Working Capital Management

Cash Management
Inventory Management
Receivables Managements

implies that all the business generated revenues

are effectively controlled and utilized in the best possible manner
to result in gains for the organization.
Scope of Cash Management
Cash Planning
Managing Cash flows
Optimum cash level
Investing idle cash
MOTIVES FOR HOLDING
BALANCES
Transaction motive
Precautionary motive
Speculative motive
Future requirements
Compensatory Motive

CASH

Cash Management: Meaning & Concept

CASH MANAGEMENT

Slowing Cash outflows

Prompt payment by customers

Paying on last date

Quick conversion of payment

into cash

Making use of float

Decentralized collections

Adjusting payroll funds

Lock box system

Centralization of payments

Managing Cash flows

Accelerating Cash inflows

 In simple terms it known as sales of good and service in credit

and make an promissory note to receive payment later.

COSTS OF MAINTAINING DEBTORS

CAPITAL COST: It is the cost on the use of additional capital to
support credit sales which alternatively could have been employed
elsewhere.
COLLECTION COSTS: Administrative costs incurred in collecting
the accounts receivable. Costs of additional steps to increase the
chances for eventful payment.
DELINQUENCY COSTS: Cost of financing the debtors for extended
period, and cost of additional steps to collect over-due debtors.
DEFAULT COSTS: Amounts which are to be written off as Baddebts, which cannot be collected in spite of serious efforts.

Receivables
Management

Receivables is known as when firm makes an ordinary sale of goods

or service and does not receive payment , it grant trade credit and
creates accounts receivables which would be collected in future.

Level of credit sales

Credit policy
Terms of trade
Expansion
plans
(Market
Share)
5. Relation with profits
6. Credit collection efforts
7. Habits of customers

RECEIVABLES MANAGEMENT

Is the process of making decisions relating to investment trade

debtors.
Scope of Receivables Management
Forming Credit
policy

Executing credit
policy

Collection policy

Credit Standards

Collecting credit
info

Reminders

Length of credit
period

Credit analysis

Personal requests

Cash discount

Credit decision

Personal visit

Discount period

Factoring

CA and Legal
action

Factors affecting Size of Debtors

1.
2.
3.
4.

Raw material
Work-in-progress
Consumables
Finished Goods
Spares

MOTIVES FOR

HOLDING

Transaction motive
inventory Precautionary
motive

Risk and Cost of HOLDING

Capital Costs
Storage and handling costs
Risk of price decline
Risk of obsolescence
Risk of decoration in quality

inventory

Speculative motive

Inventory Management

Inventory means stock of goods or a list of goods. Inventory

includes

1. To keep inventory at sufficiently high level to perform

production and sales activities smoothly.
2. To minimize carrying cost of inventory.
3. To keep investment in inventory at optimum level.
4. To reduce the losses of theft, obsolescence & wastage etc.
5. To make arrangement for sale of slow moving items.
6. To minimize inventory ordering costs.

Methods of Inventory
Management

1. Stock Level
Minimum Level: less than the minimum level, then the work will stop
Re-ordering level is fixed between minimum level and maximum level
Maximum Level: maximum limit of the quantity of inventories
Danger Level: level below the minimum level- stoppage of the production
Lead Time: time taken in processing the order
Economic Order Quantity: The EOQ is that inventory level that minimizes the total of
ordering of carrying cost.

Inventory Management

Inventory managementmainly refers to when a firm works to

obtain and preserve a suitable assortment of goods while keeping
costs in check.

2. TECHNIQUES BASED ON THE CLASSIFICATION OF

INVENTORIES
A-B-C analysis
A'items are very important for an organization. Because of
the high value of these A items, frequent value
analysis is required.
'B'items are important, but of course less important, than
A items and more important than C items. Therefore
B items are intergroup items.
'C'items are marginally important
A ITEMS: very tight control and accurate records
B ITEMS: less tightly controlled and good records
C ITEMS: simplest controls possible and minimal
records
VED Analysis
V = Vital item of inventories
E = Essential item of inventories
D = Desirable item of inventories

3. TECHNIQUES ON THE BASIS OF RECORDS

A. Inventory budget:

estimated inventory required for the business concern during a

particular period.

B. Inventory reports: provides information regarding the order trends

C. Valuation of Inventories: LIFO and FIFO
D. Just-in-Time

Factors affecting working Capital

Nature of business:
Production cycle:
Production policy:
Credit policy:
Growth and expansion:
Availability of raw materials:
Earning capacity:

Excess 0r Inadequate Working

Capital

Dangers of excess WC

Inadequacy of WC

Tempted to Overtrade
Big Inventories-Hands
tied
Cash & Liquidity
imbalance
Leads to defective credit
policy
Rise to speculative
transactions

Under-utilization of capacity
Creditworthiness is hit
Cannot utilize business
opportunity
Modernization and
Maintenance
Discounts and Perks

Sources of Working Capital

Sources of Working
Capital
Fixed
1.
2.
3.
4.

Shares
Debentures
Public Deposits
Ploughing back of
profits
5. Loans from
Institutions

Variable
1.
2.
3.
4.
5.

Commercial Bank
Indigenous bankers
Trade creditors
Installment Credit
Accounts receivablesCredit/Factoring
6. Accrued expenses
7. Commercial Papers