session1 (1).pptx.pdf

Principles of Working Capital Management Dr. Shweta Kundlia  The working capital management refers to management of the working capital, or to be more precise, the management of current assets. Working Capital Management is process which is designed to ensure that an organization operates effici...

Principles of Working Capital Management Dr. Shweta Kundlia  The working capital management refers to management of the working capital, or to be more precise, the management of current assets. Working Capital Management is process which is designed to ensure that an organization operates efficiently by monitoring & utilizing its current assets and current liabilities to the best effect. Primary objective is to enable a company maintaining sufficient cash flows in order to meet its day-to-day operating expenses and its short-term obligations. Difference Time value of money Profitability Expected sales Need for working capital management First, existence of working capital is imperative in any firm. The fixed assets which usually require a large chunk of total funds, can be used at an optimum level only if supported by sufficient working capital, and second, the working capital involves investment of funds of the firm. If the working capital level is not properly maintained and managed, then it may result in unnecessary blocking of scarce resources of the firm. The insufficient working capital, on the other hand, put different hindrances in smooth working of the firm  Working capital On the On the basis of basis of Value Time Variable/Flu Gross Net Permanent ctuating On the basis of Value Gross working capital refers to the firm’s investment in current assets. Net working capital refers to the difference between current assets and current liabilities. A positive working capital indicates the company’s ability to pay its short-term liabilities. On the other hand, a negative working capital shows inability of an entity to meet its short-term obligations.  On the basis of Time Permanent working capital refers to the base working capital, which is the minimum level of investment in the current assets that is carried by the entity at all times to carry its day-to-day activities. It generally stays invested in the business, unless the operations are scaled up or down permanently which would also result in increase or decrease in permanent working capital. It is generally financed by long term sources of finance. Temporary working capital refers to that part of total working capital, which is required by an entity in addition to the permanent working capital. It is also called variable or fluctuating working capital which is used to finance the short-term working capital requirements which arises due to fluctuation in sales volume. For instance, an organization would maintain increased levels of inventory to meet increased seasonal demand. Operating and cash conversion cycle The operating cycle may be defined as the time duration starting from the procurement of goods or raw materials and ending with the sales realization. The length and nature of the operating cycle may differ from one firm to another depending upon the size and nature of the firm. operating cycle of a firm consists of the time required for the completion of the chronological sequence of some or all of the following : (i) Procurement of raw materials and services. (ii) Conversion of raw materials into work-in-progress. (iii) Conversion of work-in-progress into finished goods. (iv) Sale of finished goods (cash or credit). (v) Conversion of receivables into cash. Working Capital or OC cycle indicates the length of time between a company’s paying for materials, entering into stock and receiving the cash from sales of finished goods. It can be determined by adding the number of days required for each stage in the cycle. For example, a company holds raw materials on an average for 60 days, it gets credit from the supplier for 15 days, production process needs 15 days, finished goods are held for 30 days and 30 days credit is extended to debtors. The total of all these, 120 days, i.e., 60 – 15 + 15 + 30 + 30 days is the total working capital cycle. The length or time duration of the operating cycle of any firm can be defined as the sum of its inventory conversion period and the receivable conversion period. Inventory Conversion Period (ICP) : It is the time required for the conversion of raw materials into finished goods sales. In a manufacturing firm the ICP is consisting of Raw Material Conversion Period (RMCP), Work-in-Progress Conversion Period (WPCP), and the Finished Goods Conversion Period (FGCP). The RMCP refers to the period for which the raw material is generally kept in stores before it is issued to the production department. The WPCP refers to the period for which the raw materials remain in the production process before it is taken out as a finished unit. The FGCP refers to the period for which finished units remain in stores before being sold to the customers. Receivables Conversion Period (RCP) : It is the time required to convert the credit sales into cash realization. It refers to the period between the occurrence of credit sales and collection of deb From the following information of XYZ Ltd., you are required to CALCULATE: (a) Net operating cycle period. (b) Number of operating cycles in a year. Rs. Raw material inventory 6,00,000 consumed during the year Average stock of raw material 50,000 Cost of Production for the year 5,00,000 Average work-in-progress 30,000 inventory Cost of goods sold during the 8,00,000 year Average finished goods stock 40,000 held Average collection period 45 days from debtors Average credit period availed 30 days No. of days in a year 360 days From the following information taken from the books of a manufacturing concern, compute the operating cycle in days: Rs. in ‘000 Period covered 365 days Average period of credit allowed by 16 days suppliers Average debtors outstanding 480 Raw materials consumption 4,400 Total production cost 10,000 Total cost of goods sold 10,500 Sales for the year 16,000 Value of average stock maintained: Raw materials 320 Work-in-progress 350 Finished goods 260