Working capital & cost management is essential is majorly coupled with cash management, inventory management

1. WORKING CAPITAL &
COST MANAGEMENT
Capital require for day to day working
Presented by:
Archana Pradhan
Guneet Bhatia
Heena Jha
K. Venugopal
Manpreet Sidhu
Sushant Sinha

2. CONTENT
Definition and Classification of Working capital
Determinants of Working capital
Measurement of Working capital
Working Capital Financing
Management of Working capital
Inventory Management
Cash Management
Receivable Management

3. DEFINITION OF WC
 Working capital means current assets
by Mead, Baker and Mallot
 The sum of the current assets is the working
capital of the business
by J.S. Mill

4. WHAT INCLUDES?
Stocks of materials,
Fuels
Semi-finished goods including Work in progress
Finished goods
By products
Cash in hand and bank
Outstanding factory payment e.g. rents, wages
Purchase of goods and Services
Short term loans and advances etc.

5. CLASSIFICATION
Working
Capital
Concept
Based
Gross
WC
Net WC
Negative
WC
Time
Based
Fixed WC
Regular
WC
Reserve
WC
Variable
WC
Seasonal
WC
Special
WC

6. CONCEPTS BASED
Gross working capital
•Firm’s investment in total current or circulating assets
Net working capital
•Excess of current asset over current liabilities
•Firm’s current assets which is financed by long-term
funds
Negative working capital
•When the current liabilities exceed the current assets.
It indicates crisis to the firm

7. TIME BASED
Permanent working capital
•minimum amount of investment in all
current assets which is required at all
times to carry out minimum level of
business activities
Temporary working capital
•It keeps on fluctuating from time to time
on the basis of business activities

8. NEED OF WORKING CAPITAL
Manufacturing cycle
•Time require for converting the raw material in to finished product
Credit policy
•Credit period given to customers and credit period allowed by
creditors
•Conversion of cash into raw materials
•Conversion of raw materials into work in progress
•Conversion of work in process into finished product
•Time for sale of finished goods – cash and credit sales
•Time for realization from debtors and Bills receivable into cash
•Credit period allowed by creditors for credit purchases and
creditors for wages and overheads

9. DETERMINATION OF WORKING
CAPITAL
The factors influencing the working capital decisions of
a firm may be classified as two groups, such as internal
factors and external factors

10. DETERMINANT OF WORKING
CAPITAL
Internal Factors
External Factors

11. INTERNAL FACTORS
Nature and size of the business
• Size may be measured in terms of the scale of operation
i.e. larger firm larger WC and vice a versa
• Nature of the business
Firm’s production policy
• Uniform Production Policy
• Seasonal Production Policy
Firm’s Credit Policy
• Liberal credit policy
• Strict credit policy

12. CONTINUED…
Availability of Credit
• Less working capital if liberal credit terms are available to it
• Similarly, if it can get bank credit easily on favorable
condition will require lesser WC
Growth and expansion of business
• Growing firms may need funds to sustain growth in sales
volume and fixed assets
Profit margin and dividend policy
• A high net profit margin contributes towards the WC pool
• Liberal or Conservative Dividend policy i.e. Distribution of
profits in the form of cash dividends result in drain on crash
resources and thus reduces company’s WC

13. CONTINUED…
Operating efficiency of the firm
•Successful control -> Improved Net
profit -> greater funds for WC
Coordinating activities in firm
•Greater and effective coordination,
lower pressure of working capital

14. EXTERNAL FACTORS
Business Fluctuation
• Upward swing in economy->increase in sales-> increase
in firm’s investment in inventories and book debt
• Decline in economy->sales decreases-> reduction in
short term borrowing
• Similar for seasonal fluctuation
Changes in Technology
• Technological changes and development in area of
production
• New technology may utilize less expensive material or
produce more output for same input, thus inventory need
is reduced and so is working capital

15. CONTINUED…
Import Policy
• Import policy of the govt. may also affect the level of
working capital
Infrastructural facilities
• Firm may require additional fund to maintain the level of
inventory and other current assets, when there is good infra.
Facilities in the company
Taxation Policy
• Regressive taxation policy->imposing heavy tax ->lower
profits -> increased working capital requirement
• Liberalized tax policy -> minimized pressure on working
capital

16. MEASUREMENT OF WORKING
CAPITAL
There are 3 methods for assessing the working capital
requirement

17. MEASUREMENT OF WORKING
CAPITAL
Percent Sales Method
•Based on past experience, some % sales may be
taken for determining quantum of working capital
Regression Analysis Method
•Relationship b/w sales and working capital and its
various component may be run on regression model
•Average percentage of sales for last 5 years
Operating cycle Method

