Notes.pptx
- 2. UNIT - IV WORKING CAPITAL
- 3. What is mean by working capital? And explain its components. Working capital is the capital which is needed to meet the day-to-day transaction of the business concern. It may cross working capital and net working capital. Normally working capital consists of various compositions of current assets such as inventories, bills, receivable, debtors, cash, and bank balance and prepaid expenses. Working capital is needed to meet the following purpose: Purchase of raw material Payment of wages to workers Payment of day-to-day expenses
- 4. Definition According to the definition of Weston and Brigham, "Working Capital refers to a firm's investment in short-term assets, cash, short-term securities, accounts receivables and inventories".
- 5. What do you mean by working capital management? Working capital management refers to the management of both current assets and current liabilities. It is a study of relationship between current assets and current liabilities. The main aim of financial management is to supply continuous flow of funds to administer the day-to-day activities. The size of this capital must not be in excess nor inadequate. It should be adequately supplied to increase the wealth of the organization.
- 6. Working capital management involves two main processes: Determining the size of the amount of working capital Arranging the sources of working capital
- 7. CONCEPTS OF WORKING CAPITAL 1. Gross working capital 2. Net working capital
- 8. What is the circular flow concept of working capital?
- 9. What are the different types of Working Capital? 1. Permanent working capital 2. Temporary working capital 3. Gross working capital 4. Net working capital 5. Negative Working capital 6. Reserve Working capital
- 10. NEEDS FOR WORKING CAPITAL Replenishment of inventory Provision for operating expenses Support for credit sales Provision of a safety margin
- 11. Principles of working capital Principles of Risk Valuation Principle of Equity Position Principle of cost capital Principles of Maturity Payment
- 12. DETERMINANTS OF WORKING CAPITAL REQUIREMENTS 1. Nature of business 2. Size of business 3. Manufacturing cycle 4. Production policy 5. Volume of sales 6. Term of purchases and sales
- 13. CONT… 7. Business cycle 8. Growth and Expansion 9. Fluctuations in the Supply of Raw Materials 10. Price Level Changes 11. Operating efficiency 12. Profit Margin 13. Profit appropriation 14. Credit policies of Reserve Bank of India 15. Capital structure of the company
- 14. What are the different sources of working capital? Sources of working capital: Long term financing Short term financing Spontaneous financing
- 15. CONT… Long term financing: Loans from financial institutions Floating of debentures Accepting public deposits Issue of shares Raising funds by Internal financing
- 16. ISSSUES IN WORKING CAPITAL Components Time Investment Criticality Growth
- 17. ACCOUNTS RECEIVABLES MANAGEMENT What is Receivables? Receivables represent amounts owed to the firm as a result of sale of goods or services in the ordinary course of business. These are claims of the firm against its customers and form part of its current assets.
- 18. What do you mean by receivables management? It is the process of making decisions relating to the investment of funds in accounting receivables which will result in maximizing the overall return on the investment of the firm. Thus, the objective of receivables management
- 19. What are the purposes of receivables? Achieving growth in sales Increasing profits Meeting competition
- 20. Explain the factors influencing the size of the receivables? Level of sales Credit policies Terms of trade
- 21. FACTORING The word ‘factor’ has been derived from the Latin word ‘factor’ which means ‘to make or to do’. In other words, it means ‘to get things done’. Factoring is a method of financing where by a company sells its trade debts at a discount to a financial institution, (namely the factor) and a company (namely the client) which sells good and services to trade customers on credit.
- 23. What are the functions of factoring? i) Maintenance of Sales Ledger ii) Collection of Accounts Receivables iii) Credit Control and Credit Protection iv) Financing of Receivable v) Advisory Services
- 24. What are the advantages of factoring? 1. Prompt Payment and Reduction in Debt 2. Improves Current Ratio 3. Increase in the Turnover of Stocks 4. Improved Credit Standing 5. Lesser Risk 6. Specialized Service 7. No need for Collection Department
- 25. What are the disadvantages of factoring? 1. High Risk 2. Existence of Teething Problems 3. Unsuitability
- 26. Meaning of Inventory Management: The dictionary meaning of inventory is ‘stock of goods’. The word ‘inventory’ is understood differently by various authors. In accounting language it may mean stock of finished goods only. In a manufacturing concern, it may include raw materials, work in process and stores, etc.
- 27. What are the kinds of inventories? Raw materials Work-in-progress Finished goods
- 28. What are benefits of holding inventories? Avoiding losses of sales Reducing ordering cost Achieving efficient production runs
- 29. Explain the Costs and Risks associated with Inventories? Cost and risk Associated with Holding Inventory Financial cost Cost of storage Price Fluctuation Risk of obsolescence Deterioration in Quality
- 30. Cont…. Theft, Damage and Accident Order placing cost Inventory carrying cost Cost of shortage of stock
- 31. What is Inventory Management? The investment inventory is very high in most of the undertakings engaged manufacturing, wholesale and retail trade. The amount of investment is sometimes more in inventory than in other assets. About 90% part of working capital invested in inventories. It is necessary for every management to give proper attention to inventory management. A proper planning of purchase, handling, storing, and accounting should form a part of inventory management. An efficient system of inventory management will determine What to purchase How much to purchase From where to purchase Where to store etc.
