4b07working capital management

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Working CapitalWorking CapitalManagementManagement




WORKING CAPITALWORKING CAPITAL

Current assetsCurrent assets ² ² Current liabilitiesCurrent liabilities

It measures how much in liquid assets aIt measures how much in liquid assets acompany has available to build its business.company has available to build its business.

A short term loan which provides money toA short term loan which provides money tobuy earning assets.buy earning assets.

Allows to avail of unexpected opportunities.Allows to avail of unexpected opportunities. Positive working capital is required to ensurePositive working capital is required to ensure

that a firm is able to continue its operationsthat a firm is able to continue its operationsand that it has sufficient funds to satisfy bothand that it has sufficient funds to satisfy bothmaturing shortmaturing short--term debt and upcomingterm debt and upcoming

operational expenses. The management of operational expenses. The management of working capital involves managingworking capital involves managinginventories, accounts receivable and payableinventories, accounts receivable and payableand cash.and cash.




WORKING CAPITALWORKING CAPITAL

An increase in working capital indicates thatAn increase in working capital indicates that

the business has either increased currentthe business has either increased current

assets (that is received cash, or other currentassets (that is received cash, or other current

assets) or has decreased current liabilities, forassets) or has decreased current liabilities, forexample has paid off some shortexample has paid off some short--termterm

creditorscreditors..




Working Capital ManagementWorking Capital Management

Decisions relating toDecisions relating to working capitalworking capital and short termand short termfinancing are referred to asfinancing are referred to as working capital working capital

management management . Short term financial management. Short term financial management

concerned with decisions regarding to CA and CL.concerned with decisions regarding to CA and CL.

Management of Working capital refers to managementManagement of Working capital refers to managementof CA as well as CL.of CA as well as CL.

If current assets are less than current liabilities, anIf current assets are less than current liabilities, an

entity has a working capital deficiency, also called aentity has a working capital deficiency, also called a

working capital deficit.working capital deficit.

These involve managing the relationship between a These involve managing the relationship between afirm's shortfirm's short--term assets and its shortterm assets and its short--term liabilities.term liabilities.




Working Capital ManagementWorking Capital Management

The goal of working capital management is to ensure The goal of working capital management is to ensure

that the firm is able to continue its operations and thatthat the firm is able to continue its operations and that

it has sufficient cash flow to satisfy both maturingit has sufficient cash flow to satisfy both maturing

shortshort--term debt and upcoming operational expenses.term debt and upcoming operational expenses. Businesses face ever increasing pressure on costs andBusinesses face ever increasing pressure on costs and

financing requirements as a result of intensifiedfinancing requirements as a result of intensified

competition on globalised markets. When trying tocompetition on globalised markets. When trying to

attain greater efficiency, it is important not to focusattain greater efficiency, it is important not to focus

exclusively on income and expense items, but to alsoexclusively on income and expense items, but to also

take into account the capital structure, whosetake into account the capital structure, whose

improvement can free up valuable financial resourcesimprovement can free up valuable financial resources




WORKING CAPITAL MANAGEMENTWORKING CAPITAL MANAGEMENT

Active working capital management isActive working capital management isan extremely effective way to increasean extremely effective way to increaseenterprise value. Optimising workingenterprise value. Optimising working

capital results in a rapid release of capital results in a rapid release of liquid resources and contributes to anliquid resources and contributes to animprovement in free cash flow and to aimprovement in free cash flow and to apermanent reduction in inventory andpermanent reduction in inventory andcapital costs, thereby increasingcapital costs, thereby increasing

liquidity for strategic investment andliquidity for strategic investment anddebt reduction. Process optimisationdebt reduction. Process optimisationthen helps increase profitability.then helps increase profitability.




WORKING CAPITAL MANAGEMENTWORKING CAPITAL MANAGEMENT

The fundamental principles of The fundamental principles of working capital management areworking capital management are

reducing the capital employed andreducing the capital employed and

improving efficiency in the areasimproving efficiency in the areas

of receivables, inventories, andof receivables, inventories, andpayables.payables.




Why working Capital is important?Why working Capital is important?

Investment in CA represents aInvestment in CA represents asubstantial portion of totalsubstantial portion of total

investment.investment.

Investment in CA and level of CL Investment in CA and level of CL

have to be geared quickly tohave to be geared quickly to

changes in sales.changes in sales.