18. OPERATING CYCLE METHOD
Inventory Period
•No. of days consumption in stock = Avg. Inventory during the
year/ (Material Consumed during the year/365)
Work in Progress
•No. of days work in progress = Avg. WIP during the year/ (Cost of
work in progress/365)
Finished products inventory method
•=Avg. finished products inventory during the year/(COGS during
the year/365)
Average collection period of debtors
•Avg. debtors balances during the year/(Credit sales during the
year/365)

19. CONTINUED…
Credit period allowed to the supplier
• Avg. creditors’ balance during the year/(Credit
purchases during the year/365)
Minimum cash balance to be kept daily
• Material consumed during the year +
Avg. WIP during the year +
COGS during the year +
Avg. debtors balance during the year –
Avg. creditors’ balances during the year

20. IMPORTANCE OF ADEQUATE WC
Solvency of business
Goodwill
Easy Loan
Cash Discount
Regular supply of raw material
Regular payment of salaries, wages and other day to day commitment
Exploitation of favorable market condition
Ability to face crisis
Quick and regular return on investments
High morale

21. EXCESS WORKING CAPITAL
Ideal funds which earns no profit for the business
May lead to unnecessary purchasing, excess inventory may
in turn lead to theft, waste and losses
May result in overall inefficiency in the organization
Due to low rate of return on investment, the value of shares
may fall also
May lead to excess debtors and defective credit policy

22. INADEQUATE WORKING CAPITAL
Cannot buy requirement in bulk and cannot avail discount
Becomes difficult to exploit favorable market conditions and
undertake profitable project
Cannot pay short term liabilities in time, thus loss in
reputation and may not get goods on credit facility
Cannot pay day to day expenses and creates inefficiencies
Inefficient utilization of Fixed Asset due to non-availability of
liquid funds

23. WORKING CAPITAL FINANCING

24. WORKING CAPITAL FINANCING
Accruals
•The major accrual items are wages and taxes. These are simply what the
firm owes to its employees and to the government.
Trade Credit
•Credit extended by suppliers of goods and service
WC advance by Commercial Bank
•Cash credit/overdrafts
•Loans
•Purchase/Discount of bills
•Letter of Credit
•When a bank opens a letter of credit in favour of its customer for some
specific purchases, the bank undertakes the responsibility to honour the
obligation of its customer, should the customer fail to do so

25. CONTINUED…
Public deposit
• Many firms, large and small, have solicited unsecured
deposits from the public in recent years
Inter-corporate deposits
• A deposit made by one company with another, normally for
a period up to six months, is referred to as an inter-corporate
deposit
Short term Loans from Financial Institution
Commercial Paper
Factoring

26. SOURCE OF WC FINANCING
Long term
• Issue of shares
• Floating of debentures
• Ploughing back of profit
• Loans
• Public deposit
Short term
• Depreciation
• Taxation(%)
• Accrued expenses
• Dividends

27. REGULATION OF BANK IN INDIA
Maximum Permissible Bank Finance
•The Tandon Committee had suggested three for determining the max permissible
bank finance
First Method
•According to this method, the borrower will have to contribute a minimum of 25%
of the working capital gap from long-term funds, i.e., owned funds and term
borrowings.
Second method
•Under this method the borrower has to provide the minimum of 25% of the total
current assets
Third method
•In this method, the borrower’s contribution from long term funds will be to the
extent of the entire core current assets and a minimum of 25% of the balance of
the current assets. The term core current assets refers to the absolute minimum
level of investment in all current assets which is required at all times to carry out
minimum level of business activities.

28. TRENDS IN WC FINANCING
Public Deposits
Inter-corporate Deposits
Short-term Loans from Financial Institutions
Rights Debentures for Working Capital
Commercial Paper
Factoring

29. FINANCING AND POLICIES OF
WORKING CAPITAL
Short Term
•Borrowing funds or raising credit for a maximum of 1 year period
Long Term
•the borrowing of funds or raising credit for one year or more
A Mix of these two sources to ensure profitability and liquidity
Conservative financing policy
•Depends more on long term funds
Aggressive financing policy
•Depends more on short term funds
Moderate financing policy
•Depends moderately on both long term and short term

30. CONTINUED…
Conservative
Financing
policy
Seasonal CA
Permanent CA
Fixed Asset
Aggressive
Financing
policy
Seasonal CA
Permanent CA
Fixed Asset
Moderate
Financing
policy
Seasonal CA
Permanent CA
Fixed Asset
Short Term
Short Term
Short Term
Long Term +
Equity Capital
Long Term +
Equity Capital
Long Term +
Equity Capital

31. MATCHING APPROACH

32. TRADE OFF BETWEEN LIQUIDITY
AND PROFITABILITY
If a firm maintains huge amount of current assets its profitability will be
affected though it protects liquidity. If a firm maintains low current
assets, its liquidity is of course weak but the firm’s profitability will be
high.