- 32. Determination of Economic Ordering Quantity Determination of the quantity for which the order should be placed is one of the important problems concerned with efficient inventory management. EOQ refers to the size of the order which gives maximum economy in purchasing any item of raw material or finished product. It is fixed mainly after taking into account the ordering cost and inventory carrying cost. It can be determined by applying the following formula: 2AB EOQ = ---------- S
- 33. Cont… Where, EQ = Economic Ordering Quantity A = Quantity (units) purchased in a year B = cost of placing an order S = Annual cost of storage of one unit.
- 34. Determination of optimum production quantity The EOQ model can be extended to production runs to determine the optimum production quantity. The two costs involved in this process are: set up cost and inventory carrying cost. The formula for EOQ can also be used for determining the optimum production quantity as given below: 2U x P E = ---------- S
- 35. Cont… Where, E = optimum production quantity U = Annual output P = set up cost for each production run S = cost of carrying inventory per unit per annum
- 36. Determination of re-order level Re order level is the level of inventory at which the firm should place an order to replace the inventory. In case, the order is placed at this level, the new goods will arrive before the firm runs out of goods to sell. It can be determined by applying the following formula. Re-order level = Maximum usage x Maximum lead time
- 37. Inventory turnover ratio This is calculated minimize the investment in inventories. It is calculated for each item of inventory by applying the following formula. Cost of goods consumed / sold during the period Inventory turnover ratio= ------------------------------------------------------------- -- Average inventory held during the perio
- 38. Aging schedule of inventory Classification of the inventories according to age also helps in identifying inventories which are moving slowly into production or sales. This requires identifying the date of purchase/manufacture of each item of the inventory and classifying them.
- 39. ABC analysis ABC analysis is a form of inventory control wherein different degrees of control are exercised over different items of stores on the basis of the investment involved. For example, in the making of aircraft, cryogenic engines involving high costs will be monitored closely while cost of tyres, nuts and bolts etc. will be given lesser attention. Categorisation: Under this system, the items are divided into three categories according to their importance (value) and frequency of replenishment during a period. These categories are: A category – Highly important – 70% B category – Relatively less important – 20% C category – Least important – 10% ABC analysis is also called as 70-20-10 analysis or selective stock control.
- 40. VED analysis V - Some spares would be so important that their non availability would render extreme damage to plant equipment or human life. If these items go out of stock or not readily available, results in loss of production for the whole period. E – Essential items which reduce the equipments performance but do not render it inoperative or unsafe: non availability of these items may result in temporary loss of production or dislocation of production work replacement can be delayed without affecting the equipments performance seriously temporary repairs are sometimes possible. D – Desirable items which are mostly non functional and do not affect the performance of the equipment.
- 41. Just-in-Time inventory (JIT) Business concerns are giving maximum attention to reduce stock levels by establishing cordial relationship with suppliers to arrange for frequent delivery of quantities. This is called Just-in- time purchasing. The objective of Just-in-time purchasing is to obtain delivery of material immediately before their use. This is possible with the co-operation of supplier.
- 42. What do you mean by cash management? Cash management: Cash management has assumed importance because it is the most significant of all the current assets. It is required to meet business obligations and it is unproductive when not used. Cash management deals with the following: Cash inflows and outflows Cash inflows with the firm Cash balances held by the firm at a point of time
- 43. What are the motives for holding cash? Transaction motive Precautionary motive Speculative motive Compensatory motive
- 44. Explain the cash management models. (a) Baumol model: This model was suggested by William J.Baumol. According to this model, optimum cash level is that level of cash where the carrying costs and transactions costs are the minimum. Carrying costs: This refers to the cost of holding cash namely, the interest foregone on marketable securities. They may also be termed as opportunity costs of keeping cash balance. Transaction costs: This refers to the cost involved in getting the marketable securities converted into cash. This happens when the firm falls short of cash and has to sell the securities resulting in clerical, brokerage, registration and other costs
- 45. Miller Orr – Model This model helps in determining the optimum level of cash in such circumstances. It deals with cash management problem under the assumption of random cash flows by laying down control limits for cash balances. These limits consist of an upper limit (U), lower limit (O) and return point (R). When cash balance reaches the upper limit, a transfer of cash equal to “U-R” is affected to marketable securities. When it touches the lower limit, a transfer equal to “R-O” from marketable securities to cash is made.
- 46. Working capital finance Trade credit Commercial paper Public deposits Letter of credit Bank finance Accruals Bills discounting Installment of credit