Description
This is a PPT explaining working capital management basics.
Working Capital Management
?
“There is no necessity to hold idle cash to bridge over intervals if it can be obtained without difficulty at the moment it is actually required.”
John Maynard Keynes - General Theory of
Employment, Interest and Money
?
Motives for holding cash
?
? ?
?
Transaction Precautionary Speculative Compensatory
Objectives of Cash Management:
?
• Meeting payments • Minimizing cash in hand
Factors determining cash needs
?
?
Synchronization of cash flows Short costs
• Brokerages • Borrowing costs • Loss of cash discount • Higher interest rates-poor credit ratings • Penalty rates
?
?
?
Excess cash balance costs (opportunity costs) Management of cash costs Uncertainty.
Determining cash needs
?
?
Baumol’s model: tells you how much is to be converted to or from cash. Miller –Orr Model:Optimum cash balance to be maintained to minimize cost of cash management Cash Budget.
?
INVENTORY MANAGEMENT
?
Costs involved in holding inventory:
• Ordering costs (set up costs)- costs of
preparing the PO, receiving, inspecting and recording goods, etc.
• Carrying Costs- storage (tax, dep, insurance,
etc.) and interest costs
Inventory Management Techniques
?
ABC system:
• A: least in number but largest in value • C: Largest in number but least in value • B: midway
Typically: A No. of items % 15 Value of items% 70 B 30 20 C 55 10
?
?
EOQ Model Re-order point
inventory
• Lead time in days x average daily use of
?
Safety stock
RECEIVABLES MANAGEMENT
?
Need:
• Induces customers to buy more • Profits go up, if the cost of credit is less than •
the benefits. Differentiating factor
?
Downsides of granting credit:
• Increase in investment • Increase in probability of bad debts • Liquidity problems
TOOLS FOR RECEIVABLES MANAGEMENT
?
?
Ageing schedule Days Sales Outstanding / Average Collection period
=receivables upto month end average daily sales
?
Changing the Credit Period.
increase in credit period.
• Find out the increase in investment due to
Accounts Receivable Aging Report
Roth Office Supply October 31, 2000
Customer Name
Total Accts. Rec.
Current
1-30 Days Past Due
31-60 Days Past Due
Over 60 Days Past Due
Quick Computer Supply Kitchens by Voels Jansa's Sport Stores Bradley Farms, Inc. TrueBrew Unlimited Enneking Enterprises Hove and Sanborn LLC J. Siegel, CPA Total
$1,600 2,800 1,000 1,600 2,000 400 600 1,200 $11,200
$ 300 2,800 1,000 ---1,100 ---600 1,200 $7,000
$ 500 ------1,600 500 400 ------$3,000
$ 500 ---------400 ---------$ 900
$ 300 ---------------------$ 300
• A firm is currently selling a product @ Rs. 150 per unit and annual sales were 40,000 units, out of which 75% was on credit. The variable cost per unit is Rs. 90 and at current sales, the total cost per unit is Rs. 120. Average Collection Period is 30 days. • If the ACP is increased to 45 days, the firm expects a 15% increase in sales with no increase in the fixed costs. • Cost of capital is assumed to be 12%.
Steps
• Find out the incremental contribution/profit • Find out the increased investment in debtors from OLD sales • Calculate the interest on the increased investment • Find out the investment in debtors from NEW sales • Calculate the interest on the increased investment • Subtract the cost of increase in investment in debtors from increased profits
Cash Discounts
?
?
?
Meant to induce customers to pay on time Aims at reducing bad debts Eg.: 1/10 net 30 which means, if the payment is made within 10 days of the sale, then a cash discount of 1% is available, else the entire amount would have to be paid in 30 days.
• Current policy:
– 2/1 net 30, current sales are Rs, 10 lakhs and 60% of customers who pay take the discount. ACP is 20 days and variable margin is 60%. Total cost margin is 90%. – New credit term proposed: 3/1 net 60, sales expected to increase by 25%, new ACP 35 days, half the new customers would avail the discount.
Steps for making the decision
?
Profit on new sales
- Increase in cash discount - Increase in bad debt losses - Cost of financing additional receivables
(Increase in receivables on existing sales + receivables on new sales) cost of capital
FACTORING
?
Non recourse/Full factoring
•
Factor has no recourse to client if receivables not collected
? ?
Recourse factoring Maturity factoring
• •
No advance or prepayment by factor-on a agreed date or on collection Advance provided
?
Advance factoring
Factoring
?
Undisclosed factoring
Invoice factoring
advance
• Customer not informed of arrangement
?
• Collection made by client- int. paid on
doc_366142189.ppt
This is a PPT explaining working capital management basics.
