Description
Concept of working capital, Operating and cash conversion cycle, Permanent and variable working capital, Balanced working capital, Determinants of working capital and Estimating working capital.
Principles of Working Capital Management
Topics
• Concept of working capital • Operating and cash conversion cycle • Permanent and variable working capital • Balanced working capital • Determinants of working capital • Estimating working capital
Concepts of Working Capital
• Gross working capital (GWC) GWC refers to the firm’s total investment in current assets. Current assets are the assets which can be converted into cash within an accounting year (or operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory).
Concepts of Working Capital
• Net working capital (NWC). • NWC refers to the difference between current assets and current liabilities. • Current liabilities (CL) are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and outstanding expenses. • NWC can be positive or negative. – Positive NWC = CA > CL – Negative NWC = CA < CL
Concepts of Working Capital
• GWC focuses on – Optimization of investment in current – Financing of current assets • NWC focuses on – Liquidity position of the firm – Judicious mix of short-term and long-tern financing
Operating Cycle
• Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a manufacturing company involves three phases: – Acquisition of resources such as raw material, labour, power and fuel etc. – Manufacture of the product which includes conversion of raw material into work-in-progress into finished goods. – Sale of the product either for cash or on credit. Credit sales create account receivable for collection.
• The length of the operating cycle of a manufacturing firm is the sum of:
Inventory conversion period (ICP). Debtors (receivable) conversion period (DCP).
• Inventory conversion period is the total time needed for producing and selling the product. Typically, it includes:
raw material conversion period (RMCP) work-in-process conversion period (WIPCP) finished goods conversion period (FGCP)
• The debtors conversion period is the time required to collect the outstanding amount from the customers.
• Creditors or payables deferral period (CDP) is the length of time the firm is able to defer payments on various resource purchases such as raw materials
• Operating cycle (OC) The total of inventory conversion period and debtors conversion period is referred to as operating cycle (OC). • Cash conversion cycle (CCC) CCC is the difference between OC & CDP.
Determinants of Working Capital
• Nature of business • Market and demand • Technology and manufacturing policy • Credit policy • Supplies’ credit • Operating efficiency • Inflation
doc_443577124.pdf
Concept of working capital, Operating and cash conversion cycle, Permanent and variable working capital, Balanced working capital, Determinants of working capital and Estimating working capital.
Principles of Working Capital Management
Topics
• Concept of working capital • Operating and cash conversion cycle • Permanent and variable working capital • Balanced working capital • Determinants of working capital • Estimating working capital
Concepts of Working Capital
• Gross working capital (GWC) GWC refers to the firm’s total investment in current assets. Current assets are the assets which can be converted into cash within an accounting year (or operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory).
Concepts of Working Capital
• Net working capital (NWC). • NWC refers to the difference between current assets and current liabilities. • Current liabilities (CL) are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and outstanding expenses. • NWC can be positive or negative. – Positive NWC = CA > CL – Negative NWC = CA < CL
Concepts of Working Capital
• GWC focuses on – Optimization of investment in current – Financing of current assets • NWC focuses on – Liquidity position of the firm – Judicious mix of short-term and long-tern financing
Operating Cycle
• Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a manufacturing company involves three phases: – Acquisition of resources such as raw material, labour, power and fuel etc. – Manufacture of the product which includes conversion of raw material into work-in-progress into finished goods. – Sale of the product either for cash or on credit. Credit sales create account receivable for collection.
• The length of the operating cycle of a manufacturing firm is the sum of:
Inventory conversion period (ICP). Debtors (receivable) conversion period (DCP).
• Inventory conversion period is the total time needed for producing and selling the product. Typically, it includes:
raw material conversion period (RMCP) work-in-process conversion period (WIPCP) finished goods conversion period (FGCP)
• The debtors conversion period is the time required to collect the outstanding amount from the customers.
• Creditors or payables deferral period (CDP) is the length of time the firm is able to defer payments on various resource purchases such as raw materials
• Operating cycle (OC) The total of inventory conversion period and debtors conversion period is referred to as operating cycle (OC). • Cash conversion cycle (CCC) CCC is the difference between OC & CDP.
Determinants of Working Capital
• Nature of business • Market and demand • Technology and manufacturing policy • Credit policy • Supplies’ credit • Operating efficiency • Inflation
doc_443577124.pdf