By:

Agrim Verma

Working Capital

Working Capital Management

Contents

Working Capital Concepts

Cash Conversion Cycle (CCC)
Cash Management
Inventory Management
Receivables Management
Operating Current Liabilities
Alternative NOWC Policies
Types of NOWC
Alternative Short-Term Financing Policies
Determinants of Working Capital
Working Capital Management

Working Capital Concepts

Working Capital
Net Working Capital (NWC)

Net Operating Working Capital (NOWC)

Working Capital Management

NOWC
Operating
Current Liabilities

Operating
Current Assets
Cash

Accounts Payable

Accounts Receivable

Accruals

Inventories

Working Capital Management

Cash Conversion Cycle (CCC)

Firms typically follow a cycle in which they
purchase inventory,
sell goods on credit,
and then, collect accounts receivable.

Working Capital Management

 Convertin
g firms
receivable
s into cash

Working Capital Management

Payables Deferral Period

Conversio
n of
materials
into
finished
goods and
then sell
those
goods

Receivables Collection Period

Inventory Conversion Period

Components of CCC
Time
taken for
payment
of
materials
and
labour

Shortening the CCC

Reducing inventory conversion period
Reducing receivables collection period

Lengthening payables deferral period

Inventory
Conversion
Period

Receivables
Collection
Period

Payables
Deferral
Period

Working Capital Management

Cash
Conversion
Cycle

Cash Management
The goal of the cash manager is to minimise the
amount of cash the firm must hold for use in
conducting its normal activities, yet, at the same time, to
have sufficient cash

Working Capital Management

Inventory Management
Goals of inventory management:
To ensure that the inventories needed to sustain
operations are available,
To hold the costs of ordering and carrying inventories
to the lowest possible level

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Improvements in
Inventory Management
Situation 1: Original

Inventory = Sales/Inventory Turnover Ratio

= Rs. 120/3
= Rs. 40
Situation 2: Improved
Inventory = Sales/Inventory Turnover Ration
= Rs. 120/4
= Rs. 30
Improvement in Inventory Management = Rs. 10
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Receivables Management

Working Capital Management

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Credit Policy
Credit period
Discounts

Credit standards
Collection policy

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Operating Current Liabilities

Accruals

Accounts
Payable

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Alternative NOWC Policies

Relaxed Working
Capital Policy
Moderate Working
Capital Policy
Restricted Working
Capital Policy
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Types of NOWC
Permanent
NOWC

Temporary
NOWC

NOWC on hand at
the low point of the
cycle

As sales increase
during upswing,
additional NOWC
employed

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Determinants of Working Capital

General nature of business

Profit level

Production cycle

Level of taxes

Business cycle

Dividend policy

Production policy

Depreciation policy

Credit policy

Price level changes

Growth and expansion

Operating efficiency

Vagaries in the availability of

raw material

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Thank you

Working Capital Management

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