PPT 14 Flashcards
What is the formula for working capital?
Working Capital = Current Assets – Current Liabilities
What are examples of current assets?
Cash & Bank Balances, Bills Receivable, Inventory
What are examples of current liabilities?
Creditors, Bills Payable
What is involved in managing working capital?
Estimation of the requirement of working capital
Procurement of funds for meeting working capital needs
What are the factors determining working capital requirement?
Operating Cycle
Sales Volume
Seasonality
Cyclical Factors
Nature of Business
Terms of Credit
Inventory Turnover
Technology
Contingency Plans
What is the operating cycle?
The time period during which cash is reconverted back to cash through a number of processes.
How does the operating cycle impact working capital?
Long Operating Cycle → More Working Capital Requirement
Short Operating Cycle → Less Working Capital Requirement
How does seasonality impact working capital?
Peak Season → Shorter Cash-To-Cash Cycle → Less Working Capital Requirement
Off Season → Longer Cash-To-Cash Cycle → More Working Capital Requirement
What are the factors involved in making an estimation of working capital requirement?
Cost of buying Raw Material
Average time taken for Raw Materials to enter the process
Length of Production Cycle
Credit extended to buyers
Credit enjoyed from suppliers
Delayed wage payment
How does buying raw materials in bulk affect working capital?
Buying raw materials in bulk with heavy discounts reduces working capital requirements.
How does the length of the production cycle impact working capital?
A longer production cycle results in more working capital requirement, and a shorter production cycle results in less working capital requirement.
What are the sources of funds for working capital?
Borrowings from banks and financial institutions
Short-term finance sources (e.g., extended credit period from suppliers)
Unsecured non-bank short-term sources
Pledging
Factoring
Bank credit
Unsecured public deposits
Inter-company deposits
Short-term loans from insurance companies
What is factoring in working capital management?
Factoring is the process of selling invoices (representing commercial accounts receivables) to another buyer (called a “Factor”) at a discount to get instant cash.
What are inter-company deposits?
These are short-term deposits made by one company in another, typically for a period up to 6 months.
