TOPIC: WORKING CAPITAL MANAGEMENT & MANAGEMENT OF CASH

PRESENTED BY ANAND VISHNU. B NAIR

SUBMITTED TO MRS SIJI ANSEL

INTRODUCTION
The capital requirement of a business can be divided

into two main categories . they are: a) fixed capital management b) working capital management

MEANING OF WORKING CAPITAL

The term working capital is commonly used for the

capital required for the day to day working in a business concern, such as purchasing raw material, for meeting daily expenditure on salaries, wages, rents, advertising etc.

DEFINITION OF WORKING CAPITAL MANAGEMENT

The sum of current assets is the working capital of the

business.- JS MILL Any acquisition of the funds which increases the current assets increases working capital, for they are the one and the same.- BONNEVILLE

NEED FOR WORKING CAPITAL

There is always a time gap between sale of goods and

receipt of cash, especially in the case of credit sales. The firm may not have funds to manage the day to day activities till the cash is collected from the debtors. To manage this cash shortage period the firm maintains the working capital. Thus working capital is required because of the time gap between the sales and actual realization of cash. This time gap is technically termed as OPERATING CYCLE OF THE BUSINESS.

OPERATING CYCLE OF A MANUFACTURING CONCERN

Operating cycle
ACCOUNTS RECEIVABLES

CASH

FINISHED GOODS

RAW MATERIALS
WORK IN PROGRESS

A) ON THE BASIS OF CONCEPT 1) gross working capital 2) net working capital

B) ON THE BASIS OF PERIODICITY OF REQUIREMENTS 1) fixed or permanent working capital 2) temporary working capital

ON THE BASIS OF CONCEPT

A) GROSS WORKING CAPITAL it refers to the investment in the total current assets. that is total of the current assets is the gross working capital. B) NET WORKING CAPITAL(NWC) NWC= current asset current liabilities defined as portion of the current assets financed by the long term funds

ON THE BASIS OF PERIODICITY OF REQUIREMENTS

A) FIXED OR PERMANENT WORKING CAPITAL

It represents that part of the capital, which is permanently locked up in the current assets to carry out the business smoothly. OR the minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. Ex: minimum stock of raw materials, work in progress, finished goods, loose tools etc.

B) TEMPORARY WORKING CAPITAL This is also called variable working capital. Variable working capital changes with increase or decrease in the volume of business. In other words it represents the additional current assets required at different times during the operating year. for example, extra inventory has to be maintained during peek sales periods. On the other hand, investment in inventories, work in progress, receivables, etc will be less during the depression period.

WORKING CAPITAL MANAGEMENT

According to Smith KV- working capital management is

concerned with the problems that arise on attempting to manage the current assets, the current liabilities and the interrelationship that exist between them. The basic objective of WC management is to manage the firms current assets and current liabilities in such a way that a satisfactory level of WC is maintained. that is, the NWC should neither be inadequate nor excessive. More over the different components of WC are to be properly balanced. If the firms investment in various components of WC are not properly balanced, that is, if the investment is not proportionate, even if the firm enjoys a high liquidity ratio the firms liquidity position will be weak.

DETERMINANTS OF WORKING CAPITAL

Nature of business Size of business unit Seasonal variations Time consumed in manufacturing Volume of sales Terms of purchase and sales Inventory turnover Receivables turnover Business cycle

Price level changes Growth and expansion of

business Vagaries in the availability of raw materials Profit level Level of taxes Dividend policy Depreciation policy Operation efficiency Labour intensive Vs capital intensive industries

Nature of business
The amount of working capital is basically related to

the nature and volume of the business. In concerns where to be used in the manufacture of a product is very large in proportion to its total cost of manufacture, the requirements of working capital will be very large. The concerns employing large amount of fixed assets, like the public utility concerns will require only small amount of the working capital where as a departmental store will require heavy investment in the inventory and receivables, which is an increase in the working capital of the concern.

Size of the organization

The bigger the size higher will be the requirement of

the working capital and vice versa. This is because larger organizations are required to carry heavier amounts of inventory and the expenditure for carrying out the day to day affairs require large funds.

