MODULE 5: Working Capital & Current Assets Management

• It refers to the funds a company requires to meet its day-to-day operational needs.

  Working Capital
• It is a crucial aspect of financial management as it directly impacts a company's ability to operate efficiently.

  Working Capital
• COMPONENTS OF WORKING CAPITAL

  • Current Assets
  • Current Liabilities
• Assets that can be converted into cash within one year.

  Current Assets
• Obligations that are due within one year.

  Current Liabilities
• The examples are cash, accounts receivable, and inventory.

  Current Assets
• The examples are accounts payable, short-term debts, and accrued expenses.

  Current Liabilities
• FORMULA of Working Capital

  $Working Capital =$$Current Assets - Current Liabilities$
• It indicates that a company has enough funds to cover its short-term obligations.

  Positive Working Capital
• It indicates that a company has not enough funds to cover its short-term obligations.

  Negative Working Capital
• SIGNIFICANCE OF WORKING CAPITAL

  • Liquidity Management
  • Operational Efficiency
  • Growth Opportunities
• Adequate working capital ensures a company can pay its suppliers, employees, and other short-term obligations on time.

  Liquidity Management
• Sufficient working capital enables businesses to invest in necessary resources and meet operational demands efficiently.

  Operational Efficiency
• Positive working capital allows businesses to explore growth opportunities, such as expanding operations, launching new products, or investing in research and development.

  Growth Opportunities
• WORKING CAPITAL MANAGEMENT STRATEGIES

  • Cash Flow Forecasting
  • Inventory Management
  • Accounts Receivable Management
• Accurate cash flow projections help in determining the required working capital and avoiding cash shortages.

  Cash Flow Forecasting
• Efficient inventory control prevents overstocking or understocking, optimizing working capital.

  Inventory Management
• Implementing credit policies and monitoring receivables helps in timely collection, reducing the risk of bad debts.

  Accounts Receivable Management
• It is a vital financial metric that indicates a company's short-term financial health.

  Working Capital
• It is the time from the beginning of the production process to the

  collection of cash from the sale of the finished product.

  Operating Cycle (OC)
• It is measured in elapsed time by summing the average selling period (ASP) and the average collection period (ACP).

  Operating Cycle (OC)
• FORMULA of Operating Cycle (OC)

  $OC\ =$$\ ASP\ +$$\ ACP$
• It is the length of time required for a company to convert cash invested

  in its operations to cash received as a result of its operations.

  Cash Conversion Cycle (CCC)
• It is the time it takes to pay the accounts payable, measured in days.

  Average Payment Period (APP)
• FORMULA of Cash Conversion Cycle (CCC)

  $CCC\ =$$\ OC\ -\ APP$ or $CCC\ =$$\ \left(ASP\ +\ ACP\right)\ -\ APP$
• It is a funding strategy under which the firm funds its seasonal

  requirements with short-term debt and its permanent requirements with long-term debt.

  Aggressive Funding Strategy
• It is a funding strategy under which the firms funds both its seasonal

  and permanent requirements with long-term debt.

  Conservative Funding Strategy
• It refers to the process of effectively managing a company's accounts receivable, which are the outstanding payments owed by customers

  for goods or services provided.

  Receivable Management
• THREE TOPICS OF RECEIVABLE MANAGEMENT

  • Credit Selection and Standards
  • Credit Policy
  • Credit Terms
• Importance of Receivable Management

  • Ensures Cash Flow
  • Improves Liquidity
  • Minimizes Bad Debts
  • Enhances Profitability
• Effective receivable management ensures a steady cash flow, as it focuses on timely collection of outstanding payments.

  Ensures Cash Flow
• By reducing the average collection period, receivable management enhances the company's liquidity position.

  Improves Liquidity
• Proper management helps in identifying and minimizing bad debts, reducing the risk of financial losses.

  Minimizes Bad Debts
• Efficient receivable management increases profitability by reducing financing costs and improving operational efficiency.

  Enhances Profitability
• They are the firm's minimum requirements for extending credit to a customer.

  Credit Standards
• Five Cs of Credit

  1. Character
  2. Capacity
  3. Capital
  4. Collateral
  5. Conditions
• The applicant's record of meeting past obligations

  Character
• The applicant's ability to repay the requested credit.

  Capacity
• The applicant's deb relative to equity.

  Capital
• The amount of assets the applicant has available for use in securing the credit.

  Collateral