Working Capital Management
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Working Capital Management as PDF for free.
More details
- Words: 700
- Pages: 18
Working Capital Management
Working Capital Management
Working Capital management is concerned with The problems that arise in managing Current assets and current liabilities And the interrelationship between them The goal is to manage CA and CL in such a way that a satisfactory level of net working capital is maintained.
Working Capital Management
Gross Working Capital means the total Current Assets Net Working capital is the difference between CA and CL. Net Working capital is necessary due to nonsynchronous nature of expected cash inflows and required cash outflows.
◦ The more predictable the cash inflows are, the less NWC will be required and vice versa ◦ The NWC represents liquidity of the firm
Working Capital Management
NWC affect liquidity, profitability and the risk of becoming insolvent The higher the NWC
◦ ◦ ◦ ◦
the higher the liquidity The lower the risk The lower the profitability And vice versa
So trade-off between profitability and risk is important
Working Capital Management The need for working capital arise from the
cash operating cycle (Working Capital Cycle) Cash operating cycle refers to the length of time required to complete the following cycle of events 3. Conversion of cash into inventory 4. Conversion of inventory into receivables 5. Conversion of receivables into cash The operating cycle and its time for completion ◦
creates the need for working capital
Working Capital Management
Permanent working capital
Needed for a certain irreducible level of CA on a continuous and uninterrupted basis Should be financed from long term sources
Temporary Working Capital
Needed to meet seasonal and other temporary requirements Should be financed from short term sources
Factors Determining NWC Factors: 2. Nature of Business Manufacturing and trading enterprises require fairly large amount of working capital to maintain sufficient amount of cash, inventories and book debts to support their production (purchase) and sale activities Service enterprises and hotels and restaurants need to carry less Working capital
Factors Determining NWC 2. Production Cycle The longer the production cycle, the larger the WC needed and vice versa 5. Business cycle During boom conditions the need for WC is likely to grow to cater for the increased level of activity During recessionary conditions the need for WC is low due to low volume of sales and production
Factors Determining NWC 4. Credit Policy Liberal credit policy to customers increase the need for WC Tight credit policy reduce WC requirement The credit policy of creditors/suppliers of materials will be an offsetting factor. 9. Growth and Expansion Growth industries and firms require more WC 12.Uncertainties in Availability of raw materials A firm require adequate level of inventory of raw materials, which increase the need for WC
Factors Determining NWC 7. Dividend Policy: Dividend payment consumes cash resources, and therefore decreases WC of a firm. Conversely non payment of dividend increases WC. 10.Depreciation: Higher depreciation (enhanced rates of depreciations) has a positive impact on the WC ◦ ◦
Lower tax liability, and so more cash Lower disposable profits, and smaller dividend payment
Factors Determining NWC 9. Efficiency of Operations Efficiency accelerates the pace of cash cycle and improves the WC turnover resulting in reduced requirement of WC
Computation of Working Capital The Optimum Level of NWC A firm should have adequate WC to support its budgeted level of activity in terms of production/sales ◦ Neither more nor less WC than required. Excessive WC affects profit adversely Inadequate WC interrupts the smooth operations of the company. So Correct computation is required.
Computation of Working Capital Each Component: CA and CL has to be separately estimated. Estimation of Current Assets: 3. Raw Material Inventory
6. Work in Process inventory 8. Finished Goods Inventory
Computation of Working Capital 4. Debtors The WC tied up in debtors should be estimated in total cost (excluding depreciation) Debtors=
10.Cash and Bank Balances
Computation of Working Capital Estimation of Current Liabilities 2. Trade creditors
4. Direct Wages
The average credit period for payment of wages is approximately half a month in the case of monthly wage payment
Computation of Working Capital 3. Overheads (other than depreciation and amortization)
Working Capital Management
Working Capital management is concerned with The problems that arise in managing Current assets and current liabilities And the interrelationship between them The goal is to manage CA and CL in such a way that a satisfactory level of net working capital is maintained.
Working Capital Management
Gross Working Capital means the total Current Assets Net Working capital is the difference between CA and CL. Net Working capital is necessary due to nonsynchronous nature of expected cash inflows and required cash outflows.
◦ The more predictable the cash inflows are, the less NWC will be required and vice versa ◦ The NWC represents liquidity of the firm
Working Capital Management
NWC affect liquidity, profitability and the risk of becoming insolvent The higher the NWC
◦ ◦ ◦ ◦
the higher the liquidity The lower the risk The lower the profitability And vice versa
So trade-off between profitability and risk is important
Working Capital Management The need for working capital arise from the
cash operating cycle (Working Capital Cycle) Cash operating cycle refers to the length of time required to complete the following cycle of events 3. Conversion of cash into inventory 4. Conversion of inventory into receivables 5. Conversion of receivables into cash The operating cycle and its time for completion ◦
creates the need for working capital
Working Capital Management
Permanent working capital
Needed for a certain irreducible level of CA on a continuous and uninterrupted basis Should be financed from long term sources
Temporary Working Capital
Needed to meet seasonal and other temporary requirements Should be financed from short term sources
Factors Determining NWC Factors: 2. Nature of Business Manufacturing and trading enterprises require fairly large amount of working capital to maintain sufficient amount of cash, inventories and book debts to support their production (purchase) and sale activities Service enterprises and hotels and restaurants need to carry less Working capital
Factors Determining NWC 2. Production Cycle The longer the production cycle, the larger the WC needed and vice versa 5. Business cycle During boom conditions the need for WC is likely to grow to cater for the increased level of activity During recessionary conditions the need for WC is low due to low volume of sales and production
Factors Determining NWC 4. Credit Policy Liberal credit policy to customers increase the need for WC Tight credit policy reduce WC requirement The credit policy of creditors/suppliers of materials will be an offsetting factor. 9. Growth and Expansion Growth industries and firms require more WC 12.Uncertainties in Availability of raw materials A firm require adequate level of inventory of raw materials, which increase the need for WC
Factors Determining NWC 7. Dividend Policy: Dividend payment consumes cash resources, and therefore decreases WC of a firm. Conversely non payment of dividend increases WC. 10.Depreciation: Higher depreciation (enhanced rates of depreciations) has a positive impact on the WC ◦ ◦
Lower tax liability, and so more cash Lower disposable profits, and smaller dividend payment
Factors Determining NWC 9. Efficiency of Operations Efficiency accelerates the pace of cash cycle and improves the WC turnover resulting in reduced requirement of WC
Computation of Working Capital The Optimum Level of NWC A firm should have adequate WC to support its budgeted level of activity in terms of production/sales ◦ Neither more nor less WC than required. Excessive WC affects profit adversely Inadequate WC interrupts the smooth operations of the company. So Correct computation is required.
Computation of Working Capital Each Component: CA and CL has to be separately estimated. Estimation of Current Assets: 3. Raw Material Inventory
6. Work in Process inventory 8. Finished Goods Inventory
Computation of Working Capital 4. Debtors The WC tied up in debtors should be estimated in total cost (excluding depreciation) Debtors=
10.Cash and Bank Balances
Computation of Working Capital Estimation of Current Liabilities 2. Trade creditors
4. Direct Wages
The average credit period for payment of wages is approximately half a month in the case of monthly wage payment
Computation of Working Capital 3. Overheads (other than depreciation and amortization)
Related Documents
Working Capital Management
June 2020 11
Working Capital Management
May 2020 16
Working Capital Management
November 2019 22
Working Capital Management
April 2020 13
Working Capital Management Overview
May 2020 6
Working Capital Management
June 2020 4More Documents from ""
Working Capital Management
May 2020 16