financial management 3
TRANSCRIPT
![Page 1: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/1.jpg)
Unit IVFinancial Management
• Management of Working Capital: Concepts of working Capital• Approaches to the financing of current
Assets• Determining capital (with numerical problems)• Management of different components
of working capital.Prepared by:-
Dr. Waqar Ahmad Asstt. Professor
Allenhouse Business School
![Page 2: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/2.jpg)
WORKING CAPITAL• Working capital management involves the
relationship between a firm's short-term assets
and its short-term liabilities.
• The basic goal of working capital management
is to ensure that a firm is able to continue its
operations and that it has sufficient ability to
satisfy both maturing short-term debt and
upcoming operational expenses.
![Page 3: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/3.jpg)
SINGNIFICANCE OF WORKING CAPITAL MANAGEMENT
In a typical manufacturing firm, current assets exceed one-half of
total assets.
Excessive levels can result in a substandard Return on Investment
(ROI).
Current liabilities are the principal source of external financing for
small firms.
Requires continuous, day-to-day managerial supervision.
Working capital management affects the company’s risk, return, and
share price.
![Page 4: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/4.jpg)
WORKING CAPITAL CONCEPTS Net Working CapitalNet working capital refers to the difference between
current assets and current liabilities. Current liabilities are
those claims of outsider, which are expected to mature
For payment within an accounting year & include creditors,
bills payable & the outstanding expenses. In other words you
can say that this is the excess of current assets over current
liabilities.
Current Assets – Current Liabilities
![Page 5: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/5.jpg)
WORKING CAPITAL CONCEPTSGross Working Capital•It refers to the firm’s investment in current assets.
•Current assets are the assets, which can be converted into
cash within an accounting year or within an operating cycle
•cash, short-term securities, debtors (accounts receivable &
book debts), bills receivable and stock.
Working capital turnover
Working capital turnover= sales/working capital
Working Capital Management
The administration of the firm’s current assets and the
financing needed to support current assets.
![Page 6: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/6.jpg)
CURRENT ASSETS• Inventories: Inventories represent raw materials and components, work-in-progress and finished goods. Trade Debtors: Trade Debtors comprise credit sales to customers. Prepaid Expenses: These are those expenses, which have been paid for goods and services whose benefits have yet to be received. Loan and Advances: They represent loans and advances given by the firm to other firms for a short period of time. Investment: These assets comprise short-term surplus funds invested in government securities, shares and short-terms bonds. Cash and Bank Balance: These assets represent cash in hand and at bank, which are used for meeting operational requirements. One thing you can see here is that this current asset is purely liquid but non-productive.
![Page 7: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/7.jpg)
CURRENT LIABILITYSundry Creditors: These liabilities stem out of purchase of raw materials on credit terms usually for a period of one to two months. Bank Overdrafts: These include withdrawals in excess of credit balance standing in the firm’s current accounts with banks Short-term Loans: Short-terms borrowings by the firm from banks and others form part of current liabilities as short-term loans. Provisions: These include provisions for taxation, proposed dividends and contingencies.
![Page 8: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/8.jpg)
WORKING CAPITAL FORMATCURRENT ASSETS CURRENT LIABILITIES• Cash • Accounts receivable• Notes receivable• Marketable securities• Inventory• Prepaid expenses
Total current assets
• Accounts payable• Notes payable• Accrued expenses• Taxes payable
Total current liabilities
![Page 9: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/9.jpg)
POINTS KEPT IN MIND WHILE PLANNING1. Excessive investment (Profitability) • It results in unnecessary accumulation of
inventories. Thus, chances of inventory mishandling, waste, theft & losses increase.
• It is an indication of defective credit policy & slack collection period. • Excessive WC makes management complacent,
which degenerates into managerial inefficiency. • Tendencies of accumulating inventories tend to
make speculative profits grow.
![Page 10: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/10.jpg)
POINTS KEPT IN MIND WHILE PLANNIN CONT…2. Inadequate investment (Liquidity) It stagnates growth. It become difficult to implement operating plans and
achieve the firm’s operating profit target. Operating inefficiencies creep in when it becomes difficult
even to meet day-to-day commitments. Fixed assets are not efficiently utilized for the lack of
working capital funds. Thus, the firm’s profitability would deteriorate.
Paucity of WC funds render the firm unable to avail attractive credit opportunities.
The firm loses its reputation when it is not in a position to honour its short-term obligations.
![Page 11: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/11.jpg)
KINDS OF WORKING CAPITAL
1.Permanent working capitalPermanent working capital is the minimum amount of
current assets, which is needed to conduct a business even during the dullest season of the year.
The minimum level of current assets is called permanent or fixed working capital as this part is permanently blocked in current assets.
