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1. Amount of money available to finance the day-to-day operations.

2. Why does it become so important?

As an indicator of financial problems Can maximize growth.

Can help minimize future financialshortcomings.

3. Determining the amount of working capitalneeds.

Current assets minus the current liabilities.

The more that assets are in the form of

cash, the lower the amount of liquid

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FACTORS DETERMINING WORKINGFACTORS DETERMINING WORKING

CAPITALCAPITAL

1. Nature of the Industry1. Nature of the Industry2. Demand of Industry2. Demand of Industry3. Cash requirements3. Cash requirements4. Nature of the Business4. Nature of the Business5. Manufacturing time5. Manufacturing time6. Volume of Sales6. Volume of Sales7. Terms of Purchase and Sales7. Terms of Purchase and Sales8. Inventory Turnover8. Inventory Turnover9. Business Turnover9. Business Turnover

10. Business Cycle10. Business Cycle11. Current Assets requirements11. Current Assets requirements12. Production Cycle12. Production Cycle

13 Credit control13 Credit control14. Inflation or Price level changes14. Inflation or Price level changes15. Profit planning and control15. Profit planning and control16. Repayment ability16. Repayment ability17. Cash reserves17. Cash reserves18. Operation efficiency18. Operation efficiency

19. Change in Technology19. Change in Technology20. Firms finance and dividend policy20. Firms finance and dividend policy21. Attitude towards Risk21. Attitude towards Risk

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Working capital

High WC due to poor delivery systems,poor accounting procedures, competitionleading to longer credit periods.

Constraints of internal and externalfunding

Need of wc depends on stock, prdn.time,output, credit sales, delays, trading

conventions, operating expenses Level of wc influenced by lack of internal

resources , low productivity and diversionof funds to other uses.

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Why the difficulty to getloans

No guarantee BANK afraid of NPA Poor information Fear of bank harsh actions

Complex and documentary procedures Corruption Inconvenient and costly to maintain proper books

of a/c for monthly reports Third party guarantee in shadow Display of bank name prominently Managerial incompetence & ignorance of

standards. Severity of competition lowering prices-poor cash

cycle

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THE WORKING CAPITAL CYCLETHE WORKING CAPITAL CYCLE

(OPERATING CYCLE)(OPERATING CYCLE)

Accounts Payable

Cash

Raw

MaterialsW I P

Finished

Goods

Value Addition

Accounts

ReceivableSALES

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How much needed

Money for capital investment: Equipment

Buildings

Permanent Working CapitalTo produce goods or services at lowest level of

demand: Inventory (raw material, WIP, finished goods)

Expenses (salaries, marketing programs, etc.)

Level of permanent WC grows as businessgrows

Temporary Working Capital: to meetseasonal or peak periods

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CASH FLOW

Many profitable firms round theglobe fail because of lack ofcash..

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Basic need for cash

Repayment of

Creditors ,employees ,lenders or forunforeseen events

Failure to it

Bankruptcy, negative impact on

creditworthiness

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CASH FLOW

CASH

ACCOUNTSPAYABLE

PRODUCTION/CASH PURCHASES

INVENTORY

CASH SALES

ACCOUNTS

RECEIVABLE

DECREASE IN CASHINCREASE IN CASH

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BIG THREE of Cashmanagement

Accounts Payable

Accounts Receivable Inventory

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Good Cash ManagementRecipe

Collect your

companys cashas quickly aspossible.

Payout your

companys cashas slowly aspossible.without impactingcredit rating

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Cash Management Roles ofEntrepreneur

CashConserver

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The Activities of a Business

Each business has 3 types of activity

Operating Activities

Investing Activities

Financing Activities

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The 3 activities can be found incertain parts of the FS

Operating activities

Income Statement (after adjusting for non-

operating items) Balance Sheet (current assets & current

liabilities)

Investing Activities

Balance Sheet (fixed assets)

Financing Activities

Balance Sheet (non-current liabilities &

Equity)

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Cash Flows

Given Period

Vertically Drawn

Operating , investing ,financing Reconcialtion Of Open/Close

Indirect Method For Cash Flows

Signed Helps tracking liquidity

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Financial Analysis and Planning

Financial Analysis is defined as theprocess of discovering economicfacts about an enterprise or a projecton the basis of an interpretation offinancial data.

Financial analysis reveals where thecompany stands with respect toprofitability, liquidity, leverage and

an efficient use of its assets.

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Utility of Financial Analysis

Appraisal of Project

Health of Enterprise

Performance Index

Index of Pitfalls

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Financial Planning

Purpose of the Financial Plan Contents of the Financial Plan

Steps in Financial Plan Development

Assess Financial Position Define Debt Policy

Determine Asset Requirements

Evaluate Financing Options Integrate into Management Control

Structure

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Assuring that the strategic plan of theorganization is achieved

Analyzing interactions of financing andinvestment choices open to firm

Projecting future consequences of presentdecisions

Deciding which alternatives to undertake

to as part of the financial plan Measuring subsequent performance

against goals

Purpose of the Financial Plan

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Contents of Financial Plan

Pro Forma Income statement :Moving picture of Firms profitability overtime

Pro Forma Balance Sheet :Snapshot of Business position

Pro Forma Cash flow

statements : Ratio analysis and its

interpretation

Break Even Analysis

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Balance for xyz co year endedMarch 31,2010

ASSETSCurrent Assets (A)CashAccounts ReceivableInventory

Other CALong Term Assets (B)Land, buildingPlant & MachineryLess: accumulated

depreciation

GoodwillOther Long term Assets

TOTAL ASSETS(A+B)

LIABLITIES & OWNERSFUND

Current Liabilities &Provisions (D)

Accounts PayableShort term bank borrowingOther current liabilitiesProvisionsLong term Liabilities (E)Secured & Unsecured loanShareholders equity (F)Ordinary share capitalPreference share capital

Reserves and Surplus

TOTAL LIABLITY & EQUITY(D+E+F)