fm presentation 1
TRANSCRIPT
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By,
Rati
Sunil
Madhusudan
surrendra
sushanth
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Introduction to working capital management Concepts of working capital
Operating cycle
Permanent and variable working capital Determinants of working capital
Cash management
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Definition:It is a financial metric which
represents operating liquidity available to a
business. Working capital management ensures acompany has sufficient cash flow in orderto meet its short-term debt obligations and
operating expenses.
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Gross working capital :gross working capital is that working
capital which is used for all the current assets.
Total value of current assets will equal to grossworking capital.
Net working capital:Net working capital is the excess of
current assets over current liabilities.
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CURRENT ASSETS Inventory
Sundry Debtors
Cash and Bank Balances
Loans and advances
CURRENT LIABILITIES Sundry creditors
Short term loans
Provisions
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Net Working Capital = Total CurrentAssets Total Current Liabilities . Net working capital can be positive or
negative .
Positive net working capital=currentassets > current liabilities
Negative net working capital =currentassets
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Issue of debt Long term debt
Commercial bank
Reserve and other funds
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The time between the purchase of an assetand its sale, or the sale of a product madefrom the asset.
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The Operating Cycle of a manufacturingcompany involves three phases:
1. Acquisition of resources
2. Manufacture of the product
3. Sales of the product
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Suppose a business buy raw material on 1st janand it takes one month to convert this rawmaterial into finished goods.
On 1st feb good are ready for sale i.e. stocked at
warehouse on 1st march goods are sold And on 1st april payment is received.
Now this revenue will be used to buy fresh rawmaterial.
The Operating cycle is 3 months..
The time taken to convert Working capital intorevenue
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There is always a minimum level of CA whichis continuously required by a firm to carry onits business operations.
Thus , the minimum level of investment incurrent assets that is required to continue thebusiness without interruption is referred as
permanent working capital.
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Permanent and Temporary working capital
temporary of
fluctuating
Amount
Of working
capitalpermanent
Time
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This is the amount of investmentrequired to take care of fluctuations inbusiness activity or needed to meet
fluctuations in demand consequentupon changes in production & salesas a result of seasonalchanges.
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For Growing firm
Temporary or fluctuating
permanent
Amount
Of workingCapital( rs)
Time
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DISTINCTION permanent is stable over time whereas
variable is fluctuating according to seasonaldemands.
investment in permanent portion can be
predicted with some profitability whereas
investment in variablecannot be predictedeasily.
while permanent is minimum investment in
various ca , variable is expected to take care
for peak in business activity.
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Determinants ofworking capital Nature and size of business
Production cycle
Demand conditions Credit policy
Production policy
Availability of credit Price level changes
Operating efficiency
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Definition:Cash management is the concern with the
managing of :
Cash flows into and out of the firm
Cash flows with in the firm
Cash balances held by the firm at a point oftime by financing deficit or investing surplus
cash.
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Collections
BorrowOr invest
Informationand control
Payments
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Cash planning Managing the cash flows
Optimum cash level
Investing surplus cash
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Transaction motive Precautionary motive
Speculative motive
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