Concepts of Working CapitalConcepts of Working Capital

Gross Working Capital

Gross Working Capital

Net working CapitalNet working Capital




Gross Working CapitalGross Working Capital

Total Current assets Total Current assets Where Current assets are theWhere Current assets are the

assets that can be converted intoassets that can be converted into

cash within an accounting year &cash within an accounting year &

include cash , debtors etc.include cash , debtors etc.

Referred as ´Economics ConceptµReferred as ´Economics Conceptµ

since assets are employed tosince assets are employed to

derive a rate of return.derive a rate of return.




Net Working CapitalNet Working Capital

CACA ² ² CL CL Referred as ¶point of view of anReferred as ¶point of view of an

Accountant·.Accountant·.

It indicates liquidity position of aIt indicates liquidity position of afirm & suggests the extent tofirm & suggests the extent to

which working capital needs may which working capital needs may

be financed by permanent sourcesbe financed by permanent sources

of funds.of funds.




CONSTITUENTS OF WORKINGCONSTITUENTS OF WORKING

CAPITALCAPITAL

CURRENT ASSETSCURRENT ASSETS Inventory Inventory

Sundry DebtorsSundry Debtors

Cash and Bank BalancesCash and Bank Balances

Loans and advancesLoans and advances

CURRENT LIABILITIESCURRENT LIABILITIES Sundry creditorsSundry creditors

Short term loansShort term loans

ProvisionsProvisions




Characteristics of Current AssetsCharacteristics of Current Assets

Short Life SpanShort Life Span

I.e. cash balances may be held idle forI.e. cash balances may be held idle for

a week or two , thus a/c may have aa week or two , thus a/c may have a

life span of 30life span of 30--60 days etc.60 days etc.

Swift Transformation into other AssetSwift Transformation into other Assetformsforms

I.e.each CA is swiftly transformed intoI.e.each CA is swiftly transformed into

other asset forms like cash is used forother asset forms like cash is used for

acquiring raw materials , raw materialsacquiring raw materials , raw materialsare transformed into finished goodsare transformed into finished goods

and these sold on credit areand these sold on credit are

convertible into A/R & finlly into cash.convertible into A/R & finlly into cash.




Matching PrincipleMatching Principle

If a firm finances a long term asset(likeIf a firm finances a long term asset(like

machinery) with a Smachinery) with a S--T Debt then it will T Debt then it will

have to be periodically finance thehave to be periodically finance the

asset which will be risky as well asasset which will be risky as well as

inconvenient.inconvenient.

i.e. maturity of sources of financingi.e. maturity of sources of financing

should be properly matched withshould be properly matched with

maturity of assets being financed.maturity of assets being financed.

Thus Fixed Assets & permanent CA Thus Fixed Assets & permanent CAshould be supported with L should be supported with L--T sources T sources

of finance & fluctuating CA by Sof finance & fluctuating CA by S--T T

sources.sources.




MATCHING PRINCIPLEMATCHING PRINCIPLE




Need for Working CapitalNeed for Working Capital

As profits earned depend uponAs profits earned depend upon

magnitude of sales and they donotmagnitude of sales and they donot

convert into cash instantly, thus thereconvert into cash instantly, thus there

is a need for working capital in theis a need for working capital in the

form of CA so as to deal with theform of CA so as to deal with the

problem arising from lack of immediateproblem arising from lack of immediate

realisation of cash against goods sold.realisation of cash against goods sold.

This is referred to as ´Operating or This is referred to as ´Operating or

Cash Cycleµ .Cash Cycleµ . It is defined as ´The continuing flowIt is defined as ´The continuing flow

from cash to suppliers, to inventory , tofrom cash to suppliers, to inventory , to

accounts receivable & back into cash ´.accounts receivable & back into cash ´.




Need for Working CapitalNeed for Working Capital

Thus needs for working capital arises Thus needs for working capital arises

from cash or operating cycle of a firm.from cash or operating cycle of a firm.

Which refers to length of time requiredWhich refers to length of time required

to complete the sequence of events.to complete the sequence of events.

Thus operating cycle creates the need Thus operating cycle creates the needfor working capital & its length infor working capital & its length in

terms of time span required toterms of time span required to

complete the cycle is the majorcomplete the cycle is the major

determinant of the firm·s workingdeterminant of the firm·s workingcapital needs.capital needs.




