LIQUIDITY DECISIONS/ WORKING CAPITAL MANAGEMENT

Meaning The excess of current assets over currents liabilities also known as circulating, revolving or fluctuating capital

Components of wc
current assets
Cash & bank balances

current liabilities Creditors Outstanding expenses Short term borrowings Advances received

Temporary investments Short term advances Receivables

Inventory of raw materials, Taxes & dividends payable Stores & spares, FG

TYPES
1. 2. 3. 4. Gross working capital & net working capital Permanent working & temporary working capital Positive working & negative working capital Balance sheet working cap & cash working cap

Methods of estimating working capital. 1. Conventional methodcash inflows & cash outflows are matched together. Emphasis is on liquidity & its ratios. 2. Operating cycle method It considers the production and other business operations. It emphasis on profitability & liquidity of the firm

Factors determining WC requirements

1. Nature of business 2. Manufacturing cycle 3. Production process 4. Business cycle 5. Seasonal variations 6. Scale of operations 7. Inventory policy 8. Credit policy 9. Accessibility of credit 10.Business standing 11. Growth of business 12. Market conditions 13. Supply situations 14. Environment factors

Working capital management

Working capital management refers to the management of working capital with twin objectives of Liquidity & profitability. Working capital management establishes the best possible trade-off between the profitability of net current assets employed and the ability to pay current liabilities as they fall due. Objectives: Optimize investments in current assets. To see that the company meets its current liabilities obligations Manage current assets to see that the return on current assets is more than cost of capital Proper balance between current assets & current liabilities

Components of WCM
INVENTORY MANAGEMENT CASH MANAGEMENT RECEIVABLES MANAGEGMENT

INVENTORY MANAGEMENT
MeaningObjectives1. 2. 3. 4. 5. 6. 7. 8. For continuous supply for uninterrupted production To reduce wastage & losses To introduce scientific inventory management techniques To reduce cost of purchase & storage To reduce excessive or shortage of inventory To have uninterrupted production for effective utilization of store space To provide right material at right time, from right source & at right prices.

TOOLS OF INVENTORY MANAGEMENT

1. Fixation of levels- Maximum level Minimum Level Reorder level Danger level 2. Fixation of EOQ- 2AOC 3. ABC analysis 4. VED analysis 5. FSN /FNSD analysis 6. Perpetual inventory system 7. Periodic inventory system 8. Inventory turnover ratios 9. JIT Analysis

CASH MANAGEMENT
ObjectivesTo make prompt cash payments To maintain minimum cash reserve Motives of holding cash- Transaction motive Precautionary motive Speculative motive compensatory motive Cash management strategies 1. Cash planning 2. Managing the cash flows 3. Optimum cash balance 4. Investing idle cash.

1.

Cash planning
It is a technique to plan for & use of cash. It involves cash forecasting and budgeting. Cash budgets & forecasting Short term cash forecasting Long term cash forecasting Methods of cash forecasting 1. Receipt & Disbursement method 2. Adjusted net income method

2. Managing cash flows

Accelerating cash collection Prompt payment by customers Lock box system Concentrating banking Electronic fund transfer Decentralize collection Controlling Disbursement Playing the Float-collection float payment float b. Payment on last day & by drafts c. Centralisation of payments

3. Determining optimum cash balance

4. Investment in marketable securities.
Selection of securities Safety Maturity Marketability

RECEIVABLES MANAGEMENT
Meaning Determinants of accounts receivable/credit sales1. Credit sales volume 2. Credit policies 3. Business terms- time period, discounts 4. Competition 5. Location 6. New products Cost of receivables/trade credits1. Carrying cost 2. Defaulting cost 3. Administration cost

Management of receivables
1. Forming of credit policy 2. Executing credit policy 3. Formulating & executing collection policy Credit rating-5 Cs (character, capacity, capital, collateral & condition) Ageing schedules-it is a statement prepared to determine quality of individual debtors. No of days, period ending, % age of debt etc. FactoringServices-finance, maintenance of accounts, collection of data or protection against credit risks.