MANAGEMENT OF WORKING CAPITAL IN AGRI FOOD BUSINESS.

INTRODUCTION
CAPITAL REQUIREMENTS OF BUSINESS----- FIXED CAPITAL REQUIREMENTS WORKING CAPITAL REQUIREMENTS
FIXED CAPITAL IS REQUIRED FOR INVESTMENT ON FIXED ASSETS. WORKING CAPITAL IS REQUIRED FOR DAY-TO- DAY WORKING OF THE ENTERPRISE. WORKING MAY BE

GROSS OR NET

GROSS WOKING CAPITAL IS THE FIRMS INVESTMENTS IN TOTAL CURRENT/CIRCULATING ASSETS. NET WORKING CAPITAL IS THE EXCESS OF CURRENT ASSETS OVER CURRENT LIABILITIES. ----- IT IS THE PORTION OF FIRMS CURRENT ASSETS FINANCED BY LONG TERM FUNDS.

NEED FOR WORKING CAPITAL-----OBJECTIVE OF FINANCIAL MANAGEMENT IS TO MAXIMISE SHAREHOLDERS WEALTH. THIS IS POSSIBLE ONLY WHEN FIRM EARNS PROFITS. AMOUNT OF PROFIT DEPENDS UPON THE MAGNITUDE OF SALES. SALES DO NOT CONVERT INTO CASH IMMEDIATELY. THERE IS ALWAYS A TIME GAP BETWEEN SALE OF GOODS AND RECEIPTS OF CASH. WORKING CAPITAL IS REQUIRED DURING THIS PERIOD TO SUSTAIN THE SALES ACTIVITY.

OPERATING CYCLE----THE TIME GAP BETWEEN THE SALES AND RECEIPT OF CASH IS CALLED AS OPERATING CYCLE. THE EVENTS IN THE O.C. OF A MANUFACTURING CONCERN ARE AS FOLLOWS--A. CONVERSION OF CASH INTO RAW MATERIALS. B.. CONVERSION OF RAW MATERIALS INTO WORK-IN PROGRESS C . CONVERSION OF W.I.P. INTO FINISHED GOODS D. CONVERSION OF FINISHED GOODS INTO ACCOUNTS RECEIVABLES AND E. CONVERSION OF ACCOUNTS RECEIVABLES INTO CASH. ------------THIS CYCLE WILL BE REPEATED AGAIN AND AGAIN.--------------THE EVENTS IN THE CASE OF A NON-MFG CONCERN WILL BE AS FOLLOWS A. B. C. CASH INTO INVENTORIES. INVENTORIES INTO ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE INTO CASH. AND

------------THIS CYCLE WILL BE REPEATED AGAIN AND AGAIN.---------------

TYPES OF WORKING CAPITAL--ON THE BASIS OF TIME IT MAY BE ------A. PERMANENT WORKING CAPITAL B. TEMPORARY OR VARIABLE WORKING CAPITAL PERMANENT WORKING CAPITAL REFERES TO THAT MINIMUM AMOUNT OF INVESTMENT IN ALL CURRENT ASSETS WHICH IS REQUIRED AT ALL TIMES TO CARRY OUT MINIMUM LEVEL OF BUSINESS ACTIVITIES. IT REPRESENTS THE CURRENT ASSETS REQUIRED ON A CONTINUING BASIS OVER THE ENTIRE YEAR.THEREFORE IT SHOULD BE FINANCED OUT OF LONG TERM FUNDS. TEMPORARY W.C. KEEPS ON FLUCTUATING FROM TIME TO TIME ON THE BASIS OF BUSINESS ACTIVITIES. IT REPRESENTS ADDITIONAL CURRENTS

REQUIRED AT DIFFERENT TIMES DURING THE OPERATING YEAR. FOR EX. EXTRA INVENTORY HAS TO BE MAINTAINED TO SUPPORT SALES DURING PEAK SALES PERIOD. ON THE OTHER HAND INVENTORY WILL DECREASE DURING THE PERIOD OF DEPRESSION.

