1. Working capital management is important for any business to sustain itself and involves managing current assets and current liabilities. 2. Taking a narrow accounting view of working capital as just current assets minus current liabilities can ignore important operational factors and risks, while seeing it as involving the entire quote-to-cash, purchase-to-pay, and order-to-delivery processes can help identify risks and opportunities. 3. Firms must determine optimal current asset levels to balance liquidity, profitability, and risk, as more current assets increase liquidity but reduce potential profitability and vice versa.

1. +
By:
Abhinav Bhansali (13020243001)
Ashwin Jacob (13020243004)
Apurva Mehta (13020243033)
Nilesh Dayalapvar (13020243031)
Ritu Singh (13020243019)
Srihrasha (13020243025)

2. Cash@Risk
• Necessary for any Business To sustain!!
• Managing working capital: for better
and for worse

3. A Narrow “Accounting” Definition of Working Capital can lead to unforeseen
risks
Definition
• “Working Capital is
Current Assets minus
Current Liabilities.”
Implication
Risk
• “Working Capital
is a Balance Sheet
Issue.”
• “Ignores operational drivers
and opportunities (e.g.,
customer service, revenue
growth, profit enhancement)
A Business Process Definition of Working Capital can identify and avoid risks.
Definition
• Working Capital Management is the
act of bringing under control all
processes involving Receivables,
Payables & Inventory through:



Quote-to-Cash
Purchase-to-Pay
Order-to-Delivery (Supply Chain)
Implication
• Working Capital Management is:





Determined by business owners and
processes outside of Finance’s
control
A driver of revenue and expense
A driver of cash flow
A driver of customer service
A driver of Shareholder Value
3

4. Concepts of Working Capital
Net Working Capital
Current Assets - Current Liabilities
Gross Working Capital
The firm’s investment in current assets
Zero Working Capital
The administration of the firm’s current assets and
the financing needed to support current assets
Inventories + Receivables - Payables

5. Determinants of working capital
1.
2.
3.
4.
5.
6.
7.
8.
Nature of business
Production cycle
Business cycle
Production Policy
Credit Policy
Growth and expansion
Availability of Raw materials
Profit level
•
•
•
Level of taxes
Dividend policy
Depreciation Policy
9. Price level changes
10. Operating efficiency

6. Matching approach to asset
financing
Total Assets
$
Short-term
Debt
Fluctuating Current Assets
Permanent Current Assets
Fixed Assets
Time
Long-term
Debt +
Equity
Capital

7. Conservative approach to asset financing
Total Assets
$
Short-term
Debt
Fluctuating Current Assets
Permanent Current Assets
Fixed Assets
Time
Long-term
Debt +
Equity
capital

8. Aggressive approach to asset
financing
Total Assets
$
Short-term
Debt
Fluctuating Current Assets
Permanent Current Assets
Fixed Assets
Time
Long-term
Debt +
Equity
capital

9. A firm has following data for year ending March
,2013

10. Management of Working Capital
• Working capital in general practice refer to
the excess of CA over CL.
• Management of working capital therefore is
concerned with the problems that arise in
attempting to manage the CA, the CL and
the inter-relationship that exists between
them.
• The basic goal of WCM is to manage the CA
& CL of a firm in such a way that a
satisfactory level of WC is maintained.
• Working Capital Management Policies of a
firm have a great effect on its profitability,
liquidity and structural health of the
organization

11. Permanent & Temporary Working
Capital
Permanent current assets
TIME
The amount of
current
assets
required to meet a
firm’s long-term
minimum needs
AMOUNT
AMOUNT
Temporary current assets
Permanent current assets
TIME
The amount of
current
assets
that varies with
seasonal
requirements.

12. Impact on Liquidity
ASSET LEVEL ($)
Policy A
Policy B
Policy C
25,000
OUTPUT (units)
Liquidity
High
Average
Low
Greater current asset
levels generate more
liquidity; all other
factors held constant.
Current Assets
0
Policy
A
B
C
50,000

13. Impact on Expected Profitability
Return on Investment
=
Net Profit
Total Assets
Let Current Assets =
(Cash + Rec. + Inv.)
Return on Investment
=
Net Profit
Current + Fixed
Assets
Policy
A
B
C
Profitability
Low
Average
High
As current asset levels
decline, total assets will
decline and the ROI will
rise.

