Working Capital Management Ms. Aparna Rammohan CA (India), CMA (UK), CGMA (US) Managing Director – SriSattva Group
Why? Capital required to undertake daily operation Ability of the Business to pay off Short Term Debts Indicator of Blocked Assets Private and Confidential www.srisattvagroup.com
Working Capital Current assets minus the current liabilities PERMANENT WORKING CAPITAL Accounts SHORT TERM CAPITAL MANAGEMENT Inventories Receivables (Debtors) Accounts Payables Cash (Creditors) Need of Working Capital Management Inventory Receivables Cash Receivables Management Management Private and Confidential www.srisattvagroup.com
Factors affecting Working Capital Conditions of Credit policy supply Operating efficiency Depreciation Abnormal factor Nature of business policy Taxation policy Availability of Dividend policy Market condition Production policy Raw material Price level changes Business cycle Inventory policy Private and Confidential www.srisattvagroup.com
Working Capital Cycle Working Capital Management Saving through Integrated Cash Cash Management Focus on Cash Conversion Cycle Raw Material, Debtors Labor Defending Gains Against the Fall back Overhead Factor Strategic Benefits through disciplined spending WC Management Continuity Finished Work-in- Budgeting and Monitoring Good / Stock Progress Private and Confidential www.srisattvagroup.com
Business Cycle Boom Size of Boom the firm Activities Partner of the Attitude Growth Recovery firm GDP HOW MUCH Recession Recession WC? Availability Others of credits Attitudes Slump towards profit Private and Confidential www.srisattvagroup.com
IMPORTANCE OF ADEQUATE WC/ OPTIMUM WC Smooth running of business Forecasting Profitability with manage risk requirement of fund Growth and development possibility Process in managing Smooth payment WC Increase in goodwill Arrangement of fund Trade relationship better Others Private and Confidential www.srisattvagroup.com
Five Rules Managing Financial Decisions Procurement & – Discretionary or Inventory Mandatory Timing Timing the Vendor Debtors Payment Improving Receivable Process Private and Confidential www.srisattvagroup.com
Procurement & Inventory Build Virtuous Supplier Relationshi ps Move Expand Forward Your with Supplier Technology Network Customer – Purchase Linking Decisions Think based on Globally Analytical Skills Sharpen Your Negotiating Skills Private and Confidential www.srisattvagroup.com
Bell the Cat – Time the Vendors Payment! Managing Setting Up Procurement Supplier & Inventory Files Moving toward a Creating paperless Management processing Workflows environment Adopting Strengthening more robust Purchasing governance Approval Process practices Private and Confidential www.srisattvagroup.com
Good to Have Process Documentation • Invoicing Procurement Process Process • Accounting Contractual Review Process Process • Reporting Supplier Process Master Data Set Up Process Managing Procurement & Inventory Private and Confidential www.srisattvagroup.com
Money, Money, Money – Receivables! Track AR & Age AR Dedicated Collection Strategy Client Satisfaction Approach Plan the Ask Proactively Payment Plan for Older Dues! Early Payment Discounts Offer better pricing plan for new orders Dedicated Collection person Use Actual and on timely Artificial Intelligence payment of old dues Private and Confidential www.srisattvagroup.com
Timing Financial Decisions – Operational Procuring an Expansion Negotiation Discretionary Cost Order or Mandatory Timely Age – Older Check the Follow up Understand, Timing the they get cash in your before and Negotiate & Debtors tougher they wallet after credit Close become timelines Private and Confidential www.srisattvagroup.com
Working Capital Monitoring Tool 1 Increase Increase Cash Sales Reduce Reduce operating Cost cycle Private and Confidential www.srisattvagroup.com
Working Capital Monitoring Tool 2 Reduce Increase Receivable Payable Days Days Reduce Increase Cash Inventory Days Visibility Private and Confidential www.srisattvagroup.com
Various Components of Operating Cycle It may be calculated as follows: Average stock of raw material A. Raw material shortage period = Average cost of raw material consumed per day Average WIP inventory B. WIP holding period = Average cost of production per day Estimated production (in units) * direct lab permit C. Finished goods storage period = 12 months / 360 days OR Average stock of finished goods Average cost of goods sold per day Average goods debtors D. Debtors collection period = Average credit sale per day Average rate credit E. Credit period available to suppliers = Average credit purchase per day Operating Cycle = A + B + C + D - E Private and Confidential www.srisattvagroup.com
Working Capital Policy / Approaches Balance of long term asset building through long term financing and shorter term Conservative Approach: investments for quicker returns for liquidity Complete depended on short term financing for both long term and short term assets Aggressive Approach: Private and Confidential www.srisattvagroup.com
Long Term Sources Share Capital Bond a. Equity share capital Debentures b. Preference share capital a. Convertible debentures b. Non-convertible debentures c. Redeemable debentures d. Non-Redeemable debentures Venture capital fund for innovative projects Retained earnings Loans from banks & financial institutions Private and Confidential www.srisattvagroup.com
Short Term Sources Loans Overdraft Bank advances Bank deposit Advance from Bills purchase and customers discounted Commercial Transaction paper credit Advance against Bank credit documents of title of goods Private and Confidential www.srisattvagroup.com
Cash Saving Approach – Tool 3
Thank You !!! Ms. Aparna RamMohan Phone: 97398 30263 Email: aparna@srisattvagroup.com Website: www.srisattvagroup.com
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