ADEQUACY OF WOKING CAPITAL.

A FRIM MUST HAVE ADEQUATE W.C. FIRM. IT SHOULD NEITHER BE EXCESSIVE NOR INADEQUATE.. BOTH SITUATIONS ARE DANGEROUS. EXCESSIVE W.C.----IDLE FUNDS.---EARN NO PROFITS. INADEQUATE W.C.-----NO SUFFICIENT FUNDS TO RUN OPERATIONS. THEREFORE PRODUCTION INTERRUPTS THEREBY LOWERING PROFITS.. i.e. AS MUCH AS NEEDED BY BTHE

RELATIONSHIP BETWEEN W.C., RISK AND RETURN.

IN A MANUFACTURING CONCERN, HIGHER LEVEL OF W.C. DECREASES THE RISK AND DECREASE THE PROFITABILITY TOO. LOWER LEVEL OF W.C. INCREASE THE RISK , BUT HAVE THE POTENTIALITY OF INCREASING THE PROFITABILITY ALSO. THIS PRINCIPLE IS BASED ON THE FOLLOWING ASSUMPTIONS:1.THERE IS A DIRECT RELATIONSHIP BETWEEN RISK AND PROFITABILITY. HIGHER THE RISK, HIGHER IS THE PROFITABILITY AND VICE VERSA. 2. CURRENT ASSETS ARE LESS PROFITABLE THAN FIXED ASSETS. 3. SHORT TERM FUNDS ARE LESS EXPENSIVE THAN LONG TERM FUNDS.

ESTIMATING THE W.C.REQUIREMENTS.(DETERMINATION ).

IN ORDER TO DETERMINE THE WORKING CAPITAL NEEDED, A NUMBER OF FACTORS ARE TO BE CONSIDERED. PRODUCTION POLICIES

NATURE OF BUSINESS LENGTH OF MANUFACTURING PROCESS CREDIT POLICIES RAPIDITY OF TURNOVER SEATIONAL FLUCTATIONS, etc.

TECHNIQUES FOR ASSESSING WORKING CAPITAL REQUIREMENTS

(A)ESTIMATION OF COMPONENTS OF WORKING CAPITAL METHOD:Since W.C.=C.A. minus C.L., an assessment can be made regarding the different constituents of W.C. i.e. inventories accounts receivables, accounts payable, cash, etc. (B)PERCENT OF SALES APPROACH:This is a traditional and simple method. The basis is the past experience between sales and W.C. On this basis estimate the W.C. requirements in future. (C) OPERATING CYCLE APPROACH:O.C. begins with the purchase of R.M. and ends with the collection of Accounts Receivables. The O.C. is classified into 4 stages i) R/M and Storage stage ii) W.I.P.Stage iii) F.G.Inventory Stage and iv) Receivables collection Stage. The duration of the O.C. for the purpose of estimating the W.C.requirements is equivalent to the sum(Total) of the duration of each of these stages less(Minus) the credit period allowed by the creditors/suppliers of the firm. O= R +W+F+D-C.

Where O denotes duration of the operating cycle, R denotes Raw material storage period, W denotes W.I.P. Period, F for F.G .Inventory storage period , D for debtorss collection period, and C for creditors payment period.

MANAGEMENT OF COMPONENTS OF WORKING CAPITAL.

Components---Cash, Creditors, etc. Inventories, Accounts Receivables,

MANAGEMENT OF CASH.
Duty of the Finance Manager is to provide adequate cash to all segments of the organization. Also he has to ensure that no funds are blocked in the form of idle cash Idle cash means interest burden to the business. A sound cash management maintains the balance between Liquidity and Cost. Meaning of cash------Includes coins, currencies, cheques, bank drafts, and demand deposits(Narrow sense) Includes near cash assets such as marketable securities and time deposits with banks (Broader sense) Cash management is both for cash and near cash assets. Motives for holding cash--1. Transaction motive---A firm enters in to a variety of business transactions resulting in both cash inflows and outflows.