Seasonal variations
In the case of concerns like sugar mill, cotton product

manufacturers, oil mills etc. have to carry heavy amount of working capital during the seasons when the raw materials for the product are available. thus the seasonal concerns require large amounts of working capital during the seasons.

Time consumed in the manufacturing

The longer the period of the manufacture, higher will

be the requirement of the working capital. ex: construction companies.

Volume of sales
This is the most important factor affecting the size and

components of the working capital. A firm maintains current assets because they are needed to support the operational activity, which result in the sales. The volume of sales and size of the working capital are directly related to each other. as the sales increase there is an increase in the investment in the working capital, because the cost of operations, investment in the inventories and receivables goes up.

Terms of purchase and sales

If the credit terms are more liberal, then the

requirement of working capital will be less. That is if the credit terms are liberal the firm will be able to invest more in the inventory with less cash. Also, the firm will get more time for repayment to the suppliers of goods. Thus if there is liberal credit tems by the supplier, then the requirement of the working capital will be less. Again, if the firm is enjoying good credit relationship with the bank, the requirement of the working capital will be less.

Inventory turnover
If the inventory turnover is high then the requirement

of the working capital will be less. By applying better inventory control, the firm will be able to reduce its investment in the stock.

Receivables turnover
Faster the rate of conversion of the receivables into

cash, lesser will be the requirement of the WC. A prompt collection of the receivables will result in the low working capital requirement.

Business cycle
During the boom period of the business will be piling

up the stock so as to sell more and get the maximum profit. Therefore the requirement of WC will be high. The expansion of the business may result in the inflation, which again will increase the burden of maintaining more amount of WC. During depression, there is a reduction in the volume of business on account of loss of demand. Because of the in the inventories and the receivables, which usually accompanies decline in sales, the firm may experience shortage of WC.

Price level changes

During the periods of rising price levels, the amount of

WC to be maintained will be higher, because to maintain same level of the current assets the firm will be required to invest more. But, if the firm also rises its price level of its products, it will not feel severe working capital problem.

Growth and expansion of the business

The growing concerns require more amount of WC

than others, which have already reached a saturation stage. Towards the expansion programs and to acquire more amount of stock ot will have to maintain higher amounts of the WC.

Vagaries in the availability of raw materials

The availability and non availability of the raw

materials can also affect the requirement of WC. There are some materials, which cannot be procured easily. To maintain smooth production, therefore, the firm may compelled to purchase and stock them in huge quantities, much more than what is actually needed in the particular period of time.

Profit level
Firms that are able to generate higher amounts of

profit will require only lesser amounts of WC. This is because, higher the profit the margin the margin would improve the prospects of generating more internal funds thereby there by reducing the dependence on external sources for WC. The net profit is considered as a source of WC as long as they are earned in cash. But availability of profit for the working capital purpose would depend on the profit appropriations for taxation, dividend, reserves and depreciation.

Level of taxes
Tax is a short term liability payable in cash. Adequate

amount should therefore be set apart as a provision for tax payment. This is an important aspect of WC planning.

Dividend policy
Dividend is also an appropriation from the profit. The

payment of dividend reduces the cash level and thus it adversely affects WC. Therefore when the firm is not in a position to drain away its cash resources in the form of dividend, bonus shares are issued. Thus dividend policy is significant element in determining the level of WC in an organization.

Depreciation policy
Depreciation doesnt lead to an out flow of cash. But it is an

appropriation from the profits. Therefore it indirectly affects the WC of an organization. When there is a higher rate of depreciation to be provided, it reduces profit and therefore the tax liability is also reduced. When the profit on account, the level of dividend also diminishes. Thus higher depreciation reduces cash out go and thus improves the WC position. Also, if the capital expenditure is lesser than the amount provided by way of depreciation, then the WC position will improve. But if capital expenditure is greater than depreciation then the firm must borrow from outside resources which will adversely affects WC.