33. CONTINUED…

34. MANAGEMENT OF WORKING
CAPITAL
Working Capital Management involves management of
different components of working capital such as cash,
inventories, accounts receivable, creditors etc.

35. MANAGEMENT OF WORKING
CAPITAL
Within Outside

36. INVENTORY MANAGEMENT
Inventory management refers to an optimum
investment in inventories. It should neither be too low to
effect the production adversely nor too high to block
the funds unnecessarily.

37. TECHNIQUES OF INVENTORY
CONTROL
Economic ordering quantity
•Economic Ordering Quantity (EOQ) is the quantity fixed at the point where
the total cost of ordering and the cost of carrying the inventory will be the
minimum
Fixing Level – Quantity control
•Max. stock level –> Reorder Level – (Min. Consumption) X (Min. Lead Times) +
Reordering Quantity
•Min. stock Level -> Reorder Level – (Avg usage X Avg Lead Time)
•Re-Order Level -> Max. usage X Max Lead time or Min. Level + Consumption
•Danger Level
ABC Analysis for Value of items consumed
•‘A’ - Small percentage of the total items but having higher values
•‘B’ - More percentage of the total items but having medium values
•‘C’ - High percentage of the total items but having low values

38. ABC ANALYSIS
Perpetual Inventory system
•A system of records maintained by the controlling department,
which reflects physical movements of stocks and their current
balance
•Bin Cards
•Stores ledger
•Continuous Stock taking
H.M.L. Classification
•Materials are classified according to their unit value as high,
medium or low valued items
FSN Analysis
•They are fast moving, slow moving and non moving
•Risk is high in case of slow – moving and non – moving – items

39. CONTINUED…
V.E.D. Classification
•Spares are classified as vital (V), essential (E) and desirable (D)
Just in Time
•Normally, inventory costs are high and controlling inventory is complex
because of uncertainties in supply, dispatching, transportation etc.
Inventory Turnover Ratio
•Inventory turnover ratio
•WIP turnover ratio
•Weeks inventory of finished good on hand
•Weeks raw material on order
•Average age of raw material inventory
•Average age of finished goods inventory

40. CASH MANAGEMENT
Cash is one of the most important components of
current assets. Every firm should have adequate cash,
neither more nor less. Inadequate cash will lead to
production interruptions, while excessive cash remains
idle and will impair profitability.

41. SIGNIFICANCE
Significance
Cash Planning
Management
of Cash flows
Maintaining
optimum cash
balance
Investment of
excess of cash

42. MOTIVES
Transaction Motive
•Refers to the holding of cash to meet expected obligations whose
timing is not perfectly matched with cash receipts
Precautionary Motive
•Cash held to meet these unforeseen situations is known as
precautionary cash balance and it provides a caution against them
Speculative Motive
•Sometimes firms would like to hold cash in order to exploit, the
profitable opportunities as and when they arise
Compensation Motive
•This motive to hold cash balances is to compensate banks and other
financial institutes for providing certain services and loans

43. OBJECTIVE
Meeting the payment schedule
• Insolvency
• Good relations
• Credit Worthiness
• Availing discount facilities
• To meet unexpected facilities
Minimizing funds committed to cash
balance

44. FACTOR DETERMINING CASH
REQUIREMENT
Matching of cash flows
• Receipts and payments are perfectly coincide, there would
be no need of cash balance
• It will only arise on the account of non-synchronization of
cash receipts and disbursement
Short Costs
• Cost that incurs as a result of shortfall of cash
Cost of cash on excess balance
• If large funds are idle, the implication is that the firm has
missed opportunities to invest and thereby lost interest. This is
known as excess cost

45. CONTINUED…
Uncertainty in business
•Uncertainty plays a key role in cash management,
because cash flows can not be predicted with
complete accuracy
Cost of procurement and management
of cash
•The costs associated with establishing and
operating cash management staff and activities
determining the cash needs of a business firm.