In order to meet such a business obligations it is necessary to maintain adequate Cash balance. 2. Precautionary motive---------- To meet unexpected cash needs arising out of unexpected Contingencies such as floods, strikes, payment of bills earlier than expected dates, unexpected slowing increase increase in down of collection of receivables, sharp

prices of raw materials, etc. More is the possibility of such contingencies, more is the amount of cash to be kept. 3. Speculative motive------To take advantage of unexpected opportunities, Typically outside the normal course of business, Purely of a speculative nature, For ex. payment, To make profit by buying securities in times when their prices fall in stock market,etc Objectives of Cash Management:- Two basic objectives------1. To meet the cash disbursement needs as per the payment schedule---( At different period of times) To purchase raw materials, payment of wages, rent , taxes, purchase of plant, etc. If payment schedule is not maintained, business activity may come to a grinding halt. Hence cash is Oil to lubricate the ever-turning wheels of the business. Without it The process grinds to a halt. 2. Minimising funds locked up as cash balance--To purchase of R.M. at reduced price on immediate cash

Finance Manager faces two conflicting aspects(a) A higher cash balance ensures proper payment with all its advantages. But this results in a large cash balance remaining idle. (b) A low level of cash balance may result in failure of the firm to meet the Payment schedule. THEREFORE AN OPTIMUM LEVEL OF CASH BALANCE IS TO BE MAINTAINED

MANAGEMENT OF INVENTORIES: Inventories----Goods held by the firm for eventual sale. One of the major elements which help the firm to obtain desired level of sale.

Kinds of inventories-----(i) R.M.

(II)

W.I.P.

(III) F.G.

Benefits of holding inventories---(a) Avoiding losses of sales-- (On account of losing the customers for Non-supply of products or goods in time) (b) Reducing ordering costs(Variable costs associated with individual orders Like typing, checking, approving , mailing , etc.)

Risks and costs associated with inventories--(i) Price decline (due to increase in market supply of the product, introduction Of a new competitive product, price cutting by competitors,etc.

(ii) Product deterioration (due to holding for too long a period or Improper storage conditions) (iii) Obsolescence.

Costs of holding inventories

(a) Materials cost---i.e. cost of purchasing , transportation, and handling Charges less discount allowed by the supplier. (b) Ordering cost--- variable cost associated with placing an order for the Goods--- (typing, checking, mailing, etc,.) (c) Carrying cost---expenses for storing the goods( Storage costs, Insurance costs, spoilage costs, cost of funds tired up in inventories).

Techniques of inventory management

1. Determination Economic Order Quantity 2. Determination of Optimum Production Quantity. 3. Determination of re-order Level. 4. ABC Analysis. 5. Just In Time (JIT) Inventory System Etc.

MANAGEMENT
result of

OF ACCOUNTS RECEIVEBLE

Asset accounts representing amounts owed to the firm as a Sale of goods or services in the ordinary course of business. Also called Receivables. Or Book Debts.s

Constitutes a significant portion of current assets next to inventories. Direct consequence of Trade Credit. Or Credit Sales. Credit sale is done by the firm to pushup sales in order to pushup profits. Credit sale is also done to meet competition. But at the same time, credit sales results in blocking of funds in Receivables. Hence additional funds are required for the operational needs of the firm. Additional funds involves extra costs in the form of interest. Hence there is a need to MANAGE THE RECEIVABLES.

Receivables Management is a process of making decisions relating to the investment of the funds in Receivables which will result in maximizing the overall return on the investment of the firm.
Costs of maintaining Receivebles:
1. Capital Costs -- Interest to the lender of funds in case of blocking on receivables.

2. Administrative CostsCost of additional staff for maintaining accounting records. 3. Collection Costs-- For collection of payments from customers.(Travelling expenses, Outstation Cheques collecting charges, etc.) 4. Defaulting Costs-customers, Bad debts,etc. Legal expenses in case of defaulting