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Working Capital Management-B.V.Raghunandan


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Basics of working capital management as delivered by B.V.Raghunandan in a guest lecture

Published in: Economy & Finance, Business
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Working Capital Management-B.V.Raghunandan

  1. 1. Working Capital Management - B.V.Raghunandan SVSC,Bantwal AIBA-Executive Development Programme July 29,2006.
  2. 2. Working Capital <ul><li>Funds needed to meet day-to-day expenses </li></ul><ul><li>Gross Working Capital is the sum of all the Current Assets---financed by both long-term and short-term funds </li></ul><ul><li>Net Working Capital is the difference between the Current Assets and Current Liabilities---financed by long term sources of funds </li></ul>
  3. 3. Current Assets <ul><li>Cash in hand & Cash in Current Account </li></ul><ul><li>Near Cash Items like balance in SB A/c, Bank Deposit, Investment in Money Market Instruments, Mutual funds </li></ul><ul><li>Accounts Receivable </li></ul><ul><li>Inventory </li></ul><ul><li>Advance Payments </li></ul>
  4. 4. Current Liabilities <ul><li>Accounts Payable </li></ul><ul><li>Taxes Payable </li></ul><ul><li>Customer Deposit </li></ul><ul><li>Dealers’ Deposit </li></ul><ul><li>Accrued Expenses Payable </li></ul>
  5. 5. Assessment of Working Capital Requirement <ul><li>Operating Cycle Method </li></ul><ul><li>Forecasted Balance Sheet Method </li></ul><ul><li>Percentage of Sales Method </li></ul><ul><li>Trial & Error Method </li></ul>
  6. 6. Operating Cycle Method <ul><li>Estimation of Conversion periods like RMCP,WIPCP,FGCP,BDCP </li></ul><ul><li>Estimation of PDP </li></ul><ul><li>Estimation of Net Operating Cycle </li></ul><ul><li>Determination of No. Net Operating Cycles in a Year </li></ul><ul><li>Sales/ No.of Net Operating Cycles =Working Capital Needed </li></ul>
  7. 7. Forecasted Balance Sheet Method <ul><li>Forecast the elements of the Balance Sheet of the Period </li></ul><ul><li>Sum Up the Current Assets </li></ul><ul><li>Sum Up the Current Liabilities </li></ul><ul><li>Current Assets-Current Liabilities= Net Working Capital </li></ul>
  8. 8. Percentage of Sales Method -Establishing the Working Capital as a Percentage of Sales -Working Capital is estimated for each period as a percentage of the sales forecasted -This method is becoming popular for its simplicity -RBI also favors this method to be followed by the Bankers
  9. 9. Management of Current Assets <ul><li>Cash Management </li></ul><ul><li>Management of Accounts Receivable </li></ul><ul><li>Inventory Management </li></ul>
  10. 10. Cash Management <ul><li>Preparation Cash Budget </li></ul><ul><li>Wherever Possible, use SB A/c with Autosweep facility </li></ul><ul><li>Investment in Near Cash Items like Bank FD, Money Market Instruments, MFs, MMMFs </li></ul><ul><li>Acceleration of Cash Inflow through….. </li></ul><ul><li>Deceleration of Cash Outflow through…….. </li></ul>
  11. 11. Acceleration of Cash Inflow <ul><li>ECS and RTGS </li></ul><ul><li>Discounting Cheques </li></ul><ul><li>Factoring </li></ul><ul><li>Stock Clearance </li></ul><ul><li>Cash Discount to Debtors </li></ul><ul><li>Discounting of Bills </li></ul><ul><li>Disposal of Useless Assets/Brands </li></ul>
  12. 12. Decelerating Cash Outflow <ul><li>Delay Payment of Insensitive Items like Utility Bills, Taxation </li></ul><ul><li>Using Multi-city Cheques instead of Bank Drafts </li></ul><ul><li>Using Credit Card and Charge Accounts without attracting Interest </li></ul><ul><li>New loans in declining interest rate period and opting for Floating interest rate loan </li></ul><ul><li>In a period of increasing interest rate , opt for fixed interest rate loans </li></ul>
  13. 13. Inventory Management <ul><li>Material Budget </li></ul><ul><li>Purchase Budget </li></ul><ul><li>Inventory Levels </li></ul><ul><li>Economic Order Quantity </li></ul><ul><li>Control of Spoilage </li></ul><ul><li>Browsing Websites to reduce lead time </li></ul><ul><li>Plant Proximity </li></ul><ul><li>Just in Time Management </li></ul><ul><li>ERP for Multi-Location Stores </li></ul>
  14. 14. Management of Accounts Receivable <ul><li>Desirability of Credit Sales </li></ul><ul><li>Establishing a Credit Policy for debtor evaluation, credit limit, cash discount </li></ul><ul><li>Billing Procedure: frequency of Statement of Account </li></ul><ul><li>Raising Finance through Factoring, Discounting Bills of Exchange </li></ul><ul><li>Review of Credit Policy </li></ul>