Tools of Working Capital

8/3/2019 Tools of Working Capital

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A

PROJECT REPORT ON TOOLS &

TECHNIQUES OF WORKING

CAPITAL

SUBMITTED TO

UNIVERSITY DEPARTMENT OF COMMERCE AND

BUSINESS MANAGEMENT, RANCHI UNIVERSITY,

RANCHI

SUBMITTED BY, UNDER THE GUIDANCE

HARSHAWARDHAN OF

ROLL NO. 27 , SECTION---(A) AMIT SHEKHAR TIRKEY

SEMESTER---2 SESSION -2010-12 (FINANCIAL MANAGEMENT)


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DECLARATION

1.I here by solemnly declare that all the statement made in theabove report are and correct to the best of my knowledge inbelief.

2.I here to certify that information of report furnished above istrue and accurate to the best of my knowledge and belief. I have

not suppressed any material fact or factual information in the

above statement , I am aware that in case , I have given wrong

information or suppressed any material fact or factual

information that my candidature will be rejected terminated for

the without giving any notice or reasons thereof.

3.I fully understand that in the event of any information beingfound false or incorrect action can be taken against me.

Place:-- Ranchi signature

Date:-- 24/04/2011


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ACKNOWLEDGEMENTI awe a debts of gratitude to many people ,

notably among them numerous scholars

who have authored book and reports on

tools and technique of working capital

thanks are due to Dr. I. M pandey and his

book financial management , I M pandey isone of the intelligent writer of finance

without his help this book fm would not

have been written . I am also grateful to my

friend suryabali , kundan kumar jha and

mrinal kumar they have helped me to

make a report on tools and techniques of

working capital .

Finally , I express my sense of gratitude to

Mr. Amit shekhar tirkey teacher of financialmanagement who has encouraged me to

complete this project .


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PREFACEWorking capital is used to run fixed capital so

in thus we can say that working capital is the

life line of any company , organizations, and

institutions . if you want to make your

company success so must give your point of

notice to working capital .

It is undiputable fact that working capital is

necessary to run fixed capital or we can say

that working capital genera public and leaders

workers and executives governmental and non-

governmental organization all have to sensitive

to working capital which is necessary to run

fixed capital,

This project is about the tools and technique of

working capital it provide the comprehensive

coverage of the various concepts and cardinal

principle of working capital . I hope this project

provide the motivation for further projects.


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INTRODUCTION

WORKING CAPITAL :--

The capital which is used for the operating

the business activity or business operation. Working capital is

very necessary to run fixed capital like you have established an

industry so must need land, capital , machinery , labor , etc. to

established the industry you need electricity , oil , lubricants ,diesel, to run the fixed capital these all are the working capital

which is use to run fixed capital . so working capital is necessary

to run fixed capital .

There are two concepts of working capital -----gross and net.

1)Gross working capital :- refers to the firm investment in currentassets . current assets are those assets which can be converted

into cash within an accounting year and include cash , short-term

securities , debtors (accounts receivable or book debts) , bills

receivable and stock (inventory)

2)Net working capital :-- it refers to the difference between currentassets and current liabilities. Current liabilities are those claims of

outsiders which are expected to mature for payment within anaccounting year and include creditors (account payable) , bills

payable , and outstanding expenses . net working capital can be

positive or negative . A positive net working capital will arise when

current assets exceeds currents liabilities. A negative net working


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capital occurs when currents liabilities are in excess of currents

assets.

NEED FOR WORKING CAPITALThe need for working capital to run the day-to-day business

activities cannot be overemphasized. We will hardly find a

business firm which does not require any amount of working

capital . indeed firms differ in their requirements of the working

capital .

We know that a firm should aim at maximizing the wealth

of its shareholders . In its endeavor to do so, a firm should earn

sufficient return from its operations. Earning a steady amount of

profit requires successful sales activity . The firm has to invest

enough funds in current assets for generating sales . current

assets are needed because sales do not convert into cash

instantaneously There is always an operating cycle involved in the

conversion of sales into cash.

There is a difference between currents and fixed assets interm of their liquidity . A firm requires many year to recover the

initial investment in fixed assets such as plant and machinery or

land and buildings .on the contrary , investment in currents assets

is turned over many times in a year . investment in current assets

is turned over many times in a year . Investment in current assets

such as investories and debtors (accounting receivable) is realized

during the firm operating cycle that is usually less than a year.


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TOOLS AND TECHNIQUES OF WORKING CAPITAL

CURRENT ASSETS :--- current assets are those assets which are

meant for sale or which the management would want to convertinto cash within one year . as such these assets are also termed as

short-lived or active assets for examples debtors are also

converted into cash within a reasonable short period , stock is

continuously sold and bills receivables are also converted into

cash within a reasonable short period stock is continuously sold

and bills receivables are also converted into cash .

According to the institute of certified public accounted , u.s.acurrent assets include cash current asset include cash and other

assets or resources commonly identified as those which are

reasonably expected to be realized in cash or sold or consumed

during the non operating cycle of the business .

Although the prepaid expenses will never be realized in

cash, there are also included in current assets. Since service or

benefits will be available against these without further payment

Current assets are also known as floating assets or

circulating or circulating assets as the amount and nature of such

assets keeps changing continuously .for example , a businessman

purchases goods for cash and this goods are sold to X on credit , X

becomes our debtors and it means that debtors has been

converted into debtors . again if the bill receivable will be

converted into cash it shows that all current assets are finally

converted into cash .

Current assets are usually shown in the balance sheet in the

liquidity order liquidity is the facility with which the assets may be


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converted into cash . those assets which are most difficult to be

converted into cash

Current assets are assets which are expected to be sold orotherwise used within

onefiscal year. Typically, current assets include cash,cash equivalents, accountsreceivable, inventory, prepaid accounts which will be used within a year, and

short-term investments.

Current liabilities are considered as liabilities of the business that are to be settled

in cash within thefiscal year. Current liabilities include accounts payable for

goods, services or supplies,short-term loans, long-term loanswith maturity within

one year, dividends and interest payable, oraccrued liabilitiessuch as accruedtaxes.

Working capital, on the one hand, can be seen as a metric for evaluating acompanys operating liquidity. A positive working capital position indicates that acompany can meet its short-term obligations. On the other hand, a companys

working capital position signals its operating efficiency. Comparably high working

capital levels may indicate that too much money is tied up in the business.

The most important positions for effective working capital management are

inventory, accounts receivable, and accounts payable. Depending on the industry

and business, prepayments received from customers and prepayments paid tosuppliers may also play an important role in the companyscash flow. Excess cashand nonoperational items may be excluded from the calculation for better

comparison.

As a measure for effective working capital management, therefore, another moreoperational metric definition applies:

(Operative) net working capital = Inventories + ReceivablesPayables

Advances received + Advances made

where:
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inventory israw materialspluswork in progress(WIP) plusfinished goods; receivables are trade receivables; payables are non-interest-bearing trade payables; advances received are prepayments received from customers; advances made are prepayments paid to suppliers.

When measuring the effectiveness of working capital management, relative metrics

(for example, coverage) are generally applied. They have the advantage of higher

resistance to growth, seasonality, and deviations in (cost of) sales. In addition to

better comparison over time, they also allow better benchmarking of operating

efficiency with internal or external peers.

A frequently used measure for the effectiveness of working capital management is

the so-calledcash conversion cycle, or cash-to-cash cycle(CCC). It reflects the

time (in days) it takes a company to get back onemonetary unitspent in

operations. The operative NWC positions are translated into days outstanding

the number of days during which cash is bound in inventory and receivables orfinanced by the suppliers in accounts payable. It is defined as follows:

CCC1

= DIO + DSODPO

inventories cumulativecost of sales) 365 = average number of days thatinventory is held;

days sales outstanding (DSO) = (average receivables cumulative sales) 365 = average number of days until a company is paid by its customers;

days payables outstanding (DPO) = (average payables cumulativepurchasing volume) 365 = average number of days until a company pays

its suppliers.

Optimizing the three components of operative NWC simultaneously not only

accelerates the CCC, but also goes hand in hand with further improvements. Figure

1 illustrates how an NWC optimization impacts thevalue addedand freecash flow

of a company. However, applying the right measures will not only increasevalue
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addedby lowering capital employed. Improved processes will also lead to reducedcosts and higher earnings before income and taxes (EBIT).

Figure 1. Holistic approach to working capital management

Holistic Approach to

Working Capital

ManagementBy streamlining end-to-end processes, companies can, for example, reduce stock,

decrease replenishment times from internal and external suppliers, and optimize

cash-collection and payment cycles. The key is to uncover the underlying causes

of excess operative working capital. In order to address the often hidden

interdependencies among the different components and achieve maximumsavings from a working capital program, companies must analyze the entire value

chain, from product design to manufacturing, sales and after-sales support. They

must also look for ways to simplify and streamline processes and eliminate waste,

always keeping potential tradeoffs in mind.
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. For instance, cutting inventories of spare parts orreducing productcustomization could lead to a major reduction in inventory. But how would these

measures affect service quality,market positioning, or other aspects of the

business?

By definition, working capital management entails shortterm decisions -generally, relating to the next one year period - which are "reversible". These

decisions are therefore not taken on the same basis as Capital InvestmentDecisions (NPV or related, as above) rather they will bebased on cash flows and /

or profitability.

One measure of cash flow is provided by thecash conversion cycle- the netnumber of days from the outlay of cash forraw materialto receiving

payment from the customer. As a management tool, this metric makes

explicit the inter-relatedness of decisions relating to inventories, accounts

receivable and payable, and cash. Because this number effectively

corresponds to the time that the firm's cash is tied up in operations and

unavailable for other activities, management generally aims at a low netcount.

In this context, the most useful measure of profitability isReturn on capital(ROC). The result is shown as a percentage, determined by dividing relevant

income for the 12 months bycapital employed;Return on equity(ROE)

shows this result for the firm's shareholders. Firm value is enhanced when,

and if, the return on capital, which results from working capital

management, exceeds thecost of capital, which results from capital

investment decisions as above. ROC measures are therefore useful as amanagement tool, in that they link short-term policy with long-term

decision making. SeeEconomic value added(EVA).

Credit policyof the firm: Another factor affecting working capitalmanagement is credit policy of the firm. It includes buying of raw material
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and selling of finished goods either in cash or on credit. This affects the

cash conversion cycle.

Management of working capital

Guided by the above criteria, management will use a combination of policies and

techniques for the management of working capital. These policies aim at managing

thecurrent assets(generallycashandcash equivalents,inventoriesanddebtors)and the short term financing, such that cash flows and returns are acceptable.

Cash management.Identify the cash balance which allows for the businessto meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials -and minimizes reordering costs - and hence increases cash flow. Besides

this, the lead times in production should be lowered to reduceWork in

Progress (WIP)and similarly, theFinished Goodsshould be kept on as low

level as possible to avoid over production - seeSupply chain management;

Just In Time(JIT);Economic order quantity(EOQ);Economic quantity

Debtors management. Identify the appropriate

credit policy, i.e. credit terms which will attract customers, such that any

impact on cash flows and the cash conversion cycle will be offset by

increased revenue and hence Return on Capital (orvice versa); see

Discounts and allowances.

Short term financing. Identify the appropriate source of financing, given

the cash conversion cycle: the inventory is ideally financed by credit

granted by the supplier; however, it may be necessary to utilize a bank

loan(or overdraft), or to "convert debtors to cash"through "factoring".

METHODS OF WORKING CAPITAL ANALYSIS
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There are so many methods for analysis of financial statements, some of the used

techniques are:-

Comparative size statements Trend analysis Cash flow statement Ratio analysis

A detail description of these methods is as follows:-

COMPARATIVE SIZE STATEMENTS:-When two or more than two years figures are compared to each other than we

called comparative size statements in order to estimate the future progress of the

business, it is necessary to look the past performance of the company. These

statements show the absolute figures and also show the change from one year to

another.

TREND ANALYSIS:-To analyze many years financial statements RIL LTD uses this

method. This indicates the direction on movement over the long time and help in

the financial statements.

Procedure for calculating trends:-

1. Previous year is taken as a base year.2. Figures of the base year are taken 100.


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3. Trend % are calculated in relation to base year.

CASH FLOW STATEMENT:-Cash flow statements are the statements of changes in the financial position

prepared on the basis of funds defined in cash or cash equivalents. In short cash

flow statement summaries the cash inflows and outflows of the firm during aparticular period of time.

Benefits:-

To prepare the cash budget. To compare the cash budgets . To show the position of the cash and cash equivalents.

THE DISCOUNT CASH FLOW APPROACH

The true economic value of a firm or a business or a project or any strategy

depends on the cash flows and the appropriate discount rate (commensurate

with the risk of cash flow). There are several methods for calculating the present

value of a firm or a business/division or a project.

The first method uses the weighted average cost of debt and equity (WACC) to

discount the net operating cash flows. When the value of a project with an

estimated economic life or of a firm or business over a planning horizon is

calculated, then an estimate of the terminal cash flows or value will also be made.

Thus, the economic value of a project or business is:


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Economic Value=Present Value of net operating cash flows+ Present

value of terminal value

ECONOMIC VALUE ADDED

Consulting firm Stern Steward has developed the concept of EconomicValue Added. Companies across a broad spectrum of industries and a wide

range of companies have joined the EVA badwagon. EVA is a useful tool to

measure the wealth generated by a company for its equity shareholders. In

other words, it is a measure of residual income after meeting the necessary

requirements for funds.

Computation of EVA

EVA is essentially the surplus left after making an appropriate charge forcapital employed in the business. It may be calculated by using following

equation.

EVA= Net operating profit after tax- Cost charges for capital employedEVA as tool for measuring the Shareholders wealth

study was empirical and descriptive in nature. The total population was TheIndian banks which are listed in NSE-50.The sample frame were individualbanks during the year 2005-06.

The sample sizes were five Indian banks selected on the basis of theconvenience sampling technique. The data was collected through

secondary resources i.e. websites of NSE.


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RATIO ANALYSIS:-

Ratio analysis is the process of the determining and presenting the relationship of

the items and group of items in the statements.

Benefits of ratio analysis :-

1. Helpful in analysis of financial statements.2. Helpful in comparative study.3. Helpful in forecasting.4. Estimate about the trend of the business.5. Fixation of ideal standards.6. Effective control.7. Study of financial soundness.

Types of ratio:-

Liquidity ratio:They indicate the firms ability to meet its currentobligation out of current resources.

Current ratio:-Current assets / Current liabilities

Quick ratio:- Liquid assets / Current liabilitiesLiquid assets =Current assets Stock -Prepaid expenses


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Leverage or Capital structure ratio: This ratio discloses the firmsability to meet the interest costs regularly and long term solvency of the

firm.

Debt equity ratio:-Long term loans / Shareholders funds ornet Worth

Debt to total fund ratio:-Long terms loans/ share holderfunds +long term loan

Proprietary ratio:-Shareholders fund/ shareholdersfund+longterm loan

Activity ratio or Turnover ratio:- They indicate the rapidity withwhich the resources available to the concern are being used to produce

sales.

Stock turnover ratio:-Cost of good sold/Average stock(Cost of good sold= Net sales/ Gross profit,

Average stock=Opening stock+closing stock/2)

Debtors turnover ratio:-Net credit sales/ Average debtors

+Average B/R

Average collection period:-Debtors+B/R /Credit sales per


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(Credit sales per day=Net credit sales of the year/365)

.Creditors Turnover Ratio:-Net credit purchases/ Average

Creditors + Average B/P

Average Payment Period: - Creditors + B/P/ Credit purchaseper day.

Fixed Assets Turnover ratio:-Cost of goods sold/Net fixedAssets

(Net Fixed Assets = Fixed Assetsdepreciation)

Working Capital Turnover Ratio:-Cost of goods sold/Working Capital

(Working capital= current assets current liability)

Profitability Ratios or Income ratios:-The main objective of every business

concern is to earn profits. A business must be able to earn adequate profit in

relation to the risk and capital invested in it.

Gross profit ratio:-Gross profit / Net Sales * 100

(Net sales= Sales Sales return)

Net profit Ratio:-Net profit / Net sales * 100


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(Operating Net Profit= operating net profit/ Net Sales *100 or

operating Net profit= gross profit operating expenses)

Operating Ratio :-Cost of goods sold + Operatingexpenses/Net Sales * 100

(Cost of goods sold = Net Sales Gross profit, Operating expenses =

office & administration expenses + Selling & distribution expenses +

discount + bad debts + interest on short term loans)

Earning per share(E.P.S.) :-Net Profit dividend onpreference share / No. of equity shares

Dividend per share (D.P.S.):-Dividend paid to equity shareHolders / No. of equity shares *100.

Dividend Payout ratio(D.P.) :-D.P.S. / E.P.S. *100

MANAGEMENT OF INVENTORYInventories constitute the most significant

part of current assets of a large majorityof companies. On an average, inventoriesare approximately 60% of current assets.Because of large size, it requires a

considerable amount of fund.The inventory means and includes the goods and

services being sold by the firmand the raw material or other components being

used in the manufacturing of suchgoods and services.


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Types of Inventory:

The common type of inventories for most of the business firms may be

classifiedas raw-material, work-in-progress, finished goods.

Inventory of Raw material:

it is basic inputs that are converted into finished products

through the manufacturing process. Raw materials inventories are

those units which have been purchased and stored for futureproductions.

Inventory of Workinprocess:

Work-in-process is semi-manufactured products.

Theyrepresent products that need more work before them

become finished products for sale.

Inventory of Finished goods:

These are completely manufactured products which areready for

sale. Stocks of raw materials and work-in-process facilitate production,

while stock of finished goods is required for smoothmarketingoperations.Thus inventories serve as a link between the

production and consumption of goods.The levels of three kinds of

inventories for a firm depend on the nature of business. A manufacturing

firm will have substantially high levels of all the three kinds of inventories.


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While retail or wholesale firm will have a very high level of finished goods

inventories and no raw material and work-in-process inventories.

So operating cycle can be known as following:-

Sale

Raw Material

Work in Progress

Cash Collection from

Finished Goods

Credit Sales Cash Sales


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FUND FLOW ANALYSIS:This approach is based on non-current indicates as how management has used

the long term sources of funds for working capital. The information relating to

working capital changes (flows) may be presented in a statement form known as

Fund flow statement. This statement presents a view of diverse sources and usesof funds.

FORMAT OF FUND FLOW STATEMENT:

Working capital in the beginning

Add : sources of funds:

i. Further issue of sharesii. Issue of debenturesiii. Raising long term loansiv. Sale of fixed assetv. Profit from operations

Rs.

--

-

-

-

Rs.

-

-

Less: uses of funds: -

CASH

RAWMATERIALS

WIPFINISHED

GODS

BOOKDEBTS


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i. Purchase of fixed assetsii. Repayments of loans/ borrowingsiii. Redemption of debenturesiv. Dividends paid

-

-

-

- -

Working capital at the end -CASH MANAGEMENT:Efficient cash management processes are pre-requisites to execute payments,

collect receivables and manage liquidity. Managing the channels of collections,

payments and accounting information efficiently becomes imperative with

growth in business transaction volumes. This includes enabling greater

connectivity to internal corporate systems, expanding the scope of cash

management services to include full-cycle processes (i.e., from purchase order

to reconciliation) via ecommerce, or cash management services targeted at theneeds of specific customer segments. Cost optimization and value-add services

are customer demands that necessitate the creation of a mechanism to service

the various customer groups.

In United Statesbanking, cash management, or treasury management, is a

marketing term for certain services offered primarily to larger business

customers. It may be used to describe all bank accounts (such as checking

accounts) provided to businesses of a certain size, but it is more often used to

describe specific services such as cash concentration, zero balance accounting,

and automated clearing house facilities. Sometimes, private banking customers

are given cash management services.

VARIOUS CASH MANAGEMENT TECHNIQUES:

Holding

One cash management technique is holding, which means that a companyholds on to cash and keeps it on hand or in a local bank account. This is one

of the preferred methods for smaller companies since there are often many

short-term transactions necessary. These expenses may include inventory,

paying employees and taxes.
http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Marketinghttp://en.wikipedia.org/wiki/Marketinghttp://en.wikipedia.org/wiki/Checking_accounthttp://en.wikipedia.org/wiki/Checking_accounthttp://en.wikipedia.org/wiki/Checking_accounthttp://en.wikipedia.org/wiki/Cash_concentrationhttp://en.wikipedia.org/wiki/Cash_concentrationhttp://en.wikipedia.org/wiki/Automated_clearing_househttp://en.wikipedia.org/wiki/Automated_clearing_househttp://en.wikipedia.org/wiki/Private_bankinghttp://en.wikipedia.org/wiki/Private_bankinghttp://en.wikipedia.org/wiki/Private_bankinghttp://en.wikipedia.org/wiki/Automated_clearing_househttp://en.wikipedia.org/wiki/Cash_concentrationhttp://en.wikipedia.org/wiki/Checking_accounthttp://en.wikipedia.org/wiki/Checking_accounthttp://en.wikipedia.org/wiki/Marketinghttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States


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Discounted cash flow techniques

Net Present Value Internal Rate of returnProfitability Index

Non-discounted cash flow techniques

Pay BackAverage Rate of ReturnDiscounted pay back period

DISCOUNTED CASH FLOW TECHNIQUE:

NET PRESENT VALUE :This method is also called Excess Present Value (E.P.V) method or Investors

method. This method is used, when management has already determined a

minimum rate of return as there policy.

INTERNAL RATE OF RETURN:This method is also called Time Adjusted Return on Investment or Discounted

Rate of Return(D.R.R). This method measures the rate of return which earnings

N.P.V= present value of cash inflow-present value of cash outflow


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are expected to yield on investments. This rate of return will be a rate of discount

at which the net present value of the project is exactly equal to zero.

I.R.R= LR+ Highest N.P.V * Difference of rate of returnDifference in N.P.V

PROFITABILITY INDEX:Since it is ratio, therefore, it happens to be relative measure and may be used in

evaluating the proposals requiring different initial investment(cost). This ratio

may be calculated as under:-

P.I(Per rupee)= P.V of cash inflows

P.V of cash outflows(cost)

NON-DISCOUNTED CASH FLOW TECHNIQUES:

PAY-BACKThis method describes in terms of period of time the relationship between annual

savings(cash inflow) and total amount of capital expenditure(investment).

Pay-back period= NI


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Working capital management techniques utilized bybusiness

managers aids them in effectively managingworking capital.Working capital management means managing current assets

mainly. Techniques such as intersection of carrying cost and

shortage cost, working capital finanicing policy, cash budgeting,EOQ and JIT are applied to manage different components of

working capital like cash, inventories, debtors, financing of working

capital etc.

tools in managing the working capital efficiently andeffectively. Working capital is the difference current assetsand current liabilities of a business. Major focus is on currentassets because current liabilities arise due to current assetsonly. Therefore, controlling the current assets canautomatically control the current liabilities. Now, currentassets include Inventories, Sundry Debtors or Recievables,Loans and Advances, Cash and Bank Balance.

All working capital management techniques attempt to findoptimum level of working capital because both excess orshortage of working capital involves cost to the business.Excess working capital carries the carrying cost or interestcost on the capital lying unutilized. Shortage of workingcapital carries shortage cost which include disturbance in

production plan, loss in revenue etc. Finding the optimumlevel of working capital is the main goal or winning situationfor any business manager.


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and low in bad seasons. There are two types of financingavailable. They are long term financing and short termfinancing. Three strategies are possible with respect tofinancing of working capital. Efficient financing of working

capital reduces carrying cost of capital.

1.Long term financing is used for both permanent andtemporary WC.

2.Long term financing is used for permanent and somepart of temporary WC. Remianing part of temporary WCis financed through short term financing as and whenrequired.

3.Long term financing is used for permanent and shortterm financing for temporary WC.

These strategies should be choosen so as to match thematurity of source of finance with the maturity of the asset.

OTHER TOOLS AND TECHNIQUESOF WORKING CAPITAL

Cash Budgeting: Cash budgeting is another importantworking capital management technique keep optimum levelof

cash in the business. Cash budgeting involves estimatingthe requirements of cash by estimating all theforecomingreciepts and payments. For effectivemanagement, a balance is needed between both excess andshortage of cash. It is because both ends are costly.


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Speeding up of collection and getting relaxed credit termsfrom the creditors can reduce the cash requirements.

Inventory Management: Inventory is an importantcomponent of working capital or current assets. Optimumlevel of inventory can save on costs heavily.

EOQ: Economic Order Quantity (EOQ) model is afamous model for managing the inventories. It helps theinventory manager know what is the right quantity thatshould be ordered considering other factors like cost of

ordering, carrying costs, purchase price and annualsales. The formula used for finding EOQ is as follows:

Economic Order Quantity (EOQ)

A Annual SalesO Cost per Order

P Purchase price per unitC Carrying Cost

Just-in-Time: Just-in-time is another very importanttechnique which brough about paradigm shift in the


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management of inventories. It did not reduce cost ofinventory but it abolished it completely. Just-in-timemeans acquiring raw material or manufacturing productat the time when it is required by the customer. This

strategy is very difficult to implement but if implementedcan bring down inventory cost to minimum levels.

These are some important techniques discussed here. Theyare very effective in managing working capital. Managing

working capital means managing current assets. Currentassets like cash can be managed using cash budgeting,inventory can managed using invetory techniques like EOQand JIT. Debtors and financing of working capital can bemanaged using appropriate sources of finance.

CONCLUSION:----from the above discussion it may be concluded

that,

Best-in-class companies understand the company- and industry-specific

drivers behind each component of operative working capital, and focus

on optimizing the most promising ones. During this process, they

consider the entire value chain to reveal the root causes of tied-up cash

and take into account all interdependencies between the respectivecomponents. They apply a holistic approach in which they do not

randomly reduce costs but consider all tradeoffs with costs and capital

employed to optimize the company value. By applying the appropriate

levers for each component, obstacles that slow cash flow can be

removed and overall company processes can be improved.


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Documents

Tools of Working Capital