Operating or Cash CycleOperating or Cash Cycle

1.1.

Conversion of cash intoConversion of cash intoinventory inventory

2.2. Conversion of inventory intoConversion of inventory into

ReceivablesReceivables

3.3. Conversion of Receivables intoConversion of Receivables into

CashCash




OPERATING CYCLEOPERATING CYCLE

Receivables

Inventory

Cash

Phase 1

Phase 2

Phase 3




TYPES OF WORKING CAPITALTYPES OF WORKING CAPITAL

PERM

ANENT WORKING

CAPITAL PERM

ANENT WORKING

CAPITAL VARIABLE WORKING CAPITAL VARIABLE WORKING CAPITAL




PERMANENT WORKING CAPITALPERMANENT WORKING CAPITAL

THERE IS ALWAYS A MINIMUM LEVEL THERE IS ALWAYS A MINIMUM LEVEL

OF CA WHICH IS CONTINOUSLYOF CA WHICH IS CONTINOUSLY

REQUIRED BY A FIRM TO CARRY ONREQUIRED BY A FIRM TO CARRY ON

ITS BUSINESS OPERATIONS.ITS BUSINESS OPERATIONS.

THUS , THEM

INIM

UM

LEVEL OF THUS , THEM

INIM

UM

LEVEL OFINVEST MENT IN CURRENT ASSETSINVEST MENT IN CURRENT ASSETS

THAT IS REQUIRED TO CONTINUE THAT IS REQUIRED TO CONTINUE

THE BUSINESS WITHOUT THE BUSINESS WITHOUT

INTERRUPTION IS REFERRED ASINTERRUPTION IS REFERRED ASPERMANENT WORKING CAPITAL PERMANENT WORKING CAPITAL ..




V ARIABLE WORKING CAPITALV ARIABLE WORKING CAPITAL

THIS IS THE AMOUNT OF INVEST MENT THIS IS THE AMOUNT OF INVEST MENT

REQUIRED TO TAKE CARE OFREQUIRED TO TAKE CARE OFFLUCTUATIONS IN BUSINESS ACTIVITY ORFLUCTUATIONS IN BUSINESS ACTIVITY OR

NEEDED TO MEET FLUCTUATIONS INNEEDED TO MEET FLUCTUATIONS IN

DEMAND CONSEQUENT UPON CHANGES INDEMAND CONSEQUENT UPON CHANGES IN

PROD

UCTION & SALES AS A RESULT OFPROD

UCTION & SALES AS A RESULT OFSEASONAL SEASONAL CHANGES.CHANGES.




DISTINCTIONDISTINCTION

PERMANENT IS STABLE OVER TIMEPERMANENT IS STABLE OVER TIME

WHEREAS VARIABLE IS FLUCTUATING WHEREAS VARIABLE IS FLUCTUATING ACCORDING TO SEASONAL DEMANDS.ACCORDING TO SEASONAL DEMANDS.

INVEST MENT IN PERMANENT PORTION CANINVEST MENT IN PERMANENT PORTION CAN

BE PREDICTED WITH SOME PROFITABILITYBE PREDICTED WITH SOME PROFITABILITY

WHEREAS INVEST MENT IN VARIABLEWHEREAS INVEST MENT IN VARIABLECANNOT BE PREDICTED EASILY.CANNOT BE PREDICTED EASILY.

WHILE PERMANENT IS MINIMUM WHILE PERMANENT IS MINIMUM

INVEST MENT IN VARIOUS CA , VARIABLE ISINVEST MENT IN VARIOUS CA , VARIABLE IS

EXPECTED TO TAKE CARE FOR PEAK INEXPECTED TO TAKE CARE FOR PEAK INBUSINESS ACTIVITY.BUSINESS ACTIVITY.




DISTINCTIONDISTINCTION

WHILE PERMANENT COMPONENT WHILE PERMANENT COMPONENT

REFLECTS THE NEED FOR A CERTAINREFLECTS THE NEED FOR A CERTAINIRREDUCIBLE LEVEL OF CURRENT ASSETSIRREDUCIBLE LEVEL OF CURRENT ASSETS

ON A CONTINOUS AND UNINTERRUPTED ON A CONTINOUS AND UNINTERRUPTED

BASIS , THE TEMPORARY PORTION ISBASIS , THE TEMPORARY PORTION IS

NEED

ED

TOM

EET SEASONAL & OTHERNEED

ED

TOM

EET SEASONAL & OTHER TEMPORARY REQUIREMENTS. TEMPORARY REQUIREMENTS.

ALSO PERMANENT CAPITAL ALSO PERMANENT CAPITAL

REQUIREMENTS SHOUL D BE FINANCED REQUIREMENTS SHOUL D BE FINANCED

FROM L FROM L--T SOURCES , S T SOURCES , S--TFUNDS SHOUL D TFUNDS SHOUL D

BE USED TO FINANCE TEMPORARYBE USED TO FINANCE TEMPORARYWORKING CAPITAL NEEDS OF A FIRM,WORKING CAPITAL NEEDS OF A FIRM,




OPERATING OPERATING

ENVIRONMENT OF ENVIRONMENT OF WORKING CAPITALWORKING CAPITAL

CHAPTER 2CHAPTER 2




Monetary and Credit PoliciesMonetary and Credit Policies

Monetary policy is the process by which theMonetary policy is the process by which the

govt.,central bank, or monetary authority of a country govt.,central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of controls (i) the supply of money, (ii) availability of

money, and (iii) cost of money or rate of interest, inmoney, and (iii) cost of money or rate of interest, in

order to attain a set of objectives oriented towards theorder to attain a set of objectives oriented towards the

growth and stability of the economy.growth and stability of the economy.

Monetary policy is the process by which the

Monetary policy is the process by which thegovernment, central bank, or monetary authority of agovernment, central bank, or monetary authority of a

country controls (i) the supply of money, (ii) availability country controls (i) the supply of money, (ii) availability

of money, and (iii) cost of money or rate of interest, inof money, and (iii) cost of money or rate of interest, in

order to attain a set of objectives oriented towards theorder to attain a set of objectives oriented towards the

growth and stability of the economy.Monetary theory growth and stability of the economy.Monetary theory

provides insight into how to craft optimal monetary provides insight into how to craft optimal monetary policy.policy.

Monetary policy involves variations in money supply ,Monetary policy involves variations in money supply ,

interest rates , lending by commercial banks etc.interest rates , lending by commercial banks etc.




Credit PolicyCredit Policy

Credit gives the customer the opportunity to buy goodsCredit gives the customer the opportunity to buy goods

and services, and pay for them at a later date.and services, and pay for them at a later date. Clear, written guidelines that setClear, written guidelines that set

(1) the terms and conditions for supplying goods on(1) the terms and conditions for supplying goods oncredit ,credit ,

(2) customer qualification criteria(2) customer qualification criteria

(3) procedure for making collections , and(3) procedure for making collections , and

(4) steps to be taken in case of customer delinquency .(4) steps to be taken in case of customer delinquency .Also called collection policy.Also called collection policy.

Where delinquency means Failure to repay anWhere delinquency means Failure to repay anobligation when due or as agreed. Thus in consumerobligation when due or as agreed. Thus in consumerinstallment loans, missing two successive paymentsinstallment loans, missing two successive paymentswill normally make the account delinquentwill normally make the account delinquent




Advantages of credit tradeAdvantages of credit trade

Usually results in more customers than cashUsually results in more customers than cashtrade.trade.

Can charge more for goods to cover the risk of Can charge more for goods to cover the risk of bad debt.bad debt.

Gain goodwill and loyalty of customers.Gain goodwill and loyalty of customers.

People can buy goods and pay for them at aPeople can buy goods and pay for them at alater date.later date.

Farmers can buy seeds and implements, andFarmers can buy seeds and implements, andpay for them only after the harvest.pay for them only after the harvest.

Stimulates agricultural and industrialStimulates agricultural and industrialproduction and commerce.production and commerce.

Can be used as a promotional tool.Can be used as a promotional tool.

Increase the sales.Increase the sales.




Disadvantages of credit tradeDisadvantages of credit trade

Risk of bad debt.Risk of bad debt.

High administration expenses.High administration expenses.

People can buy more than they People can buy more than they can afford.can afford.

More working capital needed.More working capital needed.

Risk of Bankruptcy.Risk of Bankruptcy.




Instruments of Monetary Policy inInstruments of Monetary Policy in

IndiaIndia

Money Supply Money Supply

Bank RateBank Rate

Reserve RatiosReserve Ratios

Interest RatesInterest Rates Selective Credit ControlsSelective Credit Controls

Flow of CreditFlow of Credit




Money SupplyMoney Supply

This is the sum total of money public funds This is the sum total of money public funds

and can be used for settling transactions toand can be used for settling transactions tobuy and sell things and make other paymentsbuy and sell things and make other payments

constitutes the money supply of a nation.constitutes the money supply of a nation.

Money supply = Notes and coins with public +Money supply = Notes and coins with public +

Demand deposits with Commercial papersDemand deposits with Commercial papers




Bank RateBank Rate

Standard rate at which bank is prepared to buy orStandard rate at which bank is prepared to buy or

rediscount bills of exchange or other commercialrediscount bills of exchange or other commercialpapers eligible for purchase under Reserve bank of papers eligible for purchase under Reserve bank of

India Act,1934.India Act,1934.

The rate of interest charged by central bank on their The rate of interest charged by central bank on their

loans to commercial banks is called bank rate(Discountloans to commercial banks is called bank rate(Discount

rate).rate). An increase in bank rate makes it more expensive forAn increase in bank rate makes it more expensive for

commercial banks to borrow . This exerts pressure tocommercial banks to borrow . This exerts pressure to

bring about the rise in interest rates (lending rates)bring about the rise in interest rates (lending rates)

charged by commercial banks on their lending tocharged by commercial banks on their lending to

public. This leads to a general tightening in economy.public. This leads to a general tightening in economy.

Whereas decrease in bank rate has the opposite effectWhereas decrease in bank rate has the opposite effect

and leads to general easing of credit in the economy.and leads to general easing of credit in the economy.




RESERVE REQUIREMENTSRESERVE REQUIREMENTS

The The reserve requirementreserve requirement (or(or required reserverequired reserve

ratioratio) is a bank regulation that sets the minimum) is a bank regulation that sets the minimumreserves each bank must hold to customer depositsreserves each bank must hold to customer depositsand notes. These reserves are designed to satisfy and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in thewithdrawal demands, and would normally be in theform of fiat currency stored in a bank vault(vaultform of fiat currency stored in a bank vault(vaultcash), or with a central bank.cash), or with a central bank.

The reserve ratio is sometimes used as a tool in the The reserve ratio is sometimes used as a tool in themonetary policy, influencing the country'smonetary policy, influencing the country'seconomy, borrowing, and interest rates .Westerneconomy, borrowing, and interest rates .Westerncentral banks rarely alter the reserve requirementscentral banks rarely alter the reserve requirementsbecause it would cause immediate liquidity because it would cause immediate liquidity problems for banks with low excess reserves; they problems for banks with low excess reserves; they prefer to use open market operations to implementprefer to use open market operations to implementtheir monetary policy their monetary policy




RESERVE REQUIREMENTSRESERVE REQUIREMENTS

Thus central bank makes it Thus central bank makes it

legally obligatory for commerciallegally obligatory for commercial

banks to keep a certainbanks to keep a certain

minimum percentage of depositsminimum percentage of deposits

in reserve.in reserve. These are of 2 types: These are of 2 types:--

1.1. Cash reservesCash reserves

2.2. Liquidity reservesLiquidity reserves




CRRCRR

CASH RESERVE RATIOCASH RESERVE RATIO

THIS ISDEFINED AS A THIS ISDEFINED AS A cash cash

reserve ratio reserve ratio (or CRR) is the(or CRR) is the

percentage of bank reserves topercentage of bank reserves to

deposits and notes. The cashdeposits and notes. The cashreserve ratio is also known as thereserve ratio is also known as the

cash asset ratio cash asset ratio oror liquidity ratio.liquidity ratio.




STATUTORY LIQUIDITY RATIOSTATUTORY LIQUIDITY RATIO

Statutory Liquidity RatioStatutory Liquidity Ratio (SLR) is a(SLR) is a

term used in the regulation of bankingterm used in the regulation of banking

in India. It is the amount which ain India. It is the amount which a

bank has to maintain in the form:bank has to maintain in the form:

CashCash Gold valued at a price not exceedingGold valued at a price not exceeding

the current market price,the current market price,

Unencumbered approved securities (G Unencumbered approved securities (G

Secs or Gilts come under this) valuedSecs or Gilts come under this) valuedat a price as specified by the RBI fromat a price as specified by the RBI from

time to time.time to time.




STATUTORY LIQUIDITY RATIOSTATUTORY LIQUIDITY RATIO

The quantum is specified as some percentage of the total The quantum is specified as some percentage of the totaldemand and time liabilities ( i.e. the liabilities of the bankdemand and time liabilities ( i.e. the liabilities of the bank

which are payable on demand anytime, and those liabilitieswhich are payable on demand anytime, and those liabilitieswhich are accruing in one months time due to maturity) of awhich are accruing in one months time due to maturity) of abank. This percentage is fixed by the Reserve Bank of India.bank. This percentage is fixed by the Reserve Bank of India.

The maximum and minimum limits for the SLR are 40% and The maximum and minimum limits for the SLR are 40% and25% respectively.25% respectively.

Following the amendment of the Banking regulationFollowing the amendment of the Banking regulationAct(1949) in January 2007, the floor rate of 25% for SLR wasAct(1949) in January 2007, the floor rate of 25% for SLR was

removed. Presently the SLR is 24% with effect from 8removed. Presently the SLR is 24% with effect from 8November, 2008.November, 2008. The objectives of SLR are: The objectives of SLR are:

To restrict the expansion of bank credit. To restrict the expansion of bank credit. To augment the investment of the banks in Government To augment the investment of the banks in Government

securities.securities. To ensure solvency of banks. A reduction of SLR rates looks To ensure solvency of banks. A reduction of SLR rates looks

eminent to support the credit growth in India.eminent to support the credit growth in India.




INTEREST RATESINTEREST RATES

This is generally done by stipulating min. This is generally done by stipulating min.

rates of interest for extending credit againstrates of interest for extending credit againstcommodities covetred under selective creditcommodities covetred under selective credit

control.control.

Also, concessive or ceiling rates of interest areAlso, concessive or ceiling rates of interest are

made applicable to advances for certainmade applicable to advances for certainpurposes ao to certain sectors to reduce thepurposes ao to certain sectors to reduce the

interest burden and thus facilitate theirinterest burden and thus facilitate their

development.development.

Further obj. behind fixing rates on depositsFurther obj. behind fixing rates on deposits

are to avoid unhealthy competition amongstare to avoid unhealthy competition amongst

the banks for deposits and keep the level of the banks for deposits and keep the level of

deposit rates in alignment with lending ratesdeposit rates in alignment with lending rates

of banks for deposits.of banks for deposits.




Selective Credit ControlsSelective Credit Controls

These are Qualitative instruments These are Qualitative instruments

which are aimed at affectingwhich are aimed at affecting

changes in the availability of changes in the availability of

credit with respect to particularcredit with respect to particular

sectors of the economy.sectors of the economy. Thus selective controls are called Thus selective controls are called

selective because they are aimedselective because they are aimed

at movement of credit towardsat movement of credit towardsselective sectors of the economy.selective sectors of the economy.





The general instruments such as The general instruments such as

Reserve ratios, Bank rate and openReserve ratios, Bank rate and open

market operations.market operations.

They are called so because they They are called so because they

influence the nation·s money supply influence the nation·s money supply and general availability of credit.and general availability of credit.

Quantitative instruments are calledQuantitative instruments are called

quantitative because they affect thequantitative because they affect the

total volume(quantity) of money supply total volume(quantity) of money supply and credit in the country.and credit in the country.





The most widely used qualitative The most widely used qualitative

techniques are selective control andtechniques are selective control andmoral suasion.moral suasion.

While the general credit controlsWhile the general credit controlsoperate on the cost and total volume of operate on the cost and total volume of credit , selective credit controls relatecredit , selective credit controls relateto tools available with the monetary to tools available with the monetary authority for regulating theauthority for regulating thedistrubution or direction of bankdistrubution or direction of bankresources to particular sectors of resources to particular sectors of economyin accordance with broadeconomyin accordance with broadnational priorities considerednational priorities considerednecessary for achieving the set.necessary for achieving the set.




