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Working capital Management

Working capital Management. Working capital Management – What it means. To manage funds for day to day requirement of production such as RM /SIP/FG & Recv. & expenses Money required to be invested in current assets Sum of current assets is WC – it is also called gross working capital

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Working capital Management

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  1. Working capital Management

  2. Working capital Management – What it means • To manage funds for day to day requirement of production such as RM /SIP/FG & Recv. & expenses • Money required to be invested in current assets • Sum of current assets is WC – it is also called gross working capital • Net working capital = CA – CL • NWC represents owners'

  3. Working capital management • W.C . Need - • Requirement of current assets • Funding of current assets • Funding out of - Own/ market /bank borrowings • Level of WC funds vis a- vis operating cycle

  4. What is operating cycle • The time required to complete the process I.e. right from purchase of raw materials for cash to realization of sales in cash. • It is calculated by adding number of days involved in each stages of production to sales after adjusting period of credit given by suppliers

  5. OPERATING CYCLE CASH RM RECV WIP FG

  6. Factors influencing OPC • Nature of business- Mfg./Trading/service • Seasonality- agro based • Capacity utilization- high or low • Business cycle- inflation/depression • Product- engg./chemical/textiles/ TV etc • RM- imported /local-location • manufacture cycle • Terms of purchase/sale

  7. Importance of WC • Payment to creditors • Cash discount • Dividend distribution • Creation of good will • Exploitation of business opportunities • To take care of contingencies • Operational effiency

  8. Working capital Finance • Nature of advance short term –up to 1 yr • Purpose – Working capital requirement I.e to finance stock and receivables + expenses • Target group – Business community- traders/Manufacturers/service providers • Types of facilities- Cash credit (stock financing) & Bills facility ( financing of receivables) • Quantum– 75 % of requirement

  9. Working capital Finance • Security – Primary– Charge on Stock/Receivables. • Collateral –Charge onland,building,machinery & personal guarantee of promoters/directors • Margin- (owned funds) – 20 to 25% • Interest - Floating – PLR linked vis-a-vis credit rating

  10. Working capital assessment • Methods of assessment • Turnover method • MPBF – I & II • Cash budget

  11. Turn over method • Based on projected turnover • Gross current assets presumed @ 25% • 5% as margin money (NWC) on the projected turnover • 20% as bank loan • Mainly meant for SMEs – as per RBI directives

  12. Turn over method • Projected turnover p.a Rs 100 • Gross C.A. @ 25 % 25 • Margin(nwc) @ 5% * 5 • Permissible bank finance 20 (20% on turnover)

  13. Maximum permissible Bank finance method(MPBF) • Projected level of CA/CL on the basis of sales • Projected level – past trend or expected growth • Operating cycle is taken into account – two methods – I & II • More scientific method • Mainly meant for bigger units • Superior over TOM

  14. I st Method CA Rs 100 CL(excl.BB) 20 WC Gap 80 Margin @ 25% 20 ( on WC gap) PBF 60 II nd Method CA Rs 100 CL (excl.BB) 20 WC gap 80 Margin @ 25% 25 ( on CA) PBF 55 M.P.B.F. Method

  15. Cash budget method • Yearly/Hly cash/Qly. Cash budget • E.g.. Qly.estimated receipts Rs 10.00 cr • Qly. Estimated payments Rs 15.00 • Cash gap Rs 5.00 • Less margin @ 25% Rs 1.25 • Eligible finance Rs 3.75

  16. Working capital assessment • Documents to be submitted • Application • P&L/B.S./Cash Flow statement • IT /sales tax returns • Projection for the future period

  17. Working capital assessment- Appraisal • Achievement index – sales,cost & profit • Sale – growth in sales quantity,price etc • Projections- growth rate viz industry • Market conditions – economic cycle - recession/inflation etc • Financial analysis – ratios • Inspection

  18. Key working capital ratios • Current ratio – CA/CL • Receivables - debtors/sales*12 m • payables - creditors/purchases * 12 m • Stock turnover – Avg.stock/Cost of goods* 12 m • Int.coverage – PBDIT/INT

  19. Sources of working capital • Public deposits – cannot exceed 25% of capital and free reserves. Simple to raise, No restrictive covenants and with out any collateral. Quantum restrictions and limited period. • Inter Corporate deposits. No regulatory pressure & secrecy • Commercial paper • Factoring – financing of receivables • Long term funding from debentures/equity/retained earnings/term loans .

  20. Risk vs. return

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