Characteristics of Permanent working capital It is classified on the basis of the time period It constantly changes from one asset to another and
continues to remain in the business process. Its size increase with the growth of business operations.
![Page 12: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/12.jpg)
Permanent working capital
![Page 13: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/13.jpg)
Permanent working capital CONT…2.Temporary working capitalTemporary working capital represents a certain amount of
fluctuations in the total current assets during a short period.
Variable working capital is the amount of additional current asset that are required to meet the seasonal needs of a firm, so is also called as the seasonal working capital.
Characteristics of Temporary working capital It is not always gainfully employed, though it may change from one asset to another asset, as permanent working capital does.
It is particularly suited to business of a seasonal or cyclical nature.
![Page 14: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/14.jpg)
TEMPORARY WORKING CAPITAL
![Page 15: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/15.jpg)
DETERMINANTS OF WORKING CAPITAL• Nature of business• Terms of sales and purchases• Manufacturing cycle• Rapidity of turnover• Business cycle• Changes in technology• Seasonal variation• Market conditions• Seasonality of operation• Dividend policy• Working capital cycle
![Page 16: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/16.jpg)
Importance of Working Capital:• It helps measure profitability of an enterprise. In its absence, there would be neither production nor profit.• Without adequate working capital an entity cannot meet its short-term liabilities in time.• A firm having a healthy working capital position can get loans easily from the market due to its high reputation or goodwill.• Sufficient working capital helps maintain an uninterrupted flow of production by supplying raw materials and payment of wages.• Sound working capital helps maintain optimum level of investment in current assets.• It enhances liquidity, solvency, credit worthiness and reputation of enterprise.• It provides necessary funds to meet unforeseen contingencies and thus helps the enterprise run successfully during periods of crisis.
![Page 17: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/17.jpg)
Approaches of Working Capital
![Page 18: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/18.jpg)
Approaches of Working Capital
1.Conservative Approach
2.Aggressive Approach
3.Matching Approach or Hedging
Approach
![Page 19: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/19.jpg)
Conservative Approach1. Conservative approach is a risk-free strategy of
working capital financing. 2. A company adopting this strategy maintains a higher
level of current assets and therefore higher working capital also.
3. The major part of the working capital is financed by the long-term sources of funds such as equity, debentures, term loans etc. So, the risk associated with short-term financing is abolished to a great extent.
![Page 20: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/20.jpg)
Conservative ApproachIn the conservative approach, fixed assets, permanent working capital and a part of temporary working capital is financed by long-term financing sources and the remaining part only is financed by short-term financing sources.
Financing Strategy in Equation:
Long Term Funds will Finance = Fixed Assets +
Permanent Working Capital + Part of Temporary
Working Capital
Short Term Funds will Finance = Remaining Part
of Temporary Working Capital
![Page 21: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/21.jpg)
Conservative Approach Diagram
![Page 22: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/22.jpg)
Conservative Approach DiagramThe dotted lines horizontal line indicates the point till which the long-term funds will be utilized. The dotted vertical lines indicate the sources of finance and they are tagged as ‘long-term financing’ and ‘short term financing’.
We can easily make out that long term funds are financing total fixed assets, total permanent assets and a part of the temporary or seasonal working capital also. Seasonal requirement or temporary working capital has peaks and troughs. The two areas of troughs below the long-term financing line indicate that there are idle long term funds incurring unnecessary interest cost.
![Page 23: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/23.jpg)
Conservative Approach
Advantage of Conservative Approach
1. Smooth Operation
2. No Insolvency RiskDisadvantage of Conservative Approach
1. Higher Interest Cost
2. Idle Fund
3. Higher Carrying Cost
4. Inefficient working capital Management
![Page 24: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/24.jpg)
Aggressive ApproachThe aggressive approach is a high-risk strategy of
working capital financing wherein short-term finances
are utilized not only to finance the temporary working
capital but also a reasonable part of the permanent
working capital.
In this approach of financing, the levels of inventory,
accounts receivables and bank balances are just
sufficient with no cushion for uncertainty. There is a
reasonable dependence on the trade credit.
![Page 25: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/25.jpg)
Aggressive ApproachFixed assets and a part of permanent working capital are financed by long-term financing sources and the remaining part of permanent working capital and total temporary working capital is only is financed by short-term financing sources. It is explained in the equation below:
Financing Strategy in Equation:Long Term Funds will Finance = Fixed Assets +
Part of Permanent Working Capital
Short Term Funds will Finance = Remaining Part of Permanent Working Capital + Temporary Working Capital
![Page 26: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/26.jpg)
Aggressive Approach Diagram
![Page 27: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/27.jpg)
Aggressive ApproachThe dotted lines horizontal line indicates the point till which the long-term funds will be utilized. The dotted vertical lines indicate the sources of finance and they are tagged as ‘long-term financing’ and ‘short term financing’.We can easily make out that long term funds are financing total fixed assets and a part of permanent assets. A major part of Seasonal requirement or temporary working capital is financed by short term source of finance. In this approach, the difficult area is the part of permanent working capital which is financed by short-term sources. It can pose problems of liquidity and bankruptcy to the firm.
