Description
Short term financial decisions typically involve cash flow within a year or within the operating cycle of the firm.
Short term financing and its management
Introduction
• Short term financial management is differing from the long term financial management in terms of the timing of cash. • Short term financial decisions typically involve cash flow within a year or within the operating cycle of the firm. • The long term financial decisions like buying capital equipments or issuing debentures involve cash flow over an extended period of time.
Roles of a finance manager
Negotiating favourable credit terms Arranging short term finances
Monitoring the investment in inventories Controlling the cash movement Administering accounts receivables
The working capital needs of a firm are influenced by numerous factors:
1. Nature of Business 2. Seasonality of operations 3. Production policy
4. Market conditions
5. Condition of supply
Assets
Fixed assets Current assets
Temporary vs. Permanent 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 aren’t sold
Current asset cycle
Finished Goods Accounts Receivable Wages, salaries, factory overheads Raw materials Work in process
Cash
Suppliers
Company policies
1) ? ? ? ? 2) ? ? ? ? Conservative Policy ( flexible) Investment in current assets is high Huge balance of cash & marketable securities Larger inventories Grants generous terms of credit Restrictive Policy (aggressive) Investment in current assets is low Low balance of cash & marketable securities Smaller inventories Stiff terms of credit
Operating and cash cycle
Short term finance management can be divided into:
• Inventory management • Cash and liquidity management • Credit management
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 1530%.
Recent advancements in field of inventory management. • Material requirement planning • Just in Time • Electronic data interchange and bar coding
Cash and Liquidity management
• Cash the most liquid asset is of vital importance to the daily operations of business firms. • Desired level 1-4% of assets, • “life blood of the business enterprise” • Better cash levels can be achieved by speeding collections and delaying disbursements.
Investment of surplus funds
Ready cash segment • Reserve for company's cash account • Meant to augment cash resources to meet unanticipated operational needs • Must be highly liquid
Controllable cash segment
Free cash segment • Part of investment which is neither meant for unforeseen cash requirements nor to meet known future outflows • Investment is done only to generate income • It is not concerned with liquidity or maturity
• Part of investment which is meant for knowable outflows like taxes, dividend etc • Investments must be matched in size and maturity to known future outflows
Credit management
Trade credit management is divided into the following broad areas : Credit policy Credit analysis Credit period Control of accounts receivables Cash discount
• • • • •
Room for improvement
• Management of receivables must be accorded the importance it deserves. • 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 of prospective customer with great rigour, references must be examined and necessary follow up should be taken • A well defined collection program must be developed
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
Lupin
Current ratio Acid test ratio Debt-equity ratio Debt to total asset 1.76 1.04 0.86 0.31
Piramal
1.2 0.95 1.02 0.27
Interest coverage ratio
Receivable turnover ratio Receivable turnover (in days) Payable turnover ratio Payable turnover (in days) Inventory turnover ratio
14.9
5.32 68.8 3.36 109 3.27
9.3
6.88 53 3.84 95 6.88
Inventory turnover (in days)
Operating cycle(in days) Cash cycle (in days) Total asset turnover ratio Gross profit margin Pretax margin Net profit margin
111.6
180 71 0.95 17.17 16.05 13.28
53
106 11 0.91 18.14 10.5 9.82
Rate of returns
Rate of equity ROI
12.6
35.21 18.11
8.2
21.33 15.43
Operating Cycle
180 160 140 120 100 80 60 40 20 0 lupin piramal recievable turnover (in days) inventory cycle (in days)
Cash Cycle
200 180 160 140 120 100 80 60 40 20 0 Piramal healthcare Lupin operating cycle (in days) account payable period (in days)
Cash cycle
Findings
• Both the Companies have a healthy cash flow despite spending on acquisitions and capacity expansions during the year. • Many of the pharmaceuticals have started relooking at their working capital cycles and decided to reduce their inventory levels. • Entry into new fields has influenced financial performance of companies • Piramal? Custom manufacturing business • Lupin? Lean marketing mechanism.
Lupin
Working capital (rate of increase) Increased by 20%
Piramal
Increased by 15.5%
Debt-equity ratio
CA out of total CA and loans and advances Accounts receivable (in days)
Decreased from 65% to 62%
Increased from 66% to 102%
76.8%
54.5%
69
53
doc_546589308.pptx
Short term financial decisions typically involve cash flow within a year or within the operating cycle of the firm.