14. Impact on Risk
Policy
A
B
C
Risk
Low
Average
High
Policy A
ASSET LEVEL ($)
• Decreasing cash reduces
the firm’s ability to meet
its financial obligations.
More risk!
• Stricter credit policies
reduce receivables and
possibly lose sales and
customers. More risk!
• Lower inventory levels
increase stockouts and
lost sales. More risk!
Policy B
Policy C
Current Assets
0
25,000
OUTPUT (units)
50,000
Risk increases as the level of
current assets are reduced.

15. Summary of the Optimal
Amount of Current Assets
SUMMARY OF OPTIMAL CURRENT ASSET ANALYSIS
Policy
A
B
C
1.
Liquidity
High
Average
Low
Profitability
Low
Average
High
Risk
Low
Average
High
Profitability varies inversely with
liquidity.
2. Profitability moves together with
risk.
(risk and return go hand in hand!)

16. Disadvantages of Redundant or Excess Working Capital
Idle funds, non-profitable for business, poor ROI.
Unnecessary purchasing & accumulation of inventories over
required level .
Excessive debtors and defective credit policy, higher
incidence of B/D.
Overall inefficiency in the organization.
When there is excessive working capital, Credit worthiness
suffers.
Due to low rate of return on investments, the market value
of shares may fall.

17. • Operating cycle concept
• Maximization of share holder’s wealth of a firm is
possible only when there are sufficient return from
the operations
• Successful sales activity is necessary for earning
profit sales do not convert into cash immediately
• There is invisible time lap between the sale of good
and receipt of cash
• The time taken to convert raw material into cash is
known as operating cycle
• Conversion of cash into raw material
• Conversion of raw material into work in progress
• Conversion of Work in progress into finished goods
• Conversion of finished good into Sales ( Debtors and
cash )

18. WIP
Raw
Materials
Cash
Operating Cycle in
Manufacturing firm
Debtors
SALES
Finished
Goods

19. Operating cycle of Non
Manufacturing Firm
Receivables
Cash
Stock of finished goods

20. Formula for calculating Operating
cycle for Manufacturing firm
OC = ICP+ARP
OC = Operating cycle
ICP = Inventory Conversion period
ARP = Account Receivable Period
ICP = Average Inventory
Cost of good sold /365
ARP = Average Account Receivable
Sales/365

21. Understanding Quote to Cash - Definition
Definition
Implication
Quote to Cash The processes and activities
ranging from issuing a sales
quote through collecting the
cash which resulted from the
delivery of products and
services.
Quote to Cash is:
 Controlled by processes outside of Finance
 A driver of revenue and expense
 A driver of cash flow
 A driver of customer service
 A driver of Shareholder Value

22. Understanding Quote to Cash Improvement Areas
Improving the Quote to Cash process requires an integrated program, not a point solution.
Companies can be evaluated against the Top 10 Best Practices
1- A well defined Executive driven Sales and Marketing Strategy
2- Established working capital Targets and Metrics
3- 80/20 Prioritization Rule with a focus on high value accounts
4- Risk Assessment and Control to minimize company’s exposure
5- Proactive Collection program to contact key accounts
6- Integrated Systems for all revenue management processes
7- Dispute Management to eliminate discrepancies at the source
8- Customer Master File integrity
9- Automation of low value, high volume transactions
10- Reconciliation Program focused on past due accounts

23. Understanding Quote to Cash Improvement Areas
What are the benefits?
Marketing
& Sales
Order Entry
Billing /
Invoicing
Cash
Application
Collections
COST
CASH FLOW
PRODUCTIVITY
• Time required per FTE  Improved DSO
 # of transaction
to process transactions  Increased
per FTE (invoice,
collections)
• Streamline processes
collection rate
 % Electronic
 Reduced bad debt
transaction (EDI,
Others,…)
 First time match
rate
Dispute
Management
CUSTOMER SERVICE
 Cycle time actual vs.
target (dispute
resolution)
 Exception and
Discrepancy Key
Performance Indicators
 Delivery lead time vs.
agreed lead time
 Delivery quantity vs.
actual quantity

24. Understanding Purchase to Pay Definition
By defining Purchase to Pay too narrowly companies will ignore the root causes of profit leakage
and process inefficiencies
A narrow definition
• The steps and processes
from raising a purchase
order to paying an invoice
An extended definition
• The steps and processes from defining and
agreeing on a need to buy, selecting the
best supplier, through the actual payment
of that supplier and the tracking of that
expenditure against a budget
Implications : The Purchase to Pay Cycle is



