short term fin

7/31/2019 Short Term Fin.

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Introduction

Short term financial management is differing from thelong term financial management in terms of thetiming of cash.

Short term financial decisions typically involve cashflow within a year or within the operating cycle of thefirm.

The long term financial decisions like buying capitalequipments or issuing debentures involve cash flowover an extended period of time.


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Roles of a finance managerNegotiating favourable

credit termsArranging short term

finances

Controlling the cashmovement

Administeringaccounts receivables

Monitoring theinvestment in

inventories


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The working capital needs of afirm are influenced by numerousfactors:

1. Nature ofBusiness

2. Seasonalityof operations

3. Productionpolicy

4. Marketconditions

5. Conditionof supply


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Assets

Fixed assets

Current assets


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.Assets

Temporary current assets

Sales or required inventory build-up may be seasonal

Additional current assets are needed during the

peak time The level of current assets will decrease as sales occur

Permanent current assets Firms generally need to carry a minimum level of

current assets at all times

These assets are considered permanent because the

level is constant, not because the assets arent sold


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Current asset cycle

AccountsReceivable

Finished Goods

Cash

Work in process

Wages, salaries,factory overheads

Raw materials

Suppliers


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Company policies

1) Conservative Policy ( f lexible) Investment in current assets is high Huge balance of cash & marketable securities Larger inventories

Grants generous terms of credit

2) Restrictive Policy (aggressive) Investment in current assets is low

Low balance of cash & marketable securities Smaller inventories Stiff terms of credit


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Operating and cash cycle


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Short term finance management canbe divided into:

Inventory managementCash and liquidity management

Credit management


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Inventory Management

There are 3 type of inventories:- Raw materials Work in progress Finished goods

Inventories represent the 2nd largest asset category for manufacturing companies. The proportion of inventory to total assets generally varies between 15-30%.

Recent advancements in field of inventory management. Material requirement planning Just in Time Electronic data interchange and bar coding


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Cash and Liquiditymanagement

Cash the most liquid asset is of vital importance to thedaily operations of business firms.

Desired level 1-4% of assets, life blood of the business enterprise

Better cash levels can be achieved by speedingcollections and delaying disbursements.


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Investment of surplus fundsReady cash segment

Reserve for

company's cashaccount

Meant to augmentcash resources tomeet unanticipatedoperational needs

Must be highly liquid

Controllable cashsegment

Part of investment

which is meant forknowable outflowslike taxes, dividendetc

Investments must bematched in size and

maturity to knownfuture outflows

Free cash segment

Part of investment

which is neithermeant for unforeseencash requirementsnor to meet knownfuture outflows

Investment is done

only to generateincome

It is not concernedwith liquidity ormaturity


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Credit management

Trade credit management is divided into the followingbroad areas :

Credit policy Credit analysis

Credit period

Control of accounts receivables

Cash discount


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Room for improvement

Management of receivables must be accorded the importance itdeserves.

Credit policies need to be articulated in explicit terms and

revised periodically There should be better coordination between sales, production

and finance departments

Firms granting credit should examine the published statement ofprospective customer with great rigour, references must be

examined and necessary follow up should be taken A well defined collection program must be developed


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Working Capital Financing

Accruals

Trade credit

Working capital advance by commercial banks Regulation of bank finance

Inter corporate deposits

Short-term loans from financial institutions

Commercial paper


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Lupin Piramal

Current ratio 1.76 1.2

Acid test ratio 1.04 0.95

Debt-equity ratio 0.86 1.02

Debt to total asset 0.31 0.27

Interest coverage ratio 14.9 9.3

Receivable turnover ratio 5.32 6.88

Receivable turnover (in days) 68.8 53

Payable turnover ratio 3.36 3.84

Payable turnover (in days) 109 95

Inventory turnover ratio 3.27 6.88

Inventory turnover (in days) 111.6 53

Operating cycle(in days) 180 106

Cash cycle (in days) 71 11

Total asset turnover ratio 0.95 0.91

Gross profit margin 17.17 18.14

Pretax margin 16.05 10.5

Net profit margin 13.28 9.82

Rate of returns 12.6 8.2

Rate of equity 35.21 21.33

ROI 18.11 15.43


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Operating Cycle

0

20

40

60

80

100

120

140

160

180

lupin piramal

recievable turnover (in days)

inventory cycle (in days)


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Cash Cycle

0

20

40

60

80

100

120

140

160

180

200

Piramal healthcare Lupin

operating cycle (in days)

account payable period (in days)

Cash cycle


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Findings

Both the Companies have a healthy cash flow despitespending on acquisitions and capacity expansions duringthe year.

Many of the pharmaceuticals have started re-looking attheir working capital cycles and decided to reduce theirinventory levels.

Entry into new fields has influenced financial performanceof companies

Piramal Custom manufacturing business Lupin Lean marketing mechanism.


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Working capital(rate of increase)

Debt-equity ratio

CA out of total CA

and loans andadvances

Accounts receivable(in days)

Lupin

Increased by 20%

Decreased from65% to 62%

76.8%

69

Piramal

Increased by 15.5%

Increased from66% to 102%

54.5%

53


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short term fin

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