WORKING CAPITAL MANAGEMENT

OUTLINE Characteristics of Current Assets Factors Influencing Working Capital Requirements Level of Current Assets Current Assets Financing Policy Profit Criterion for Current Assets Operating Cycle Analysis Cash Requirement for Working Capital

Current Assets and Liabilities

Current Assets Inventories Raw material and components Work-in-progress Finished goods Others Trade debtors Loans and advances Cash and bank balances Current Liabilities Sundry creditors Trade advances Borrowings (short term) Commercial banks Others Provisions

CHARACTERISTICS OF CURRENT ASSETS

Short life span Swift transformation into other asset forms Decision relating to working capital management are repetitive and frequent Profit and Present Value is not applicable Close interaction in all parts are very necessary.

CHARACTERISTICS OF CURRENT ASSETS

Current Assets Cycle

Finished goods

Accounts receivable Wages, salaries, factory overheads

Work-inprocess

Raw materials

Cash

Suppliers

FACTORS INFLUENCING WORKING

CAPITAL

REQUIREMENTS
Nature of Business Seasonality of Operations Production Policy Market Conditions Conditions of Supply

WC influenced by

Purchase of raw materials Payment for raw materials Manufacture of goods Sale of finished goods Collection of cash for sale

OPERATING CYCLE AND CASH CYCLE

Order placed Stock arrives Inventory period Goods sold Cash received Accounts receivable period

Accounts payable period Firm receives invoice Cash paid for materials Operating cycle Cash cycle Average inventory Inventory period = Average COGS / 365 Average accounts receivable Accounts receivable period = Annual sales / 365 Average accounts payable Average payable period = Average COGS / 365

ILLUSTRATION
Financial Information for Horizon Limited
Balance Sheet Data Profit and Loss Account Data Sales Cost of goods 800 720 Inventory Accounts receivable Beginning of 20X0 96 86 End of 20X0 102 90

Sold

Accounts payable

56

60

(96 + 102) / 2

Inventory period =
720 / 365

= 50.1 days

(86 + 90) / 2

Accounts receivable period =

800 / 365 (56 + 60) / 2

= 40.2 days

Accounts payable period

=
720 / 365

= 29.4 days

Operating cycle

50.1 + 40.2 = 90.3 days Inventory Accounts period receivable period

Cash cycle

90.3 29.4 = 60.9 days Operating Accounts cycle payable period

CASH REQUIREMENT FOR

WORKING CAPITAL
Step 1 : Estimate the cash cost of various current assets

required by the firm. Step 2 : Deduct the spontaneous current liabilities from
the cash cost of current assets

Assignment

Assignment 26.2 page number 669 of Prasanna Chandra, Submission mandatory on 22/1/10.