MORAL SUASIONMORAL SUASION

IT IMPLIES THE CENTRAL BANKIT IMPLIES THE CENTRAL BANK

EXERTING PRESSURE ONEXERTING PRESSURE ON

BANKS BY USING ORAL AND BANKS BY USING ORAL AND

WRITTEN APPEALS TO EXPAND WRITTEN APPEALS TO EXPAND

OR RESTRICT CREDIT IN LINEOR RESTRICT CREDIT IN LINEWITH ITS CREDIT POLICY.WITH ITS CREDIT POLICY.




DETERMINATION OF DETERMINATION OF

WORKING CAPITAL NEEDSWORKING CAPITAL NEEDS

CHAPTER3

CHAPTER3




Different approaches inDifferent approaches in

determination of workingdetermination of working

capitalcapital Industry norm approachIndustry norm approach

Economic modeling approachEconomic modeling approach

Strategic choice approachStrategic choice approach




INDUSTRY NORM APPROACHINDUSTRY NORM APPROACH

THIS APPROACH IS BASED ON THIS APPROACH IS BASED ON THE PREMISE THAT EVERY THE PREMISE THAT EVERYCOMPANY IS GUIDED BY THECOMPANY IS GUIDED BY THEINDUSTRY PRACTICE.INDUSTRY PRACTICE.

LIKE IFM

AJORITY OF FIRM

SLIKE IFM

AJORITY OF FIRM

SHAVE BEEN GRANTING 3HAVE BEEN GRANTING 3MONTHS CREDIT TO AMONTHS CREDIT TO ACUSTOMER THEN OTHERS WILL CUSTOMER THEN OTHERS WILL

HAVE TO ALSO FOLLOW THEHAVE TO ALSO FOLLOW THEMAJORITY DUE TO FEAR OFMAJORITY DUE TO FEAR OFLOSING CUSTOMERS.LOSING CUSTOMERS.

ECONOMIC MODELLINGECONOMIC MODELLING




ECONOMIC MODELLINGECONOMIC MODELLING

APPROACH APPROACH

TO ESTIMATE OPTIMUM TO ESTIMATE OPTIMUM

INVENTORY IS DECIDED WITHINVENTORY IS DECIDED WITH

THE HELP OF EOQ MODEL. THE HELP OF EOQ MODEL.




STRATEGIC CHOICE APPROACHSTRATEGIC CHOICE APPROACH

THIS APPROACH RECOGNISES THIS APPROACH RECOGNISES THE VARIATIONS IN BUSINESS THE VARIATIONS IN BUSINESSPRACTICE AND ADVOCATES USEPRACTICE AND ADVOCATES USEOF STRATEGYIN TAKING OF STRATEGYIN TAKING WORKING CAPITAL DECISIONS.WORKING CAPITAL DECISIONS.

THE PURPOSE BEHIND THIS THE PURPOSE BEHIND THISAPPROACH IS TO PREPARE THEAPPROACH IS TO PREPARE THEUNIT TO FACE CHALLENGES OFUNIT TO FACE CHALLENGES OF

COMPETITION & TAKE ACOMPETITION & TAKE ASTRATEGIC POSITION IN THESTRATEGIC POSITION IN THEMARKET PLACE.MARKET PLACE.




STRATEGIC CHOICE APPROACHSTRATEGIC CHOICE APPROACH

THE EMPHASIS IS ON THE EMPHASIS IS ON

STRATEGIC BEHAVIOUR OFSTRATEGIC BEHAVIOUR OF

BUSINESS UNIT.THUS THE FIRM BUSINESS UNIT.THUS THE FIRM

IS INDEPENDENT IN CHOOSING IS INDEPENDENT IN CHOOSING

ITS OWN COURSE OF ACTIONITS OWN COURSE OF ACTIONWHICH IS NOT GUIDED BY THEWHICH IS NOT GUIDED BY THE

RULES OF INDUSTRY,RULES OF INDUSTRY,



PCTI Limited A Unique Name For Quality Education

Determinants of working capitalDeterminants of working capital

General nature of businessGeneral nature of business

Production cycleProduction cycle

Business cycleBusiness cycle

Credit policy Credit policy Production policy Production policy

Growth and expansionGrowth and expansion

Profit levelProfit level Operating efficiency Operating efficiency

4b07working capital management

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