46. STRATEGIES OF CASH
MANAGEMENT
Projection of cash flows and planning
•Cash planning and projection is determined by with the help of cash
budget, which is an important tool
Determining the level of cash holding
•Optimum level of cash balance influenced by a trade off between risk and
profitability
•Inventory model to cash management
•Stochastic Model
•Probability Model
Strategy for economizing cash
•Once cash flow projections are made and appropriate cash balances are
established
•Strategy towards accelerating cash inflows
•Strategy towards slowing cash outflows

47. STRATEGY TOWARDS
ACCELERATING CASH INFLOWS
Quick deposit of customer’s cheques
•Special attention should be given to deposit the cheques without
any delay
Establishing collection centers
•In order to accelerate the cash inflows the organization may
establish collection centres in various marketing centres of the
country
Lock-box method
•The company rents lock-box from post offices through its service
area.
•It helps to reduce the time interval from the mailing of the cheque
to the use of fund

48. STRATEGY FOR SLOWING CASH
OUTFLOWS
Delaying outward payments
• Increasing the cash turnover by delaying the payment
on bills until the due date
Making pay roll period less frequent
• The firm can economise its cash resources by changing
the frequency of disbursing pay to its employees
Solving disbursement of by use of Drafts
• When the firm pays the amount through drafts,
the bank will not make the payment against the draft
unless the bank gets the acceptance of the issuer firm

49. CONTINUED…
Playing the float
•Float is the difference between the company’s
cheque book balance and the balance shown in
the banks books of accounts.
•The company can maximize its cash utilization by
ignoring its book balance and keep its cash
invested until just before the cheques are actually
presented for payment
Centralized payment system
•Payments will be made rom a single central
account, thus payments can be delayed

50. MANAGEMENT OF RECEIVABLES
Receivables or debtors get created on account of the
credit sales made by the company. They are also
termed as book debts/amount receivables/customer
receivables/trade receivable.

51. COST OF MAINTAINING
RECEIVABLES
Capital Costs
•There is a time lag between the sale of goods to customers and the payments by
them.
•Additional funds may either be raised from outside or out of profits retained in the
business
Administrative Cost
•May incur additional administrative costs for maintaining accounts receivable in
the form of salaries to the staff kept for maintaining accounting records relating to
customers
Collection Cost
•The firm has to incur costs for collecting the payments from its credit
customers
Defaulting cost
•firm may not be able to recover the overdue because of the inability of the
customers

52. BENEFITS OF MAINTAINING
RECEIVABLES
Increase in Sales
• Sales can be increased by liberalizing the credit terms
Increase in Profits
• Increase in sales will help the firm
• Easily recover the fixed expenses and attaining the
break-even level
• Increase the operating profit of the firm
Extra Profits
• Firms make the credit sales at a price which is higher than
the usual cash selling price

53. FACTORS AFFECTING THE SIZE OF
RECEIVABLES
Level of credit sales
•Firm adhering to sales on credit basis will have high receivables as compared to a
firm allowing sales on cash.
Credit Policies
•Firms with tight credit policies will have low receivables when compared to a firm
with liberal credit policy
•The vigour with which the firm collects the receivables. Prompt collection will help
in keeping receivables under control while lenient collection may result in
outstanding receivables which may result in bad debts.
Terms of trade
•Credit Period
•time duration for which credit is extended to the customers. Longer the period
more would be the receivables
•Cash Discount
•It indicate the rate of discount as well as the period for which the discount has
been offered. If certain schemes are provided for payment at an early stage
then the receivables will decrease.

54. OPTIMUM SIZE OF RECEIVABLE
• Optimum investment in receivables will be at a level where there is
a trade off between cost and profitability

55. CREDIT POLICIES
Liberal credit policy
• The profitability of the firm increases on
account of higher sales, but it results in
increased investment in receivables,
increased chances of bad debt, more
collection cost
Stringent credit policy
• It reduces the profitability but increases the
liquidity of the firm

56. DETERMINANT OF CREDIT
POLICIES
Determinants of credit policy
•Level of credit sales required to optimize the profits
•Credit period i.e. duration of credit
•Cash discount, discount period and seasonal offers
•Credit standard of a customer: 5 Cs of credit
•Character -of customer
•Capacity – ability to repay
•Capital – financial resources of a customer/money you personally have
invested in a business
•Conditions- the intended purpose of loan
•Collateral security – additional securities provided to the lender
•Profits
•Market and economic conditions
•Collection policy, paying habit of customers, billing efficiency, grant of
credit

57. OPTIMUM CREDIT POLICY
Credit Standards
•These are criteria to decide to whom credit sales can be made & how
much. They are generally determined by the five “C’s”
Credit Terms
•These are the conditions for extending credit sales & they include:
•Credit Period – the length of time for which credit is extended to customers
•Cash Discount are given for receiving PAYMENTS before normal credit
period
Collection procedures
•Gathering credit information of the customer
•Credit analysis – Checking credit worthiness
•Credit decision – Whether or not to provide credit to customer
•Credit limit – Extension based on Credit potential
•Collection procedure – A suitable and clear-cut collection procedure,
which is a detailed statement of steps that needs to be taken regarding
when & how the past-due amounts of a debt are to be collected.