A comprehensive program rather than a point solution
Controlled by business owners and processes outside of
Finance
A driver of profitability, cash flow, customer service and
ultimately Shareholder Value

25. Understanding Purchase to Pay Improvement Areas
Improving the Purchase to Pay process requires an integrated Program rather than a point solution.
The following are the top 10 high level best practices against which companies may be evaluated
1- Executive driven adherence to strong purchasing principles
2- Strategic alliances and preferred vendor programs
3- Integrated systems, including on-line requisition and
procurement
4- Requester-focused ordering; Purchasing-focused sourcing
5- Purchasing involvement in budgeting and planning of total spend
6- Performance tracking, spend analysis and process measurement
7- Automation/Outsourcing of small value, high volume
transactions
8- AP and Purchasing as information providers to decision makers
9- Co-ordinated Purchasing, Receiving and Payable processes
10-Authorization managed at budget-holder level

26. Understanding Purchase to Pay Improvement Areas
Where are the benefits?
Budgeting and
Forecasting
(Strategy)
Supplier
Originating
Selection and
Requirements
Negotiation
PURCHASING COST
- 3% to 5% by
consolidating
expenditure on
preferred suppliers and
changing buying habits
• Volume rebate
• Price discount
Ordering and
Contracting
CASH FLOW
+ 10% to 25%
 Better negotiated
terms (including
term discounts)
 Increased early
payment discount
effectiveness
 Reduce premature
payment
Receiving and
Evaluating
PRODUCTIVITY
+ 25% to 50%
 Transactions
processed,
automated match
rate within
payables
 Rework reduction,
by preventing root
cause of
discrepancies
Payment
Processing
Continuous
improvement
CUSTOMER SERVICE
Improved Quality and
Customer Service
 Approval cycle time
reduction, improve
visibility of
requisition
 Reduce void checks
and duplicate
payment

27. Understanding Order to Distribution Definition
By defining Order to Distribution too narrowly, companies will miss opportunities to gain full
inventory reduction opportunities as well as minimizing profit leakage and process inefficiencies
A narrow definition
• The processes and steps
from receiving a
customer order to
distributing the ordered
product to the customer
An extended definition
• Working with customers to understand
their production/customer forecasts to
plan your own operations, thus making the
“supply chain” more effective and efficient
Implications : The Order to Distribution Cycle is
 A comprehensive program and not a point solution
 Operates on processes outside of finance, and even the business
(customers & suppliers)
 A driver of profitability, cash flow, customer service and
ultimately Shareholder Value

28. Understanding Order to Distribution Improvement
Improving the Order to Distribution process requires an integrated Program rather than a
point solution. The following are high level best practices against which companies may be
evaluated
12345678-
Executive driven adherence to strong supply chain objectives
High Customer Service Levels and accurate available-to-promise
Inventory Levels, in accordance with corporate targets
Strategic alliances with both suppliers and customers
Integrated systems, including sales, inventory, shipping, & purchasing
Performance tracking, and process measurement
High Data Integrity, inventory accuracy, Bill of Materials, lead times
Co-ordinated supply chain processes - forecasting, purchasing, planning,
manufacturing and shipping
9- Balanced production, based on capacity constraints
10Product rationalization, reducing low margin, low selling products

29. Understanding Order to Distribution Improvement Areas
Where are the benefits?
Forecasting
(Strategy)
Order
Entry
Purchasing
Requirements
Master
Planning
OPERATING COST
CASH FLOW
-3% to -5%
+ 10% to 25%
• Improved productivity
 Improved inventory
will reduce labor hours
management
(FTE and overtime)
• Improved forecasting and  Improved forecasting
 Calculated
inventory management
will require less “remanufacturing and
balancing” of product
purchasing lot sizes
between warehouses
 Reduced leadtimes
(transportation costs)
• Elimination of distribution
costs will reduce
operating costs
Production
Scheduling
Warehousing
& Distribution
Continuous
improvement
ADMINISTRATION
CUSTOMER SERVICE
PRODUCTIVITY
Improved Quality and
+ 10% to 15%
Customer Service
 Increased information
 Cycle time reduction
sharing
resulting in reduced
lead times
 Administrative time
spent more effectively
 Better order fill rates
managing important
increase customer
items rather than “firesatisfaction and
fighting”
customer retention

