Presentation on Working capital management
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The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities, representing the funds available to run day-to-day operations. It notes that working capital management involves managing current assets like cash, debtors, and inventory as well as current liabilities like creditors. Proper working capital management is important for business liquidity, profitability, and survival, especially in today's competitive environment. The key steps in working capital management include cash management, debtors management, inventory management, and creditors management.
Presentation on Working capital management
- 1. WORKING CAPITAL MANAGEMENT PREPARED BY: PRIYANKA SARRAF BBA V SEM. ISBM
- 2. Meaning of working capital In very simple terms working capital means the amount required to do day to day business smoothly. It is excess of current assets over current liabilities. From another point of view we can say that WC is that part of CA (i.e. raw material) which is required to run the fixed assets (i.e. machine) profitably. WC = CA – CL CURRENT ASSETS Current assets are those assets which can be converted into cash within one year or less then one year. In current assets, we include cash, bank, debtors, bill receivables, prepaid expenses, outstanding incomes . CURRENT LIABILITIES Current Liabilities are those liabilities which can be paid to respective parties within one year or less than one year at their maturity. In current liabilities, we include creditors, outstanding bills, bank overdraft, bills payable and short term loans, outstanding expenses, advance incomes .
- 3. WORKING CAPITAL VALUE TIME NET WC PERMANENT WC TEMPORARY WC CURRENT ASSETS DIFFERENCE OF CA & CL MINIMUM INVESTMENT THROUGHOUT THE YEAR INVESRMENT ABOVE PERMANENT WC CASH POSITIVE NEGATIVE CURRENT ASSETS VARIABLE WC < 1YEAR ABLE TO PAY SHORT TERM LOAN UNABLE TO PAY SHORT TERM LOAN MINIMUM LEVEL OF ACTIVITIES FLUCTUATING (SEASONS,FESTIVALS, ETC.) WORKING CAPITAL GROSS WC
- 4. ON THE BASIS OF VALUE IT HAVE TWO TYPES OF WC 1) Gross WC The gross working capital refers to investment in all the current assets. It is also known as Gross current assets. The sum of all of a company's current assets (assets that are convertible to cash within a year or less). 2) NET WC It is a difference between current assets and current liabilities. It is the amount invested by the promoters on the current assets of the organization.
- 5. ON THE BASIS OF TIME IT HAVE TWO TYPES WC 1) Permanent working capital Minimum amount of investment in current assets required at all point of time. Remains in the business in one form or another. Grows with the size of the business. Financed by long term funds. 2) Temporary working capital Variable working capital, required by business over and above permanent working capital. Additional current assets required at different point of time. E.g. Extra inventory should be maintained during peak sales period like festivals, seasons, etc. Will decrease in depression periods or off seasons. Financed from short term loans.
- 6. Is it a issue of today’s business? Yes, it is. Because every business landscape has become: Competitive Complex Ever-changing So, building a profitable business and ensuring its success in future is increasingly difficult now. Also it is facing problems like: Shortage of cash Heavy bad debts Cash block in inventories Spoiling reputation by late payment to creditors because of shortage of cash itself. These all arises due to inefficient working capital management. So, it has become a significant issue in today’s business that how to manage it to optimize profit and ensure success.
- 7. ANALYSIS OF WORKING CAPITAL WC LargeInadequate Adequate (Short term and Long term) Idle Funds Risk Survival (At different Points of Time) Cost Insolvency Growth Interest Payment The standard favorable ratio of CA in relation to CL is 2:1, this means, a company has total liabilities of one rupee. And, to pay that liability it has available cash or (say liquidity status) of two rupees. OR, say it has sufficient current assets to meet its current liability. Note: This ratio may vary as per the nature of business.
- 8. IMPORTANCE OF WORKING CAPITAL MANAGEMENT Working capital management is required to use fixed assets profitability. For e.g. Machine cannot be used productively without raw materials etc. Funds are required for day to day operations and transactions. These are provided by cash and cash equivalents, forming part of current assets. Adequate working capital determine the short term solvency of the firm. Increase in activity levels and sales should be backed up by suitable investment in working capital to expand business. Adequate working capital enables a firm to face business crisis in emergencies such as depression.
- 9. WORKING CAPITAL MANAGEMENT STEPS CURRENT ASSETS MANAGEMENT CURRENT LIABILITIES MANAGEMENT CASH MANAGEMENT DEBTORS MANAGEMENT INVENTORY MANAGEMENT CREDITORS MANAGEMENT OTHER SHORT TERM LIABILITIES MANAGEMENT
- 10. STEPS OF WORKING CAPITAL MANAGEMENT The techniques should be applied in different items of working capital (like cash, debtors, inventory, creditors.) 1) CASH MANAGEMENT (MOST IMPORTANT ASPECT OF WC) Cash planning: The pattern of cash inflows and outflows should be properly predicted in advance by preparing cash budgets. Managing the cash flows: The cash inflows should be accelerated/speeded up, while as far as possible, the cash outflows should be decelerated. Optimum cash level: The optimum level of cash balance should be determined by balancing the twin objectives of liquidity and profitability. Investing surplus cash: Surplus cash should be properly invested to earn profits. The firm should determine the timing and quantity of investment of surplus cash.
- 11. 2) DEBTORS MANAGEMENT Collecting debts on time. Setting credit limits i.e. 10/15/30 or so on. Providing discounting facilities for early payment. Enforcing a clear credit policy. Considering debtor finance. 3) INVENTORY MANAGEMENT Classification and codification of inventory. Maintenance of inventory records. Control of the cycle flow of materials. Control of tools. Store room management.
- 12. 4) CREDITORS MANAGEMENT Find reliable and competitively prices suppliers. Negotiate clear, written agreements from the outset. Communicate with the suppliers. Improve systems for paying suppliers. Keep good records. 5) OTHER SHORT TERM LOAN(STL) MANAGEMENT Payment of outstanding salaries, wages, expenses, etc. Payment of outstanding duties and taxes, outstanding interest, etc. Payment of short term loans.
- 13. CONCLUSION From all the above discussion we can conclude that Working Capital Management is one of the tending CONTEMPORARY ISSUE which the business enterprises and organizations are facing now-a-days. So, they should apply the Working Capital Management techniques and prepare SMART PLANS for procurement of Working Capital for the growth, profitability and ultimate success of their business.