Working Capital or short-term finance management
CAPEX Vs. OPEX
Working Capital or short-term finance management
• Liquidity management
• Keeping the operations afloat
• Poor liquidity management has direct impact on profits and share price of the firm
• Think of some economies and firms that suffered liquidity issue and paid heavy price
Working Capital or short-term finance management
• Factors that drive liquidity management
• Internal Vs External
• How to avoid or prevent liquidity issue?
• Foresee the problem
• Plan and execute optimal WC management
Management of CAs and CLs
Current Assets
• Inventory
• Trade Receivables
• Loans and Advances Lent
• Cash and Cash Equivalents
Management of CAs and CLs
Current Liabilities
• Trade Payables
• Advances from customers
• Short-term loans and securities
• Any outstanding expenditure
Working Capital
• Gross Working Capital (TCA)
• Net Working Capital (NCA)
• Permanent working capital
Working Capital Management
• It is about management of cash, trade receivables, inventory and trade payables
• Optimum utilization of current assets and current liabilities
• Ensure the business has enough to meet with short-term payment obligations
• Control the investment level in inventory, trade receivables and C&CEs
• Leverage the short-term loans, including interest free credit by the vendors
Working Capital Policies
• WCM policies are critical impacting the financial health of the business
• Type of WCM policy determines the excess of current assets over current liabilities
• The common policies practiced are;
• Aggressive Policy
• Conservative Policy
• Matching Policy/Principle
Please go through the following link to learn more………….
https://www.bajajfinserv.in/what-are-the-types-of-working-capital-policies
Cycles
• Operating Cycle
Inventory Days + Trade Receivables Days
• Cash Conversion Cycle
(Inventory Days + Trade Receivables Days) – Trade Payables
Cost of Net Working Capital (NCA)
Let us assume a firm’s project with a life of five years
requires Rs. 500,000 investment in its net working
capital that will be drawn back at the end of its life.
Given the prevailing interest rate of 9%, what is the
cost of investment in net working capital?
Trade Credit
• Applicable only to credit sales
• Trade credit is the credit the firms extends to its customers to pay later
• Stringent/tight/conservative credit policy
• Lenient/liberal/aggressive credit policy
• What is relationship between credit policy and liquidity risk?
Trade Credit – Terms and Conditions
• Net 30…..means the firm allows the customer to pay within or 30 th day from the date
of sales
• 2/10, net 30….means the firm allows 2% discount if the customer pays on or before
10th day otherwise no discount if paid between 11th and 30th day.
• What is the cost benefit analysis if the customer exercise the option to pay on or
before 10th days to avail cash discount?
Trade Receivables Management
• Analysis of effectiveness of receivables management
• Ratio of Trade Receivables to Sales
• Ratio of bad debts to Sales
• How do you identify the risk in trade receivables in the balance sheet?
Trade Receivables Management
• How do you identify the risk in trade receivables in the balance sheet?
Let us assume a firm has reported Rs. 125 as trade receivables in its balance sheet. The
internal records indicate that there were 11 accounts with Rs. 15 due for the last 10
days, 5 accounts with Rs. 40 due for the last 11-20 days, 20 accounts with Rs. 45 due for
the last 21-30 days and 22 accounts with Rs. 25 due for the last 31-40 days.
Questions:
1. Is Rs. 125 receivables balance itself an indication of the risk or
2. Is there something else we can analyses to identify the risk involved