![Page 28: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/28.jpg)
Aggressive Approach
Advantage of Aggressive Approach1. Lower Financing Cost, High Profitability2. Lower Carrying and Handling Cost3. Highly Efficient Working Capital Management
Disadvantage of Aggressive Approach1. Insolvency Risk2. Lost Opportunities and Unexpected Shocks
![Page 29: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/29.jpg)
Matching Approach or Hedging Approach
Maturity matching or hedging approach is a strategy of
working capital financing wherein short term
requirements are met with short-term debts and long-
term requirements with long-term debts.
The underlying principal is that each asset should be
compensated with a debt instrument having almost the
same maturity.
![Page 30: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/30.jpg)
Matching Approach or Hedging Approach
Maturity Matching or Hedging Approach Equation
This matching approach of working capital financing
can be explained in terms of a simple equation as
follows:{
Long Term Funds will Finance = Fixed Assets +
Permanent Working Capital
Short Term Funds will Finance = Temporary
Working Capital
![Page 31: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/31.jpg)
Matching Approach or Hedging Approach
![Page 32: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/32.jpg)
Matching Approach or Hedging ApproachIn the diagram, we can see three levels, each of fixed assets,
permanent working capital and temporary working capital.
The red vertical line with white spaces represents the type of
financing.
The bigger line which stretches till permanent working capital
is long-term financing and a smaller line is the temporary
working capital. The line from where the temporary working
capital starts and the line of a hedging strategy is the same.
Any strategy below this line will be an aggressive strategy and
a strategy above it will be a conservative strategy.
![Page 33: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/33.jpg)
Matching Approach or Hedging Approach
RATIONALE BEHIND MATURITY MATCHING
OR HEDGING APPROACH
Knowing why to apply maturity matching strategy is
very important. It suggests financing permanent
assets with long-term financing and temporary with
short-term financing. Now let us suppose opposite
situations and see. There can two such situations.
![Page 34: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/34.jpg)
Matching Approach or Hedging Approach
1. Permanent Assets Financed with
Short Term Financing
2. Temporary Assets Financed with
Long Term Financing
![Page 35: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/35.jpg)
Management for different components of working capital
1.Cash Management
2.Inventory Management
3.Debtors Management
4.Creditors Management
![Page 36: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/36.jpg)
1.Cash ManagementBusiness concern needs cash to make payments for acquisition
of resources and services for the normal conduct of business.
Cash is one of the important and key parts of the current
assets.
Cash is the money which a business concern can disburse
immediately without any restriction. The term cash includes
coins, currency, cheques held by the business concern and
balance in its bank accounts. Management of cash consists of
cash inflow and outflows, Cash flow within the concern and
cash balance held by the concern etc.
![Page 37: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/37.jpg)
Motives for Holding Cash1. Transaction motiveIt is a motive for holding cash or near cash to meet routine cash requirements to finance transaction in the normal course of business. Cash is needed to make purchases of raw materials, pay expenses, taxes, dividends etc.
2. Precautionary motiveIt is the motive for holding cash or near cash as a cushion to meet unexpected contingencies. Cash is needed to meet the unexpected situation like, floods strikes etc.
3. Speculative motiveIt is the motive for holding cash to quickly take advantage of opportunities typically outside the normal course of business. Certain amount of cash is needed to meet an opportunity to purchase raw materials at a reduced price or make purchase at favourable prices.
4. Compensating motiveIt is a motive for holding cash to compensate banks for providing certain services or loans. Banks provide variety of services to the business concern, such as clearance of cheque, transfer of funds etc.
![Page 38: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/38.jpg)
Cash Management TechniquesManaging cash flow constitutes two important parts:
A. Speedy Cash Collections.
B. Slowing Disbursements.The techniques aim at, the customer who should be encouraged to
pay as quickly as possible and the payment from customer without
delay. Speedy Cash Collection business concern applies some of the
important techniques as follows:
• Prompt Payment by Customers
• Early Conversion of Payments into Cash
• Concentration Banking
• Lock Box System
![Page 39: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/39.jpg)
Slowing DisbursementAn effective cash management is not only in the part of
speedy collection of its cash and receivables but also it
should concentrate to slowing their disbursement of cash
to the customers or suppliers. Slowing disbursement of
cash is not the meaning of delaying the payment or
avoiding the payment. Slowing disbursement of cash is
possible with the help of the following methods:.
1. Avoiding the early payment of cash
2. Centralised disbursement system
![Page 40: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/40.jpg)
Cash Management ModelsBaumol modelThe basic objective of the Baumol model is to determine the minimum cost amount of cash conversion and the lost opportunity cost. Total conversion cost per period can be calculated with the help of the following formula:
t= Tb C
Opportunity cost can be calculated with the help of the following formula;
i = C 2Optimal cash conversion can be calculated with the help of the following formula;
C = 2bT i
where,T = Total transaction cash needs for the periodb = Cost per conversionC = Value of marketable securities
where,i = interest rate earned, C/2 = Average cash balance,
C = Optimal conversion amountb = Cost of conversion into cash per lot or transactionT = Projected cash requirementi = interest rate earned
![Page 41: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/41.jpg)
Management for different components of working capital
Orgler’s modelOrgler model provides for integration of cash management with production and other aspects of the business concern. Multiple linear programming is used to determine the optimal cash management.
Orgler’s model is formulated, based on the set of objectives of the firm and specifying the set of constrains of the firm.
![Page 42: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/42.jpg)
2. Inventory ManagementInventory constitutes a major part of total working
capital. Efficient management of inventory results in
maximization of earnings of the shareholders.
Efficient inventory management consists of managing
two conflicting objectives:
1. Minimization of investment in inventory on the one hand
2. Maintenance of the smooth flow of raw materials for production and sales on the other.
![Page 43: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/43.jpg)
Types of Inventory
1. Raw-Materials Inventory
2. Work-in-Process Inventory
3. Finished-Goods Inventory
4. Stock of Cash
![Page 44: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/44.jpg)
Inventory Management Techniques
1. Economic order quantity
2. Fixation of stock levels
3. ABC Analysis
4. Just in Time (JIT)
![Page 45: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/45.jpg)
Inventory Management Techniques
1. Economic order quantityEconomic Order Quantity (EOQ) is one of the important techniques of inventory management. EOQ represents that level of inventory which minimizes the total inventory cost.
The formula for calculating EOQ is given below:EOQ = √2QA / K
Where, Q = Annual requirement or Production,A = Ordering Cost per order, andK = Carrying Cost per unit per Year.
![Page 46: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/46.jpg)
Inventory Management Techniques
2. Fixation of stock levelsEfficient inventory management requires an effective stock control system. One of the important aspects of inventory control is stock level. Level of stock has a significant bear ing on the profitability. Over-stocking requires large capital investments whereas under-stocking affects flow of the production process. The following are the levels of stock fixed for efficient management of inventory.
![Page 47: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/47.jpg)
Inventory Management Techniques
1. Re-order Level
2. Minimum Stock Level
3. Maximum Stock Level
4. Average Stock Level
![Page 48: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/48.jpg)
Inventory Management Techniques3. ABC Analysis
ABC Analysis is one of the important inventory control
techniques.
In a big manufacturing concern it is not always possible to pay
equal attention to each and every raw material.
In such cases raw materials are classified according to their
value so that proper con trol may be exercised on materials
having high value.
ABC Analysis is an analytical technique that tries to group
materials into three categories on the basis of cost involved.
![Page 49: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/49.jpg)
Inventory Management Techniques3. ABC Analysis
The categories are:
A – High value materials
B – Medium value materials
C – Low value materials
![Page 50: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/50.jpg)
Inventory Management Techniques4. Just in Time (JIT)Just in time (JIT) inventory control system was developed by Taiichi Okno of Japan and was first introduced in Toyata Manufacturing Company of Japan. So it is also known as Toyata Production Method. The basic idea behind this system is that a firm should keep minimum level of inventory on the assumption that suppliers will deliver the raw materials as and when required. This system tries to make inventory carrying cost as zero.
Three important elements of JIT are Just in time purchasing, just in time production and just in time supply. Just in time purchasing, just in time production and just in time delivery can be effectively applied through adoption of advanced manufacturing technology.
![Page 51: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/51.jpg)
4. Accounts Payable Management:Payables or creditors are one of the important components
of working capital. Payables provide a spon taneous source of
financing of working capital. Payable management is very
closely related with the cash management. Effective payable
management leads to steady supply of materials to a firm as
well as enhances its reputation.
It is generally considered as a relatively cheap source of
finance as suppliers rarely charge any interest on the amount
owed. However, trade creditors will have a cost as a result of
loss of enjoying cash discount on cash purchases.
![Page 52: Financial management 3](https://reader035.vdocument.in/reader035/viewer/2022070519/58ecbee01a28ab7b5c8b4653/html5/thumbnails/52.jpg)
Thank You