Working Capital Management
?
“There is no necessity to hold idle cash to bridge over intervals if it can be obtained without difficulty at the moment it is actually required.”
John Maynard Keynes - General Theory of
Employment, Interest and Money
?
Motives for holding cash
?
? ?
?
Transaction Precautionary Speculative Compensatory
Objectives of Cash Management:
?
• Meeting payments • Minimizing cash in hand
Factors determining cash needs
?
?
Synchronization of cash flows Short costs
• Brokerages • Borrowing costs • Loss of cash discount • Higher interest rates-poor credit ratings • Penalty rates
?
?
?
Excess cash balance costs (opportunity costs) Management of cash costs Uncertainty.
Determining cash needs
?
?
Baumol’s model: tells you how much is to be converted to or from cash. Miller –Orr Model:Optimum cash balance to be maintained to minimize cost of cash management Cash Budget.
?
INVENTORY MANAGEMENT
?
Costs involved in holding inventory:
• Ordering costs (set up costs)- costs of
preparing the PO, receiving, inspecting and recording goods, etc.
• Carrying Costs- storage (tax, dep, insurance,
etc.) and interest costs
Inventory Management Techniques
?
ABC system:
• A: least in number but largest in value • C: Largest in number but least in value • B: midway
Typically: A No. of items % 15 Value of items% 70 B 30 20 C 55 10
?
?
EOQ Model Re-order point
inventory
• Lead time in days x average daily use of
?
Safety stock
RECEIVABLES MANAGEMENT
?
Need:
• Induces customers to buy more • Profits go up, if the cost of credit is less than •
the benefits. Differentiating factor
?
Downsides of granting credit:
• Increase in investment • Increase in probability of bad debts • Liquidity problems
TOOLS FOR RECEIVABLES MANAGEMENT
?
?
Ageing schedule Days Sales Outstanding / Average Collection period
=receivables upto month end average daily sales
?
Changing the Credit Period.
increase in credit period.
• Find out the increase in investment due to
Accounts Receivable Aging Report
Roth Office Supply October 31, 2000
Customer Name
Total Accts. Rec.
Current
1-30 Days Past Due
31-60 Days Past Due
Over 60 Days Past Due
Quick Computer Supply Kitchens by Voels Jansa's Sport Stores Bradley Farms, Inc. TrueBrew Unlimited Enneking Enterprises Hove and Sanborn LLC J. Siegel, CPA Total
$1,600 2,800 1,000 1,600 2,000 400 600 1,200 $11,200
$ 300 2,800 1,000 ---1,100 ---600 1,200 $7,000
$ 500 ------1,600 500 400 ------$3,000
$ 500 ---------400 ---------$ 900
$ 300 ---------------------$ 300
• A firm is currently selling a product @ Rs. 150 per unit and annual sales were 40,000 units, out of which 75% was on credit. The variable cost per unit is Rs. 90 and at current sales, the total cost per unit is Rs. 120. Average Collection Period is 30 days. • If the ACP is increased to 45 days, the firm expects a 15% increase in sales with no increase in the fixed costs. • Cost of capital is assumed to be 12%.
Steps
• Find out the incremental contribution/profit • Find out the increased investment in debtors from OLD sales • Calculate the interest on the increased investment • Find out the investment in debtors from NEW sales • Calculate the interest on the increased investment • Subtract the cost of increase in investment in debtors from increased profits
Cash Discounts
?
?
?
Meant to induce customers to pay on time Aims at reducing bad debts Eg.: 1/10 net 30 which means, if the payment is made within 10 days of the sale, then a cash discount of 1% is available, else the entire amount would have to be paid in 30 days.
• Current policy:
– 2/1 net 30, current sales are Rs, 10 lakhs and 60% of customers who pay take the discount. ACP is 20 days and variable margin is 60%. Total cost margin is 90%. – New credit term proposed: 3/1 net 60, sales expected to increase by 25%, new ACP 35 days, half the new customers would avail the discount.
Steps for making the decision
?
Profit on new sales
- Increase in cash discount - Increase in bad debt losses - Cost of financing additional receivables
(Increase in receivables on existing sales + receivables on new sales) cost of capital
FACTORING
?
Non recourse/Full factoring
•
Factor has no recourse to client if receivables not collected
? ?
Recourse factoring Maturity factoring
• •
No advance or prepayment by factor-on a agreed date or on collection Advance provided
?
Advance factoring
Factoring
?
Undisclosed factoring
Invoice factoring
advance
• Customer not informed of arrangement
?
• Collection made by client- int. paid on
doc_366142189.ppt