Introduction

Short term financial management is differing from the

long term financial management in terms of the timing of cash. Short term financial decisions typically involve cash flow within a year or within the operating cycle of the firm. The long term financial decisions like buying capital equipments or issuing debentures involve cash flow over an extended period of time.

Roles of a finance manager

Negotiating favourable credit terms Arranging short term finances

Monitoring the investment in inventories Controlling the cash movement Administering accounts receivables

The working capital needs of a firm are influenced by numerous factors:

1. Nature of Business 2. Seasonality of operations 3. Production policy

4. Market conditions

5. Condition of supply

Assets

Fixed assets Current assets

Temporary vs. Permanent Assets

Temporary current assets
Sales or required inventory build-up may be seasonal Additional current assets are needed during the peak time The level of current assets will decrease as sales occur

Permanent current assets

Firms generally need to carry a minimum level of current assets at all times These assets are considered permanent because the level is constant, not because the assets arent sold

Current asset cycle

Finished Goods Accounts Receivable Wages, salaries, factory overheads Raw materials Work in process

Cash

Suppliers

Company policies
1)

Conservative Policy ( flexible) Investment in current assets is high Huge balance of cash & marketable securities Larger inventories Grants generous terms of credit Restrictive Policy (aggressive) Investment in current assets is low Low balance of cash & marketable securities Smaller inventories Stiff terms of credit

2)

Operating and cash cycle

Short term finance management can be divided into:

Inventory management

Cash and liquidity management

Credit management

Inventory Management
There are 3 type of inventories: Raw materials Work in progress Finished goods Inventories represent the 2nd largest asset category for manufacturing companies. The proportion of inventory to total assets generally varies between 15-30%.

Recent advancements in field of inventory management.

Material requirement planning Just in Time Electronic data interchange and bar coding

Cash and Liquidity

management
Cash the most liquid asset is of vital importance to the

daily operations of business firms. Desired level 1-4% of assets, life blood of the business enterprise Better cash levels can be achieved by speeding collections and delaying disbursements.

Investment of surplus funds

Ready cash segment Reserve for company's cash account Meant to augment cash resources to meet unanticipated operational needs Must be highly liquid Controllable cash segment Part of investment which is meant for knowable outflows like taxes, dividend etc Investments must be matched in size and maturity to known future outflows Free cash segment Part of investment which is neither meant for unforeseen cash requirements nor to meet known future outflows Investment is done only to generate income It is not concerned with liquidity or maturity

Credit management
Trade credit management is divided into the following broad areas : Credit policy Credit analysis Credit period Control of accounts receivables Cash discount

Room for improvement

Management of receivables must be accorded the importance it

deserves. Credit policies need to be articulated in explicit terms and revised periodically There should be better coordination between sales, production and finance departments Firms granting credit should examine the published statement of prospective customer with great rigour, references must be examined and necessary follow up should be taken A well defined collection program must be developed

Working Capital Financing

Accruals
Trade credit Working capital advance by commercial banks

Regulation of bank finance

Inter corporate deposits Short-term loans from financial institutions Commercial paper

Lupin
Current ratio Acid test ratio Debt-equity ratio Debt to total asset 1.76 1.04 0.86 0.31

Piramal
1.2 0.95 1.02 0.27

Interest coverage ratio

Receivable turnover ratio Receivable turnover (in days) Payable turnover ratio Payable turnover (in days) Inventory turnover ratio

14.9
5.32 68.8 3.36 109 3.27

9.3
6.88 53 3.84 95 6.88

Inventory turnover (in days)

Operating cycle(in days) Cash cycle (in days) Total asset turnover ratio Gross profit margin Pretax margin Net profit margin

111.6
180 71 0.95 17.17 16.05 13.28

53
106 11 0.91 18.14 10.5 9.82

Rate of returns
Rate of equity ROI

12.6
35.21 18.11

8.2
21.33 15.43

Operating Cycle
180 160 140

120
100 80 60 40 20 0 lupin piramal recievable turnover (in days) inventory cycle (in days)

Cash Cycle
200 180 160 140 120 100 80 60 40 20 0 Piramal healthcare Lupin

operating cycle (in days)

account payable period (in days) Cash cycle

Findings
Both the Companies have a healthy cash flow despite

spending on acquisitions and capacity expansions during the year. Many of the pharmaceuticals have started re-looking at their working capital cycles and decided to reduce their inventory levels. Entry into new fields has influenced financial performance of companies Piramal Custom manufacturing business Lupin Lean marketing mechanism.

Lupin
Working capital (rate of increase) Increased by 20%

Piramal
Increased by 15.5%

Debt-equity ratio
CA out of total CA and loans and advances Accounts receivable (in days)

Decreased from 65% to 62%

Increased from 66% to 102%

76.8%

54.5%

69

53