CORPORATE FINANCE/

FINANCIAL MANAGEMENT

Working Capital Management

- Dr. Sandeep Goel

 WORKING CAPITAL
• Capital needed for day to day operations.

Working Capital

Gross Working Capital Net Working Capital

Firm’s Investment in Current assets – Current liabilities

total current assets
 WORKING CAPITAL MANAGEMENT
Issues
 Level of Current Assets
Optimum
- Neither Too High / Nor Too Low

 Requirement of Current Assets

- Permanent vs. Fluctuating Working Capital

 Financing of Current Assets

- Aggressive vs. Conservative Policy
Trade off between ‘profitability and risk’
 OPERATING CYCLE
-The length of time required to complete the following cycle of events:

Operating Cycle =
Days in Inventory (115 days)
+
Days in Receivables (65 days)
=180 days

Operating Cycle =
Inventory Conversion Period +
Debtors (Receivable)
Conversion Period

Operating cycle = Time gap between sales and realization of cash

 Example
115 days are taken to deliver, process the raw material and sell the
finished goods to the customers.
Customers take further 65 days on average to pay.
Operating cycle = 115 inventory days + 65 debtor days = 180 days

 If the firm received a 30 days credit from its suppliers.

Cash conversion cycle = 180 days – 30 creditor days = 150 days

Cash Conversion Cycle / Cash Cycle/ Net operating cycle

= Operating Cycle – Accounts Payable Period

Cash conversion cycle = Time to receive the payments from sales –

Time to make payments for materials and labor
 HUL CASE - 2018
HUL is known for its liquidity management
The Company avails more days of credit facility from its suppliers
than it offers to its customers.

Current credit terms of suppliers 90 days

Credit terms to customers 11 days

 Estimation of Working Capital
Raw Material
Estimated yearly production x Raw Material Cost x Average Holding Period
(in units) (per unit) (months /days)
12 months /365 days

Work in Progress
Estimated yearly production x WIP Cost x Average production cycle
(in units) (per unit) (months /days)
12 months /365 days

Finished Goods
Estimated yearly production x *Cost of Goods produced x Average holding period
(in units) (per unit) (months /days)
12 months /365 days

* Excluding depreciation
Debtors
Estimated yearly credit sales x *Cost of Sale x Average collection period
(in units) (per unit) (months /days)
12 months /365 days

Trade Creditors
Estimated yearly production x Raw Material Cost x Average Credit Period
(in units) (per unit) (months/ days)
12 months /365 days

*Excluding depreciation. Also, Overheads are always taken excluding depreciation.

 TYPES OF WORKING CAPITAL
Working Capital

Permanent working capital Temporary working capital

- Core current assets - Additional current assets

(Eg. Extra inventory during peak period
and vice-versa.)

- Financed from long-term sources - Financed from short-term sources

- Grows with the size of business - Fluctuating trend

TEMPORARY
WORKING
CAPITAL

PERMANENT
WORKING
CAPITAL
 FINANCING MIX POLICIES

Conservative Financing Policy

Total working capital (Permanent Working Capital

+ Temporary Working Capital)

Financed through Long-term sources

Positive working capital


Aggressive Financing Policy
Temporary Working Capital +Some Part of Permanent Working
Capital

Financed through Short-term Sources

Negative working capital


 Working Capital Management of BEL
Discussion questions:
(i)Comment on the working capital policy of BEL.
(ii)Analyse the assets composition for resources availability using
‘current assets to total assets ratio’ and liquidity ratios.
(iii)Calculate and evaluate the operating cycle and cash cycle of BEL.
(AHP for 2014 was 189 days and ACP for 2014 was 217 days
APP for 2014 and 2015 was 85 and 79 days)
(iv) What are the areas of working capital which need to be focused
for efficiency?
  Additional Information:
Trade Receivables (Rs. million)
March,14 March,15
Good - Over 6 Months 18,088 23,035
Good - Less than 6 months 23,197 14,826
1. BEL’s Working Capital Policy

BEL’ W.C. (Rs. lakhs) 2015 2014

= CA - CL = 13,78,101.62 – 13,21,142.51 -
6,87,120.17 7,13,429.10

= 6,90,981.45 6,07,713.41
2. BEL (Operating Risk - Operational Efficiency)
(Rs. in million)
March, 11 March, 12 March, 13 March, 14 March, 15

Fixed Assets* 5,414 6,236 7,368 8,522 9,108

Investments 120 120 120 120 120

Long-Term Loans & Advances 1,110 1,734 1,304 628 616

Other Non-Current Assets 1,109 1,172 799 937 893

Current Assets 122,058 137,035 132,155 132,114 137,810

Total Assets 129,811 146,297 141,746 142,321 148,547

CA / TA Ratio (%) 94.03 93.67 93.23 92.83 92.77

*Fixed Assets comprise of Net Block and Capital Work- in- Progress

Total Assets above exclude Deferred Tax Assets

3. BEL’s Operating cycle and Cash conversion cycle

BEL’ OC 2015 2014

= AHP + ACP = 178 d + 211 d 189 d+217 d

= 398 days 406 days

BEL’ CCC
= AHP + ACP – APP = 178 d + 211 d - 79 d 189 d+217 d - 85
d

= 310 days 321 days

4. BEL (Current Assets)
70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
Cash & Short- Other
Trade
Bank Term Loans Current
Inventories Receivables
Balances & Advances Assets
March,11 23,501 28,966 65,194 4,173 224
March,12 26,750 26,866 67,725 15,078 616
March,13 31,913 33,347 53,025 13,079 792
March,14 32,987 41,285 45,644 11,535 663
March,15 33,694 37,861 58,815 6,904 535

In Rs. million
First, we talk about Inventories
 BEL (INVENTORY MANAGEMENT)
200.00

150.00

100.00

50.00

0.00
Inventory Turnover Ratio
AHP (days)
(In times)
March,11 2.33 157
March,12 2.30 159
March,13 2.08 175
March,14 1.93 189
March,15 2.05 178

Sector: Capital Goods  

Industry: Engineering - Industrial Equipments  
Sub-Industry: Electronics - Others  
Industry Avg. - IHP: 73
days
What about Debtors?
 BEL (DEBTORS MANAGEMENT)
250.00
200.00

150.00

100.00

50.00

0.00
Debtors Turnover
ACP (days)
Ratio (In times)
March,11 2.21 166
March,12 2.07 177
March,13 2.03 180
March,14 1.68 217
March,15 1.73 211

Sector: Capital Goods  

Industry: Engineering - Industrial Equipments  
Sub-Industry: Electronics - Others  
Industry Avg. - ACP: 119 days