Description
The PPT explaining about 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 finance managers
negotiating favourable credit terms arranging short term finances
monitoring the investment in inventoriies controlling the cash movement administering accounts recievables
• The working capital needs of a firm are influenced by numerous factors like 1. Nature of Business: 2. Seasonality of operations: 3. Production policy: 4. Market conditions: 5. Condition of supply:
• Optimal level of current assets involves a tradeoff between costs that rise with current assets and fall with current assets. These are carrying cost referred as carrying cost and the latter as shortage costs. • Carrying costs are mainly in the nature of the cost of financing a higher level of current assets. • Shortage costs are mainly in the form of disruption in production schedule, loss of sales and the loss of customer goodwill.
Current asset cycle
Finished Goods Accounts Receivable Wages,salaries, factory overheads Raw materials
Work in process
Cash
Suppliers
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
Operating and cash cycle
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
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, • In view of its importance, it is generally referred to as the “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 unanticiapted 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 taxesdividend etc • investments must be matched in size and maturity to known future outflows
Credit management in India
Trade credit management is divided into 3 broad areas • Credit policy • Credit analysis • Control of accounts receivables
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
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%. Recently there has been advancements in field of inventory management. The more important ones are listed below:• Material requirement planning • Just in Time • Electronic data interchange and bar coding
Lupin
Current ratio Acid test ratio 1.76 1.04
Piramal
1.2 0.95
Debt-equity ratio
Debt to total asset Interest coverage ratio
0.86
0.31 14.9
1.02
0.27 9.3
Receivable turnover ratio
Receivable turnover (in days) Payable turnover ratio
5.32
68.8 3.36
6.88
53 3.84
Payable turnover (in days)
Inventory turnover ratio Inventory turnover (in days) Operating cycle(in days) Cash cycle (in days) Total asset turnover ratio Gross profit margin Pretax margin Net profit margin Rate of returns Rate of equity ROI
109
3.27 111.6 180 71 0.95 17.17 16.05 13.28 12.6 35.21 18.11
95
6.88 53 106 11 0.91 18.14 10.5 9.82 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% Debt-equity ratio Decreased from 65% to 62%
Piramal
Increased by 15.5% Increased from 66% to 102%
CA out of total CA and loans and advances Accounts receivable (in days)
76.8%
54.5%
69
53
doc_554017503.pptx
The PPT explaining about 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 finance managers
negotiating favourable credit terms arranging short term finances
monitoring the investment in inventoriies controlling the cash movement administering accounts recievables
• The working capital needs of a firm are influenced by numerous factors like 1. Nature of Business: 2. Seasonality of operations: 3. Production policy: 4. Market conditions: 5. Condition of supply:
• Optimal level of current assets involves a tradeoff between costs that rise with current assets and fall with current assets. These are carrying cost referred as carrying cost and the latter as shortage costs. • Carrying costs are mainly in the nature of the cost of financing a higher level of current assets. • Shortage costs are mainly in the form of disruption in production schedule, loss of sales and the loss of customer goodwill.
Current asset cycle
Finished Goods Accounts Receivable Wages,salaries, factory overheads Raw materials
Work in process
Cash
Suppliers
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
Operating and cash cycle
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
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, • In view of its importance, it is generally referred to as the “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 unanticiapted 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 taxesdividend etc • investments must be matched in size and maturity to known future outflows
Credit management in India
Trade credit management is divided into 3 broad areas • Credit policy • Credit analysis • Control of accounts receivables
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
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%. Recently there has been advancements in field of inventory management. The more important ones are listed below:• Material requirement planning • Just in Time • Electronic data interchange and bar coding
Lupin
Current ratio Acid test ratio 1.76 1.04
Piramal
1.2 0.95
Debt-equity ratio
Debt to total asset Interest coverage ratio
0.86
0.31 14.9
1.02
0.27 9.3
Receivable turnover ratio
Receivable turnover (in days) Payable turnover ratio
5.32
68.8 3.36
6.88
53 3.84
Payable turnover (in days)
Inventory turnover ratio Inventory turnover (in days) Operating cycle(in days) Cash cycle (in days) Total asset turnover ratio Gross profit margin Pretax margin Net profit margin Rate of returns Rate of equity ROI
109
3.27 111.6 180 71 0.95 17.17 16.05 13.28 12.6 35.21 18.11
95
6.88 53 106 11 0.91 18.14 10.5 9.82 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% Debt-equity ratio Decreased from 65% to 62%
Piramal
Increased by 15.5% Increased from 66% to 102%
CA out of total CA and loans and advances Accounts receivable (in days)
76.8%
54.5%
69
53
doc_554017503.pptx