30. PROFORMA - WORKING CAPTIAL ESTIMATES
1. TRADING CONCERN
STATEMENT OF WORKING CAPITAL REQUIREMENTS
Amount (Rs.)
Current Assets
(i) Cash
(ii) Receivables ( For…..Month’s Sales)---(iii) Stocks ( For……Month’s Sales)----(iv)Advance Payments if any
Less : Current Liabilities
(i) Creditors (For….. Month’s Purchases)(ii) Lag in payment of expenses
WORKING CAPITAL ( CA – CL )
Add : Provision / Margin for Contingencies
NET WORKING CAPITAL REQUIRED
--------------------_
xxx
----XXX

31. 2. MANUFACTURING CONCERN
STATEMENT OF WORKING CAPITAL REQUIREMENTS
Amount (Rs.)
Current Assets
(i) Stock of R M( for ….month’s consumption)
(ii)Work-in-progress (for…months)
(a) Raw Materials
(b) Direct Labour
(c) Overheads
(iii) Stock of Finished Goods ( for …month’s sales)
(a) Raw Materials
(b) Direct Labour
(c) Overheads
(iv) Sundry Debtors ( for …month’s sales)
(a) Raw Materials
(b) Direct Labour
(c) Overheads
(v) Payments in Advance (if any)
(iv) Balance of Cash for daily expenses
(vii)Any other item
Less : Current Liabilities
(i) Creditors (For….. Month’s Purchases)
(ii) Lag in payment of expenses
(iii) Any other
WORKING CAPITAL ( CA – CL )xxxx
Add : Provision / Margin for Contingencies
NET WORKING CAPITAL REQUIRED
-----------------
----------------------------------------------------XXX

32. Estimation of Current Assets
• Raw material inventory:
Budgeted production * Cost of raw mat * Avg inventory
holding period/ 12 months / 365
• Work in Progress Inventory:
Budgeted production * Estimated work in progress cost
per unit * Avg time span of WIP Inventory / 12 months /
365
• Finished goods inventory:
Budgeted production * Cost of goods produced per unit*
Finished goods holding period / 12 months / 365
• Debtors:
Budgeted credit in sales * Cost of sales per unitexcluding
depreciation * Avg debt collection period / 12
months/365

33. Estimation of Current Liabilities
1. Trade creditors:
Budgeted yearly production * Raw material cost
per unit * Credit period allowed by creditors /
12 months / 365
2. Debtors:
Budgeted yearly production* Direct labour cost
per unit * Avg time lag in payment of wage / 12
months / 365
3. Overheads:
Budgeted yearly production* Overhead cost per
unit * Avg time lag in payment of overheads /
12 months / 365

34. TIME IS MONEY
 You can get money to move faster around the cycle or
reduce the amount of money tied up. Then, business will
generate more cash or it will need to borrow less money to
fund working capital.
 As a consequence, you could reduce the cost of bank
interest or you'll have additional free money available to
support additional sales growth or investment.
 Similarly, if you can negotiate improved terms with
suppliers e.g. get longer credit or an increased credit limit,
you effectively create free finance to help fund future sales.

35. If you
Then ......
Collect
receivables
(debtors) faster
You release cash from the
cycle
Collect
receivables
(debtors) slower
Your receivables soak up
cash
Get better credit (in terms
of duration or amount)
from suppliers
Shift inventory (stocks)
faster
You increase your cash
resources
Move inventory (stocks)
slower
You consume more cash
You free up cash

36. • Sales and costs and, therefore, profits do not
necessarily coincide with their associated cash
inflows and outflows.
• The net result is that cash receipts often lag cash
payments and, whilst profits may be reported, the
business may experience a short-term cash
shortfall.
• For this reason it is essential to forecast cash flows
as well as project likely profits.
• Bear in mind that more businesses fail for lack

38. Sources of Finance
• Spontaneous Sources of Finance
• Trade Credit:
• Bills Payable:
• Accrued Expenses-Short term
Financing
• Inter corporate loans & Deposits :
Surplus Funds –Short term
• Commercial Papers : Unsecured
promissory note
• Funds Generated from operations:

39. • Bills Discounting: Short financial
Institute.
• Bills Rediscounting Schemes : Offer Bill
of Exchange to the RBI for rediscount.
• Factoring : Is a method of Financing
whereby a firm sells its trade at a
discounting to FI.

40. • Working capital Finance from Banks
• Assessment of working capital
• Forms of Bank Credit:
• Cash credit:
• Bank Overdraft:
• Bills Discounting:
• Bills Acceptance:
• Line of credit :
• Bank Guarantees: