| Topic : Managing Working Capital |
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Activity:
125 views;
last activity : 11 27 2010 07:20:47 +0000
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List it down....
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Collection time
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Answer
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Must Watch closely the receiveables.
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Knowing the importance of WC and manage it wisely.
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Question
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Working capital management
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List it down and Collection time
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List all of your current debt and recurring expenses such as mortgage, utilities and any day to day needs. If you run a business you must include payroll cost and all associated benefits such as advertising and marketing costs if applicable. Write the average cost for each category or item. Be sure to document annual expenses such as land taxes. Everything that is a pay out must be listed in order to determine what your day to day cash flow must be. |
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Hello ! Ghosh Sir @ SBI ,
Apart from the safety margin in the L.S. , it has been recommended by the Tandon Committee Study Group instituted by the Central Banking Authority that for better control , the borrowers should be classified by each Bank which will facilitate easy identification of borrowers particularly whose affairs require to be taken care of . Normal variation of statutory 10% in the credit end-use should be respected. Also , the Chairman , P.L.Tandon (Chairman of the Punjab National Bank) of the TCSG made a seminal recommendation that each Bank must undertake the BANKER-BORROWER SEMINAR to understand those operating Bank Officials from all the respective Banks along with the borrowers .
sd/- Dr.R.Sudhakar Rao ,
ex-CSIR.Jr.Research Scholar @ Andhra Univers'
on my personal home business HP L'TOP 520 MODEL
Apart from meeting day to day operational expenses working capital is also required to meet the unforeseen expenses which may crop up due to failure by third party to fulfil their obligation in a business transactions.Therefore the best way to manage working capital is to always leave a margin of 15-20% of limit sanctioned.
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1)I actualy forgot the name for this process. It goes like this, when you sell on credit you make sure that you collect the receivable in shorter period than your payables for your material purchase so that you don't have to borrow to finance purchases reducing cost of capital. Receivable turnover should be as high as possible, that sales/average collection period. Average collection period = 365/Times inventory turned over whi 2)Better Inventory management. Just in time inventory can reduce working capital needs severely. 3)I don't know whether in India they have compensating balance account for companies, if it is there, then one can use that facility for working capital financing where when you borrow you keep certain amount balance with the bank and the full amount of the loan is not borrowed, this incurs less cost of capital again.
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i agree. managing which menas shortening the working capital cycle is the most important element of working capital management. you have to convert everything into cash in the shortest possible time. that includes everyting from raw materials to finished goods to receivables
1.The name of the Process , Sir Mathew Cherian @the Western Michigan Univers' has forgotten is known as the "Working Capital Cycle". Also called the Debts Collection Department. It indicates the total time lag and the relative significance of its constituent parts called the production and operating subcycles . A subcycle does forecast , control and manage Working Capital effectively with the duration of a subcycle subject to nature of selected business . As per the Accounting Standard settled by the Institute of Chartered Accountants of India , Research & Development Expenses not to be considered for valuation of Working Capital nor Inventories.
3. Yes ! In India , it is called the Marginal Money or the Borrower's Contribution taken before granting the Loan excluding it.
sd/- Dr. R.Sudhakar Rao,
ex-C.S.I.R.[INDIA]Jr. Research Scholar @ANDHRA UNIVERS'
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I would like to answer Mr. Sandeep Sahadev. The ratios for the current year are compared with the previous year and estimates of the next two years. There are Efficiency Ratios that determine the efiiciency of the company as compared to previous years and if any deterioation is noticed, remedial steps will be taken. There are risk related ratios (concerned to the banker) which helps him to decide whether to give dditional finance or call back the loan. If you are interested I can send you some models (live examples of running companies) that will help you understand the ratios. Since they are in excel format, will help you better. |
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Certainly... Will do it..
Thank you sir, i would like to know about manufacturing company, please send me some models.
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In today the industry is majorly facing problems with is debtors and clients. The middle scale trend or the corporate trend is to utilise the vendor money as finance. So one must have a close watch on its timely receiveable and credit period extensively. The receiveiveable chart should be managed very strictly to avoid bad debt s and poor inflow.
Everything settles off automatically. |
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Dear Mr. SUdhakar,
Thanx for the comments. Infact the automatic settlement is the short term used for the geniune business houses.
Why I wanted a strrict vigilence on Receiveables. The answers is very clearly explained by your selves the the Poor Indian Judiciary System which doesnt value public money for unfair practices happening in business fraud.
I think nowaday it only the basic problem for the SME and SSI for the basic product offering to the consumers. Even there is lot of NPA growing in the financial system. How the money will be realized.
Hence the business need to track the receivables.
Hello ! Jyoti !!
Your last sentence , as a freelancer, "Everything settles off automatically", is certainly not a "balancer" in the right direction .
