Working Capital Management Ms. Aparna Rammohan CA (India), CMA - - PowerPoint PPT Presentation

Working Capital Management

• Ms. Aparna Rammohan

CA (India), CMA (UK), CGMA (US) Managing Director – SriSattva Group

Why?

Private and Confidential www.srisattvagroup.com

Capital required to undertake daily operation Ability of the Business to pay off Short Term Debts Indicator of Blocked Assets

Current assets minus the current liabilities

Working Capital

Inventories Accounts Receivables (Debtors) Accounts Payables (Creditors) Cash

PERMANENT WORKING CAPITAL

Need of Working Capital Management Inventory Receivables Receivables Management Cash Management

Private and Confidential www.srisattvagroup.com

SHORT TERM CAPITAL MANAGEMENT

Nature of business Production policy Credit policy Inventory policy Abnormal factor Market condition Conditions of supply Business cycle Taxation policy Dividend policy Operating efficiency Price level changes Depreciation policy Availability of Raw material

Factors affecting Working Capital

Private and Confidential www.srisattvagroup.com

Cash Raw Material, Labor Overhead Work-in- Progress Finished Good / Stock Debtors

Working Capital Cycle

Private and Confidential www.srisattvagroup.com

Working Capital Management Saving through Integrated Cash Management Focus on Cash Conversion Cycle Defending Gains Against the Fall back Factor Strategic Benefits through disciplined spending WC Management Continuity Budgeting and Monitoring

GDP Growth Boom Recession Slump Recovery Recession Boom

Business Cycle

HOW MUCH WC? Size of the firm Activities

• f the

firm Availability

• f credits

Attitudes towards profit Others Partner Attitude

Private and Confidential www.srisattvagroup.com

IMPORTANCE OF ADEQUATE WC/ OPTIMUM WC Smooth running of business Profitability with manage risk Growth and development possibility Smooth payment Increase in goodwill Trade relationship better Others

Forecasting requirement

• f fund

Arrangement

• f fund

Process in managing WC

Private and Confidential www.srisattvagroup.com

Five Rules

Private and Confidential www.srisattvagroup.com

Managing Procurement & Inventory Timing Vendor Payment Improving Receivable Process Timing the Debtors Financial Decisions – Discretionary or Mandatory

Procurement & Inventory

Private and Confidential www.srisattvagroup.com

Customer – Purchase Linking Build Virtuous Supplier Relationshi ps Expand Your Supplier Network Decisions based on Analytical Skills Sharpen Your Negotiating Skills Think Globally Move Forward with Technology

Bell the Cat – Time the Vendors Payment!

Private and Confidential www.srisattvagroup.com

Managing Procurement & Inventory Moving toward a paperless processing environment Adopting more robust governance practices Setting Up Supplier Files Creating Management Workflows Strengthening Purchasing Approval Process

Good to Have Process

Private and Confidential www.srisattvagroup.com

Managing Procurement & Inventory Supplier Master Data Set Up Process Contractual Review Process Procurement Process Documentation

• Invoicing

Process

• Accounting

Process

• Reporting

Process

Money, Money, Money – Receivables!

Private and Confidential www.srisattvagroup.com

Track AR & Age AR Plan the Ask Proactively Payment Plan for Older Dues! Early Payment Discounts Offer better pricing plan for new orders

• n timely

payment of

• ld dues

Dedicated Collection Strategy Dedicated Collection person Client Satisfaction Approach Use Actual and Artificial Intelligence

Timing

Private and Confidential www.srisattvagroup.com

Financial Decisions – Discretionary

• r Mandatory

Operational Cost Expansion Procuring an Order Negotiation Timing the Debtors Age – Older they get tougher they become Check the cash in your wallet Timely Follow up before and after credit timelines Understand, Negotiate & Close

Working Capital Monitoring Tool 1

Private and Confidential www.srisattvagroup.com

Increase Cash Reduce

• perating

cycle

Increase Sales Reduce Cost

Working Capital Monitoring Tool 2

Private and Confidential www.srisattvagroup.com

Reduce Receivable Days Increase Payable Days Reduce Inventory Days Increase Cash Visibility

Various Components of Operating Cycle

A. Raw material shortage period = Average stock of raw material Average cost of raw material consumed per day B. WIP holding period = C. Finished goods storage period = It may be calculated as follows: Average WIP inventory Average cost of production per day Average stock of finished goods Average cost of goods sold per day OR Estimated production (in units) * direct lab permit 12 months / 360 days D. Debtors collection period = Average goods debtors Average credit sale per day E. Credit period available to suppliers = Average rate credit 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 investments for quicker returns for liquidity Conservative Approach: 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

• a. Equity share capital
• b. Preference share capital

Debentures

• a. Convertible debentures
• b. Non-convertible debentures
• c. Redeemable debentures
• d. Non-Redeemable debentures

Bond Loans from banks & financial institutions Venture capital fund for innovative projects Retained earnings

Private and Confidential www.srisattvagroup.com

Short Term Sources

Bank credit Commercial paper Transaction credit Advance from customers Bank advances Loans Overdraft Bank deposit Bills purchase and discounted Advance against 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