 Conversion Period = 3/2 = n2 days

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Finished Goods Storage Period

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Annual cost of sales= opening stock of FG+ cost of production + excise duty+ Selling & distribution cost+ administrative cost+ financial cost – closing stock of FG Average daily cost of sales= 1/360 Average stock of FG= (opening FG + closing FG)/2 Finished goods storage period = 3/2 = n3 days

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• Average Collection Period (ACP) 1.Annual credit sales of the company 2. Average daily credit sales = 1/360 3. Average balance of Sundry Debtors = ( opening balance + closing balance of AR)/2 4. ACP= 3/2 = n4 days GROSS OPERATING CYCLE = ( n1 + n2 + n3 + n4 ) days

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Average Payment Period (APP) 2. Annual credit purchase made by the company 3. Average daily credit purchases= 1/360 4. Average balance of Sundry Creditors ( opening balance + closing balance of AP)/2 4. APP = 3/2 = n5 days NET OPERATING CYCLE=( n1 + n2 + n3 + n4 – n5)days