According to me , the time has come to teach " PAYABILITY " in our Indian Financial Moral Character Lessons just as in England , for example, Lessons are conducted to teach Tolerance . Only a small change in Moral Conduct will bring about big value Results ! When everybody clears one's Payables, nobody will have Receivables . So, it is the other way round when you said the receivable chart very strictly managed ! No punitive administration is required. Nor there will be small causes Courts . A small change in Moral Character is the need of the hour . "We don't clear Payables because we have the Receivables " is the position taken by the concerned . This social stand in the Indian Financial Character is unfortunate enough that unfair practices like netting between Receivables & Payables on large-scale is resorted to resulting in many unfathomable distortions.
sd/- Dr. R. Sudhakar Rao,
ex-C.S.I.R Jr.Research Scholar @Andhra Univers'
on my PERSONAL HOME BUSINESS HP L'TOP 520 MODEL.
6-10-'10.
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Working capital represents the operating liquidity available to a business firm.
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.
Inadequate working capital can put a company in jeopardy rather quickly due to liquidity problems. On the other hand, excessive working capital strains the company finances.
When there is deficiency of WC – remedies are
a. Raise Equity
b. Sell out Non-current Assets
Having Too Much WC is Bad –
This is due to rise in inventories and trade debtors –
Problems with Excessive inventories :
1. Obsolescence risk. viz., physical deterioration, technical or market obsolescence.
2. Inventories drain cash. Liquid cash is tied up until the products are sold and the money collected from customers.
3. Inventories require storage facilities. This takes up valuable space and may cost a business in terms of rental expense or opportunity cost in terms of facilities tied up.
Trade Debtors - Trade debtors represent financing by the company to its customers. When trade debtors build up, it may also be an indication of poor credit policy and poor follow up on outstanding debts.
The more efficient a business can manage its inventories and trade debtors, the better it is for liquidity. More cash would then be available for growing the business, reducing finance costs and paying shareholders
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what is the use of Ratio analysis in working capital management ? |
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Thank you sir, i would like to know which ratio's are important in manufacturing company to know their financial position which will also relate to the working capital management.
Hello! Welcome , Mr.Sandeep S. Wagh,
The Schedule Vl of the Indian Companies Act, 1956, do not prescribe disclosure of Ratios. Legally, Ratios are not published along with the Financial Statements.However, the Controller of Capital Issues publishes Ratios is a digression in the context.
The Ratio Analysis is the basis for Working Capital Analysis in order to keep smooth running of Businesses. Called the Behaviour of Ratios and the Parity in Ratios , the trends & the tendencies of Businesses are found out . Hence came in the Ratio Analysis of Working Capital Effective Managememt . Specific Applications are listed below.
1. Working Capital Utilization .
2. Ability to dilute shorter duration debts.
3. Cash Realizations offsetting redundancy assets .
4. Excess idle cash figurement.
5. Transformations Study in Working Capital .
sd/- Dr. R. Sudhakar Rao ,
ex-C.S.I.R [ INDIA] Jr. Research Scholar @ Andhra Univers'.
From my personal HOME BUSINESS HP L ' TOP 520 MODEL .
4.10.'10
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For effective working capital management to pay attention on three things is very important. These are- 1. Cash management 2. Inventory management 3. Account receiable management. Cash management is nessary to make daily statement for inflow and outflow of cash and Inventory management is also a most important aspect of working capital management. For this is necessary to analyse the cost of inventory and to use technique like ABC method, EOQ etc. As we know more inventory in stock also increase cost and less inventory also not good. So inventory management is also very important. Account receiables management is the third most important aspect of working capital where from company get cash to day to day operations. It managed well or not, to know by the account receivale ratios. According to me Account receiable and account payable have a proper coordination. Account receiable period should be less than account payables. Other factor also effect this like good relationship with customers and suppliers. One other good way to manage account receivables is contract with factor for factoring services. |
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Bth are good. This is depends on how you plan, to have fight with uncertainty.. and process according to it.
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Hello ! Purushothaman !! Sir, Your contention "How you plan to have fight with uncertainty " , smacks of which definition of Business Planning ?
George Terry ? Alford & Beatty ? Koontz & O' Donnell ? Billy E.Geotz ? Philip Kotler ? Confucius ? Prof . Haney ? The present age is rightly called the age of Planning . The concept of Planning has Universal Application . A Student , a Housewife , a Secretary do planning in a simple sense ! The saying goes on that the Businessman's plans are more or less the same as that of a Housewife ! Is it ? The idea of Planning @ National Level was first introduced by the Communist Soviet Russia in the year 1921 !! Even the "Uncertainty" has been turned into positivity - the huge business- by the so-called " Life Insurance Corporation of India " . Credit goes to India ! What a marvel ?
sd/- Dr. R.Sudhakar Rao ,
ex-C.S.I.R Jr. Research Scholar @Andhra Univers'
on my personal home business HP L' Top 520 MODEL
7-10-'10
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