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Working capital management Working capital = CA-CL 1.

Working capital management: Management of short term assets and short term liabilities to meet the day to day transactions effectively and efficiently. Working capital management deals hort term financing Ade!"ate cash balance level Converting short term assets to cash #A$%& 'nventory( Controlling o"tgoing payments Collection )ayments Credit policy *ank dealing Cash forecasting factors affecting on +orking capital need 'nternal factors #a( company si,e and gro+th #b( organi,ational str"ct"re #c( sophistication of +orking capital #d( borro+ing and investing -.ternal factors #a( *anking service #b( 'nterest rate /e+ #c( /e+ technologies and ne+ #d( 0he economy #e( Competitors 2.Managing and measuring liquidity Li!"idity: easy to sell& convertibility into cash& able to meet short term obligations 0+o dimension of li!"idity#a( types of assets #b( speed of conversion 2.1 1efining the li!"idity management Ability of an organi,ation to generate cash +hen and +here it is needed. 0o keep the entity solvent to tape the reso"rces into cash Long term assets can be converted into cash 2.1.1 )rimary so"rces of li!"idity2not affect on normal operation %eadily accessible reso"rces Cash& bank& investment income li!"idation of near cash sec"rities #less 34 days hort term f"nds& credit card credit line Cash flo+ management- effective management for collection cycle management

Centrali,ed---lo+ level of collection tightening cash 1ecentrali,ed-- 5igh level of collection tightening cash 2.1.2 econdary so"rce of li!"idity- affect on operation and financial position /egotiated debt contract-reliving press"re from high interest Li!"idating long-term assets +ith o"t losing s"bstantial val"e 6iling bankr"ptcy protection and reorgani,ation 2.1.3 1rags and p"lls on li!"idity- )ress"re on +orking capital

1rag on li!"idity-receipts lag creating press"re from the decreased available f"nds-slo+ recovery )"ll on li!"idity-+hen disb"rsements are paid too !"ickly or trade credit availability is limited Ma7or drags Uncollectible receivable: slo+ %eceivable t"rnover Obsolete inventory- lo+ inventory t"rnover Tight credit- scarcity of capital in economy Ma7or )"ll- o"tflo+ management Making payments early- effective management is to hold the payment till d"e date educe credit limit- history of late payment may red"ce the credit limit !imit on short term lines O" credit #ompany$s bank red"ces the line of credit. 1"e to government restriction. 'n emerging economies companies hold e.cess #over banking( cash d"e inefficient banking !o% liquid position- chronic shortage of +orking capital d"e to +eaker financial position of company and ind"stry. Company m"st identify the assets that can help them in this critical sit"ation. 2.2 Measuring the !iquidity Credit +orthiness- )erceived ability of borro+er to pay the borro+ing timely and ability to +ithstand #s"rvive( adverse impact on cash flo+s. *enefits of Credit +orthiness #a( Lo+er the cost of borro+ing. #b( *etter term of trade #c( 6le.ibility in investment #d( -.ploit profitability opport"nities. Lo+ credit +orthiness disadvantages #a( risk #b( 'nsolvency #c( *ankr"ptcy Li!"idity ratios 8 calc"late the ability to meet short term obligation #a( C"rrent ratio #b( 9"ick ratio- above and this can be meas"re by trend& competitor and availability of capital investment opport"nities.

1 : & Acco"nt receivable t"rnover 'nventory t"rnover /"mber of day payable :perating cycle- time needed to convert %a+ material to cash from sale :perating cycle=/"mber of days of inventory & /"mber of days receivable. #h( /et operating cycle=operating cycle-n"mber of days of payables /et operating cycle meas"re the time elapse bet+een collection cash from sale and payment to s"pplier. /et operating cycle tells period of time that re!"ire financing 3 Managing the cash position Arrangement of cash for daily transaction. )ositive cash balance--- no negative :pport"nity cost of holding short term portfolio %eliable so"rce of borro+ing 'nformation and decision All above iss"e are disc"ssed in managing the cash position 3.1 'orecasting short term cash "lo%s. 6orecasting allo+ effective +orking capital management 6orecasting may not be acc"rate because economy condition& ra+ material shortage and changing interest. 1"e to above conditions firm maintain minim"m level of cash balance ;.1.1 Minim"m of cash balance Minim"m cash balance are maintained for "ne.pected cash need Minim"m balance depend "pon #a( attractive opport"nities #b( cash disco"nt on p"rchase #c( inflo+ and o"t flo+s speed #d( ability to access li!"idity so"rces #e( borro+ing facility ;.1.< 'dentify the typical cash flo+s Acc"rate forecasting help in cash management Analy,e the prod"ct line& their stages of life and e.pected cash flo+s Cash manager identify the cash flo+ elements Arrange the elements inflo+s and o"tflo+s manner
Inflows 1 2 3 Receipt from operation, broken by operation unit and department Fund transfer from subsidiaries Maturing investment !ebt proceeds ot#er income item $dividend ,interest Outflows Payable and payroll disbursement broken down in unit and department Fund transfer to subsidiaries Investment made !ebt payments Interest and dividend payments

#c( #d( #e( #f( #g(


&a' refunds

&a' payments

0hese above cash floes represent the net cash need of the firm 3.1.3 3.2 cash forecasting system analy,e the data fre!"ency& format& techni!"e& acc"racy& %eliability "ses Monitoring cash uses and level Managing the cash position essentially keeping =r"nning score> on daily cash flo+s. 0ransaction are kno+n b"t collection of information in time is is important like deposit information Minim"m level of cas7h available in advance . Cash balnce "ses shortterm investment& deficit co"nter