Scribd
Upload
85 views30 pages

Working Capital Management: Presented by

The document summarizes a lecture on working capital management. It defines working capital as current assets minus current liabilities, and discusses managing inventories, accounts receivable, accounts payable, and cash to effectively manage working capital. The lecture covers calculating net and gross working capital, components of working capital including current assets and current liabilities, objectives of working capital management including minimizing costs and risks, and approaches to financing working capital like hedging, conservative, and aggressive approaches.

Uploaded by

asif rahan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
85 views30 pages

Working Capital Management: Presented by

The document summarizes a lecture on working capital management. It defines working capital as current assets minus current liabilities, and discusses managing inventories, accounts receivable, accounts payable, and cash to effectively manage working capital. The lecture covers calculating net and gross working capital, components of working capital including current assets and current liabilities, objectives of working capital management including minimizing costs and risks, and approaches to financing working capital like hedging, conservative, and aggressive approaches.

Uploaded by

asif rahan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 30

Lecture 11 Presented by

Dr. Md. Anwar Ullah, FCMA


Southeast University

Working Capital
Management

1
Definition and meaning of Working Capital

• Working capital is the cash needed to pay day to day


operations of the business.
• It can be defined as current assets minus current liabilities.
• It measures how much in liquid assets a company has available to
build its business.
• Positive working capital is required to continue operations and to pay
short-term debt and upcoming operational expenses.
• The management of working capital involves managing inventories,
accounts receivable and payable and cash.
• An increase in working capital indicates that the business has either
increased current assets (that is received cash, or other current
assets) or has decreased current liabilities.
Working Capital Concepts

Net Working Capital


Current Assets - Current Liabilities.

Gross Working Capital


The firm’s investment in current assets.

Working Capital Management


The administration of the firm’s current assets and the
financing needed to support current assets.
Gross Working Capital Net Working Capital
• Total Current assets • CA – CL
• Where Current assets are the • It indicates liquidity position
assets that can be converted of a firm & suggests the
into cash within an accounting extent to which working
year & include cash, debtors capital needs may be
etc. financed by permanent
sources of funds.

Composition of Working Capital


Current Assets + Current Liabilities = WC
 Inventory  Accounts payables or
 Accounts Receivables Sundry creditors
 Short term loans
or Sundry Debtors
 Provisions
 Cash and Bank Balances
 Loans and advances
Significance of Working Capital Management

• About 60 % of a financial manager’s time is devoted to short-term


financial management.
• In a typical manufacturing firm, current assets exceed one-half of
total assets.
• In general, many manufacturing firms, current assets represent 35%
of total assets.
• Excessive levels can result in a substandard Return on Investment
(ROI).
• Current liabilities are the principal source of external financing for
small firms.
• Requires continuous, day-to-day managerial supervision.
• Working capital management affects the company’s risk, return,
and share price.
Objectives of Working Capital Management

• To run business enterprise efficiently with as little money


as possible tied up in Working Capital
• Involves trade-offs between easier operation and cost of
carrying short-term assets
• To obtain the benefit of low working capital
 Money otherwise tied up in current assets can be invested in
activities that generate higher payoff
 Reduces need for costly financing
• Minimize the cost of low working capital
 Risk of shortages in cash, inventory
Permanent Working Capital

The amount of current assets required to meet a


firm’s long-term minimum needs.
AMOUNT

Permanent current assets

TIME
Temporary Working Capital

The amount of current assets that varies with


seasonal requirements.

Temporary current assets


AMOUNT

Permanent current assets

TIME
Operating Cycle or Cash Cycle

Phase 3
Receivables
 
 
Phase 2
 
  Cash
Inventory
Phase 1

1. Conversion of cash into inventory


2. Conversion of inventory into Receivables
3. Conversion of Receivables into Cash
Operating Cycle (OC)
and
Cash Conversion Cycle (CCC)
Problem 01: Bangladesh products is concerned about managing
cash efficiently. On the average, inventories have an age of 90 days,
and accounts receivable are collected in 60 days. Accounts payable
are paid approximately 30 days after they arise. The firm spends $30
millions on operating cycle investments each year at a constant rate.
Assume 360 days year.

a.Calculate the firm’s operating cycle.


b.Calculate the firm's cash conversion cycle
c.Calculate the amount of resources needed to support the firm’s cash
conversion cycle.
d.Discuss how management might be able to reduce the cash conversing
cycle.
Solution to Problem 01:
Financing of Working Capital

1.Hedging (or Maturity Matching) Approach


2.Conservative Approach
3.Aggressive Approach
Hedging (or Maturity Matching) Approach

A method of financing where each asset would be offset with a financing


instrument of the same approximate maturity, meaning Hedge the risk by
matching the maturities of assets and liabilities.

Short-term
financing**

Current
AMOUNT

assets*
Long-term
Fixed financing
assets

TIME

* Less amount financed spontaneously by payables and accruals.


** In addition to spontaneous financing (payables and accruals).
Conservative Approach

Temporary Current Short Term


Assets Financing

BDT

A s sets Marketable
C u r ren t securities Long
anen t
P er m Term
ts Financing
Fixed Asse

Time
Risks vs. Costs Trade-Off
(Conservative Approach)

Firm can reduce risks associated with short-term borrowing by using a


larger proportion of long-term financing.

Short-term financing
Taka amount

Current assets

Long-term financing
Fixed assets

TIME
Aggressive Approach

Temporary Current Assets Short Term


BDT
Financing

t A ss ets
ent C urren
an
Perm

ts Long
Fixed Asse Term
Financing

Time
Marketable Securities

• Liquid investments that can be held instead


of cash and earn a modest return
– Examples include Treasury bills, commercial
paper, bankers’ acceptances
– Many are bought and sold at a discount in
money market
Seasonal Cash Demands

Total Financing needs


Bank loans

Marketable Short-term
securities financing

Long-
term
financing
Time
Jan Feb March April May
Nominal Cost Formula
Example: 1/10, net 40

Discount % 365 days


rNom  
1  Discount % Days Discount

taken period
1 365
   0.0101 12.1667
99 30
 0.1229  12.29%.

Pays 1.01% 12.167 times per year.


3. Problem – 16-6 (Brigham p.637)
Calculate the nominal annual cost of non free
trade credit under each of the following terms.
Assume payment is made either on the due or on
the discount date.
a. 1/15, net 20
b. 2/10, net 60
c. 3/10, net 45
d. 2/10, net 45
e. 2/15, net 40
Cash Management
1. How much liquidity (cash plus
marketable securities) should the
firm have?

2. What should be the relative


proportions of cash and
marketable securities?
Cash Management
Why have cash on hand?
– Transactions demand: need money to pay bills
(employees, suppliers, utility/phone, etc.)
– Precautionary demand: to handle emergencies
(unforeseen expenses)
– Speculative demand: to take advantage of
unexpected opportunities (purchase of raw materials
that are on sale)
– Compensating balances
Efficient Cash Management Strategies

1.Delaying and stretching Accounts Payables

2.Speeding up collection of Accounts


Receivables

3.Efficient Inventory-Production Management


and

4.Combined cash management strategies


25
Trade Credit and Credit Policy

Why Grant Credit?


To facilitate business and promote efficiency
• Financial intermediation
• Collateral
• Information costs
• Product quality information
• Employee theft
• Steps in the distribution process
• Convenience, safety, and buyer psychology
Sources of Short-term Financing

Three major sources of short-term financing:


1. Trade credit (accounts payable)
2. Commercial bank loans
(Secured/unsecured)
3. Commercial paper

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy