LIQUIDITY DECISIONS/WORKING CAPITAL MANAGEMENT

Meaning“ The excess of current assets over currents liabilities” also known as circulating, revolving or fluctuating capital

Components of wc

current assetscurrent liabilitiesCash & bank balancesCreditors

Temporary investmentsOutstanding expenses

Short term advancesShort term borrowings

ReceivablesAdvances received

Inventory of raw materials,

Stores & spares, FG

Taxes & dividends payable

TYPES

1. Gross working capital & net working capital2. Permanent working & temporary working capital3. Positive working & negative working capital4. Balance sheet working cap & cash working cap

Methods of estimating working capital.1. Conventional method- cash inflows & cash outflows are matched together.

Emphasis is on liquidity & its ratios. 2. Operating cycle method It considers the production and other business

operations. It emphasis on profitability & liquidity of the firm

Factors determining WC requirements

1. Nature of business 11. Growth of business2. Manufacturing cycle 12. Market conditions 3. Production process 13. Supply situations4. Business cycle 14. Environment factors5. Seasonal variations6. Scale of operations7. Inventory policy8. Credit policy9. Accessibility of credit10.Business standing

Working capital managementWorking capital management refers to the management of working

capital with twin objectives of Liquidity & profitability.

Working capital management establishes the best possible trade-off between the profitability of net current assets employed and the ability to pay current liabilities as they fall due.

Objectives:

• Optimize investments in current assets.

• To see that the company meets its current liabilities obligations

• Manage current assets to see that the return on current assets is more than cost of capital

• Proper balance between current assets & current liabilities

Components of WCM

• INVENTORY MANAGEMENT

• CASH MANAGEMENT

• RECEIVABLES MANAGEGMENT

INVENTORY MANAGEMENT

Meaning-

Objectives-1. For continuous supply for uninterrupted production

2. To reduce wastage & losses

3. To introduce scientific inventory management techniques

4. To reduce cost of purchase & storage

5. To reduce excessive or shortage of inventory

6. To have uninterrupted production

7. for effective utilization of store space

8. To provide right material at right time, from right source & at

right prices.

TOOLS OF INVENTORY MANAGEMENT

1. Fixation of levels- Maximum level Minimum Level Reorder level Danger level2. Fixation of EOQ- 2AO÷C3. ABC analysis4. VED analysis5. FSN /FNSD analysis6. Perpetual inventory system7. Periodic inventory system8. Inventory turnover ratios9. JIT Analysis

CASH MANAGEMENT

Objectives- To make prompt cash payments

To maintain minimum cash reserve

Motives of holding cash- Transaction motive

Precautionary motive

Speculative motive

compensatory motive

Cash management strategies -

1. Cash planning

2. Managing the cash flows

3. Optimum cash balance

4. Investing idle cash.

1. Cash planning – It is a technique to plan for & use of cash. It involves cash forecasting and budgeting.

Cash budgets & forecasting – Short term cash forecasting Long term cash forecasting

Methods of cash forecasting –1. Receipt & Disbursement method2. Adjusted net income method

2 .Managing cash flows

Accelerating cash collection• Prompt payment by customers• Lock box system• Concentrating banking• Electronic fund transfer• Decentralize collection

Controlling Disbursement• Playing the Float-collection float

payment float

b. Payment on last day & by drafts

c. Centralisation of payments

3 .Determining optimum cash balance

4. Investment in marketable securities. Selection of securities

Safety

Maturity

Marketability

RECEIVABLES MANAGEMENTMeaning –Determinants of accounts receivable/credit sales-1. Credit sales volume2. Credit policies3. Business terms- time period, discounts4. Competition5. Location6. New productsCost of receivables/trade credits-1. Carrying cost2. Defaulting cost3. Administration cost

Management of receivables1. Forming of credit policy

2. Executing credit policy

3. Formulating & executing collection policy

Credit rating-5 C’s (character, capacity, capital, collateral & condition)

Ageing schedules-it is a statement prepared to determine quality of individual debtors.

No of days, period ending, % age of debt etc.

Factoring-

Services-finance, maintenance of accounts, collection of data or protection against credit risks.