m Financial Managers spend a great deal of

time in managing current assets &

liabilities. Arranging short term financing,
negotiating favorable credit term,
controlling the movement of cash,
administering account receivable, and
monitoring the investment in inventories
consume a great deal of time
 orking Capital
Management

orking capital policy

R

  
 Concept
There are two concepts
m Gross working capital=
Total of all Current Assets
m Net orking Capital=
Current Assets ƛ Current Liabilities
 Characteristics of Current Assets
m Short life span

m Swift
transformation into other assets
forms-- cash--
forms cash-- raw material--
material-- finished
goods--
goods -- accounts receivable--
receivable-- cash
 Current Assets Cycle

cash suppliers

Raw material ork in

Receivable
progress
ages salaries
&factory overhead

Finished goods
 ïnfluencing factors
m Nature of business(Hotels-
business(Hotels-10-
10-20%,
Trading--80-
Trading 80-90%)
m Seasonality of operation
m Production policy
m Market conditions
m Conditions of supply
 Level of current assets
Flexible policy/Conservative policy
Restrictive policy/Aggressive policy
á
 



 


 
 



 Current Assets Financing Policy
m Theinvestment in current assets may be
broken into two parts:
m Permanent current assets
m Temporary current assets
The former represents what the firm requires
even at the bottom of its sales cycle; the
latter reflects a variable component the
moves in line with seasonal fluctuations.
Capital requirement 6





 


A
B

Permanent current asset requirement Fixed assets

requirement

Time

Fig.- Capital Requirement and their Financing

 ãperating Cycle and Cash Cycle
m The time that elapses between the
purchases of raw material and the
collection of cash for sales is referred to as
the operating cycle.
m The time length between the payment for
raw material purchases and the collection
of cash for sales is referred to as the cash
cycle.
 ãperating Cycle and Cash Cycle
ãrder placed Stock arrives Goods sold Cash received

ïnventory period Accounts receivable period

A/c payable
period

Cash paid for

Firm receives
material
invoice

ïnventory period+ Accounts Receivable Period=ãperating Cycle

ãperating cycle-Accounts Payable Period=Cash Cycle

ïnventory period= Average inventory
Annual cogs /365

Accounts receivable period=

Average A/c receivable
Annual sales/365

Accounts payable period= Average A/c payable

Annual cogs /365
 Cash requirement for working capital
m Can be calculated ƛ
m Step -1 Estimate the cash cost of various current
assets required by the firm
m Cash cost= Value of current assets-
assets-profit element
if any-
any-Non cash charges like depreciation if any.
Value of debtors in B/S Rs. 10.00 million
Profit margin Rs. 2.5 million
Cogs Rs. 7.5 million
Depreciation Rs. 0.5 million
Cash cost of sundry Debtors Rs. 7.00 million
m Step 2-- Deduct the spontaneous current
2
liabilities from the Cash Cost of Current
Assets----
Assets ----
m A portion of the cash cost is supported by
trade credit and accruals of wages and
expenses which may be referred to
spontaneous Current liabilities.
 ero working capital
m Many leading companies seek to have zero
or even negative working capital. hen
inventories and receivable are supported
by the credit provided by suppliers and
the advance given by customers.
 Benefits
m Financial -
m Every rupee released makes a one time
contribution to cash flow
m The cost of money locked in working
capital is saved
m ãther
m Reducing working capital forces company to
serve customer quickly
m Lessens warehousing needs etc.