07-05-2013, 12:58 PM
Presentation on Working Capital
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Working capitalIntroduction
Working capital typically means the firm’s holding of current or short-term assets such as cash, receivables, inventory and marketable securities.
These items are also referred to as circulating capital
Corporate executives devote a considerable amount of attention to the management of working capital.
Definition of Working Capital
Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.
Concept of working capital
There are two possible interpretations of working capital concept:
Balance sheet concept
Operating cycle concept
Balance sheet concept
There are two interpretations of working capital under the balance sheet concept.
a. Excess of current assets over current liabilities
b. gross or total current assets.
Working capital investment
The size and nature of investment in current assets is a function of different factors such as type of products manufactured, the length of operating cycle, the sales level, inventory policies, unexpected demand and unanticipated delays in obtaining new inventories, credit policies and current assets.
Points to be remembered while estimating WC
(1) Profits should be ignored while calculating working capital requirements for the following reasons.
(a) Profits may or may not be used as working capital
(b) Even if it is used, it may be reduced by the amount of Income tax, Drawings, Dividend paid etc.
(2) Calculation of WIP depends on the degree of completion as regards to materials, labour and overheads. However, if nothing is mentioned in the problem, take 100% of the value as WIP. Because in such a case, the average period of WIP must have been calculated as equivalent period of completed units.
(3) Calculation of Stocks of Finished Goods and Debtors should be made at cost unless otherwise asked in the question.
MANAGEMENT OF ACCOUNTS PAYABLE
Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems.
Guidelines for effective management of Accounts Payable……
Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people?
Are purchase quantities geared to demand forecasts?
Do you use order quantities which take account of stock-holding and purchasing costs?
Do you know the cost to the company of carrying stock ?
Do you have alternative sources of supply ? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier.
How many of your suppliers have a returns policy ?
Are you in a position to pass on cost increases quickly through price increases to your customers ?
If a supplier of goods or services lets you down can you charge back the cost of the delay ?
Can you arrange (with confidence !) to have delivery of supplies staggered or on a just-in-time basis ?