FM Presentation 1

8/3/2019 FM Presentation 1

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By,

Rati

Sunil

Madhusudan

surrendra

sushanth


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Introduction to working capital management Concepts of working capital

Operating cycle

Permanent and variable working capital Determinants of working capital

Cash management


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Definition:It is a financial metric which

represents operating liquidity available to a

business. Working capital management ensures acompany has sufficient cash flow in orderto meet its short-term debt obligations and

operating expenses.


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Gross working capital :gross working capital is that working

capital which is used for all the current assets.

Total value of current assets will equal to grossworking capital.

Net working capital:Net working capital is the excess of

current assets over current liabilities.


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CURRENT ASSETS Inventory

Sundry Debtors

Cash and Bank Balances

Loans and advances

CURRENT LIABILITIES Sundry creditors

Short term loans

Provisions


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Net Working Capital = Total CurrentAssets Total Current Liabilities . Net working capital can be positive or

negative .

Positive net working capital=currentassets > current liabilities

Negative net working capital =currentassets


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Issue of debt Long term debt

Commercial bank

Reserve and other funds


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The time between the purchase of an assetand its sale, or the sale of a product madefrom the asset.


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The Operating Cycle of a manufacturingcompany involves three phases:

1. Acquisition of resources

2. Manufacture of the product

3. Sales of the product


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Suppose a business buy raw material on 1st janand it takes one month to convert this rawmaterial into finished goods.

On 1st feb good are ready for sale i.e. stocked at

warehouse on 1st march goods are sold And on 1st april payment is received.

Now this revenue will be used to buy fresh rawmaterial.

The Operating cycle is 3 months..

The time taken to convert Working capital intorevenue


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There is always a minimum level of CA whichis continuously required by a firm to carry onits business operations.

Thus , the minimum level of investment incurrent assets that is required to continue thebusiness without interruption is referred as

permanent working capital.


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Permanent and Temporary working capital

temporary of

fluctuating

Amount

Of working

capitalpermanent

Time


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This is the amount of investmentrequired to take care of fluctuations inbusiness activity or needed to meet

fluctuations in demand consequentupon changes in production & salesas a result of seasonalchanges.


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For Growing firm

Temporary or fluctuating

permanent

Amount

Of workingCapital( rs)

Time


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DISTINCTION permanent is stable over time whereas

variable is fluctuating according to seasonaldemands.

investment in permanent portion can be

predicted with some profitability whereas

investment in variablecannot be predictedeasily.

while permanent is minimum investment in

various ca , variable is expected to take care

for peak in business activity.


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Determinants ofworking capital Nature and size of business

Production cycle

Demand conditions Credit policy

Production policy

Availability of credit Price level changes

Operating efficiency


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Definition:Cash management is the concern with the

managing of :

Cash flows into and out of the firm

Cash flows with in the firm

Cash balances held by the firm at a point oftime by financing deficit or investing surplus

cash.


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Collections

BorrowOr invest

Informationand control

Payments


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Cash planning Managing the cash flows

Optimum cash level

Investing surplus cash


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Transaction motive Precautionary motive

Speculative motive


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Documents

FM Presentation 1