Short term financing and its management
Introduction
• Short term financial management is differing from the long term financial management in terms of the timing of cash. • Short term financial decisions typically involve cash flow within a year or within the operating cycle of the firm. • The long term financial decisions like buying capital equipments or issuing debentures involve cash flow over an extended period of time.
Roles of a finance manager
Negotiating favourable credit terms Arranging short term finances
Monitoring the investment in inventories Controlling the cash movement Administering accounts receivables
The working capital needs of a firm are influenced by numerous factors:
1. Nature of Business 2. Seasonality of operations 3. Production policy
4. Market conditions
5. Condition of supply
Assets
Fixed assets Current assets
Temporary vs. Permanent 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 aren’t sold
Current asset cycle
Finished Goods Accounts Receivable Wages, salaries, factory overheads Raw materials Work in process
Cash
Suppliers
Company policies
1) ? ? ? ? 2) ? ? ? ? Conservative Policy ( flexible) Investment in current assets is high Huge balance of cash & marketable securities Larger inventories Grants generous terms of credit Restrictive Policy (aggressive) Investment in current assets is low Low balance of cash & marketable securities Smaller inventories Stiff terms of credit
Operating and cash cycle
Short term finance management can be divided into:
• Inventory management • Cash and liquidity management • Credit management
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 1530%.
Recent advancements in field of inventory management. • Material requirement planning • Just in Time • Electronic data interchange and bar coding
Cash and Liquidity management
• Cash the most liquid asset is of vital importance to the daily operations of business firms. • Desired level 1-4% of assets, • “life blood of the business enterprise” • Better cash levels can be achieved by speeding collections and delaying disbursements.
Investment of surplus funds
Ready cash segment • Reserve for company's cash account • Meant to augment cash resources to meet unanticipated operational needs • Must be highly liquid
Controllable cash segment
Free cash segment • Part of investment which is neither meant for unforeseen cash requirements nor to meet known future outflows • Investment is done only to generate income • It is not concerned with liquidity or maturity
• Part of investment which is meant for knowable outflows like taxes, dividend etc • Investments must be matched in size and maturity to known future outflows
Credit management
Trade credit management is divided into the following broad areas : Credit policy Credit analysis Credit period Control of accounts receivables Cash discount
• • • • •
Room for improvement
• Management of receivables must be accorded the importance it deserves. • 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 of prospective customer with great rigour, references must be examined and necessary follow up should be taken • A well defined collection program must be developed
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
Lupin
Current ratio Acid test ratio Debt-equity ratio Debt to total asset 1.76 1.04 0.86 0.31
Piramal
1.2 0.95 1.02 0.27
Interest coverage ratio
Receivable turnover ratio Receivable turnover (in days) Payable turnover ratio Payable turnover (in days) Inventory turnover ratio
14.9
5.32 68.8 3.36 109 3.27
9.3
6.88 53 3.84 95 6.88
Inventory turnover (in days)
Operating cycle(in days) Cash cycle (in days) Total asset turnover ratio Gross profit margin Pretax margin Net profit margin
111.6
180 71 0.95 17.17 16.05 13.28
53
106 11 0.91 18.14 10.5 9.82
Rate of returns
Rate of equity ROI
12.6
35.21 18.11
8.2
21.33 15.43
Operating Cycle
180 160 140 120 100 80 60 40 20 0 lupin piramal recievable turnover (in days) inventory cycle (in days)
Cash Cycle
200 180 160 140 120 100 80 60 40 20 0 Piramal healthcare Lupin operating cycle (in days) account payable period (in days)
Cash cycle
Findings
• Both the Companies have a healthy cash flow despite spending on acquisitions and capacity expansions during the year. • Many of the pharmaceuticals have started relooking at their working capital cycles and decided to reduce their inventory levels. • Entry into new fields has influenced financial performance of companies • Piramal? Custom manufacturing business • Lupin? Lean marketing mechanism.
Lupin
Working capital (rate of increase) Increased by 20%
Piramal
Increased by 15.5%
Debt-equity ratio
CA out of total CA and loans and advances Accounts receivable (in days)
Decreased from 65% to 62%
Increased from 66% to 102%
76.8%
54.5%
69
53
doc_546589308.pptx