Operating efficiency
The management can improve the WC position

through operating efficiency. By efficient utilization of the resources, the management can reduce the wastage and ensure full utilization of the capacity of the plant. Operating efficiency accelerates the process of conversion of the raw materials- finished goods- cash. It thus reduces the pressure on the WC by the generation of internal funds.

Labour intensive Vs capital intensive industries.

In labour intensive industries, larger WC is required

because of the regular payment of wages and more time taken in manufacturing process. On the other hand in the case of capital intensive industries require lesser amount of WC because of the heavy investment in fixed assets and shorter manufacturing periods.

MANAGEMENT OF CASH

INTRODUCTION
Cash is the most liquid asset that a business owns. It

includes money and instruments such as cheques, money orders, bank drafts all other assets, which can be converted into cash in no time. Cash is the most important factor in financial management. It is an important current asset for the operations of the business. Every activity in an organization revolves around cash. But the supply of cash is scarce and it can not be raised as one likes it. Therefore cash management is important.

SIGNIFICANCE OF CASH MANAGEMENT

Cash management is one of the key areas of WC

management. Apart from being the most liquid asset, cash is the most common denominator to which all current assets can be converted into. The significance of cash management can be understood from the fact that significant current assets like inventory and receivables will eventually be converted into cash. The difficulty in the estimation of cash flows and lack of confidence between the cash inflows and cash outflows adds to the significance of cash management.

MEANING OF CASH MANAGEMENT

Cash management is to maintain a sound cash

position to keep the firm sufficiently liquid and to use the excessive cash, if any in a productive manner.

CASH PLANNING
Cash planning is the process of predicting cash inflows and

out flows of the firm over the forthcoming period so as to determine surplus or shortage of cash. cash planning involves cash controls as well. If there is excess cash inflow, the firm can invest it more profitably and incase of the shortage in the cash inflows , the firm can make adequate provision for the same. Thus, with the help of cash planning, the firm can anticipate imbalances in the cash inflow and outflow and thereby can reduce the chances of the idle cash balance or shortfall in the cash. Cash planning may be done on daily, weekly or monthly basis. The period and frequency of cash planning depends on the size and nature of the firm.

MOTIVES FOR HOLDING CASH

TRANSACTION MOTIVE: holding of cash to meet the routine cash

requirements to finance the transactions which a firm carries on in the ordinary course of its business. purposes which can not be predicted or anticipated. The more is the possibility of such contingencies, more is the amount of cash kept by the firm for meeting them. maintain a minimum balance of cash with them. This will help the bank to earn interest and thus compensate the for the free services that are provided. opportunities, typically outside the normal course of the business. Therefore, such motives are purely speculative in nature.

PRECAUTIONARY MOTIVE: a firm may have to pay cash for the

COMPENSATION MOTIVE: in banks, usually clients are required to

SPECULATIVE MOTIVE: to take advantage of the unexpected

ADVANTAGES OF AMPLE CASH BALANCE

Protection against inefficiency.
To avail cash discount. Maintenance of goodwill.

Increase in efficiency.
Exploitation of business opportunities. Good relation with banks. Overcoming abnormal situation.

There are two basic objectives of cash management they are: 1) MEETING CASH DISBURSEMENTS. 2) MINIMIZING THE FUNDS LOCKED UP AS CASH BALANCES

MEETING CASH DISBURSEMENTS

The basic objective of cash management is to meet the

payments in time. It means that the firms should always have sufficient cash to meet the various requirements of a firm. If there is not sufficient cash balance the entire business activity will stop. therefore it is aptly said, cash is the oil to lubricate the ever turning wheels of business, and without it the process grinds to stop.

MINIMIZING THE FUNDS LOCKED UP AS CASH BALANCES.

The other objective of cash management is to

minimize the amount locked up as cash balances. This calls for efficient cash management. If cash balance is high, it leads to the problem of idle cash balance. on the other hand shortage in cash balances may result in the failure of firm to meet payment schedules, which will affects the firms reputation.

CONCLUSION
We can see that WC management and cash

management are two sides of a coin. But WC management has short term objectives while cash management has long term objectives in priority and both assures liquidity of the firm. Similarly we can say that WC management is a part of cash management because WC itself is cash.