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Amount of money available to finance the dayto-day operations. 2. Why does it become so important? As an indicator of financial problems Can maximize growth. Can help minimize future financial shortcomings. 3. Determining the amount of working capital needs. Current assets minus the current liabilities. The more that assets are in the form of cash, the lower the amount of liquid

FACTORS DETERMINING WORKING CAPITAL


1. Nature of the Industry 2. Demand of Industry 3. Cash requirements 4. Nature of the Business 5. Manufacturing time 6. Volume of Sales 7. Terms of Purchase and Sales 8. Inventory Turnover 9. Business Turnover 10. Business Cycle 11. Current Assets requirements 12. Production Cycle 13 Credit control 14. Inflation or Price level changes 15. Profit planning and control 16. Repayment ability 17. Cash reserves 18. Operation efficiency 19. Change in Technology 20. Firms finance and dividend policy 21. Attitude towards Risk

Working capital
High WC due to poor delivery systems, poor accounting procedures, competition leading to longer credit periods. Constraints of internal and external funding 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 diversion of funds to other uses.

Why the difficulty to get loans


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

Accounts Payable

Value Addition

Raw Materials

WIP

Cash

THE WORKING CAPITAL CYCLE (OPERATING CYCLE)

Finished Goods

Accounts Receivable

SALES

How much needed


Money for capital investment:
Equipment Buildings

Permanent Working Capital


To 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 business grows

Temporary Working Capital: to meet seasonal or peak periods

CASH FLOW

Many profitable firms round the globe fail because of lack of cash..

Basic need for cash


Repayment of Creditors ,employees ,lenders or for unforeseen events Failure to it Bankruptcy, negative impact on creditworthiness

CASH FLOW
INCREASE IN CASH CASH DECREASE IN CASH

ACCOUNTS RECEIVABLE

ACCOUNTS PAYABLE

CASH SALES

PRODUCTION/ CASH PURCHASES

INVENTORY

BIG THREE of Cash management


Accounts Payable Accounts Receivable Inventory

Good Cash Management Recipe


Collect your companys cash as quickly as possible. Payout your companys cash as slowly as possible.witho ut impacting credit rating

Cash Management Roles of Entrepreneur

Cash Conserver

The Activities of a Business


Each business has 3 types of activity
Operating Activities Investing Activities Financing Activities

The 3 activities can be found in certain parts of the FS


Operating activities
Income Statement (after adjusting for nonoperating items) Balance Sheet (current assets & current liabilities)

Investing Activities
Balance Sheet (fixed assets)

Financing Activities
Balance Sheet (non-current liabilities & Equity)

Cash Flows
Given Period Vertically Drawn Operating , investing ,financing Reconcialtion Of Open/Close Indirect Method For Cash Flows Signed Helps tracking liquidity

Financial Analysis and Planning


Financial Analysis is defined as the process of discovering economic facts about an enterprise or a project on the basis of an interpretation of financial data. Financial analysis reveals where the company stands with respect to profitability, liquidity, leverage and an efficient use of its assets.

Utility of Financial Analysis


Appraisal of Project Health of Enterprise Performance Index Index of Pitfalls

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

Purpose of the Financial Plan


Assuring that the strategic plan of the organization is achieved Analyzing interactions of financing and investment choices open to firm Projecting future consequences of present decisions Deciding which alternatives to undertake to as part of the financial plan Measuring subsequent performance against goals

Contents of Financial Plan


Pro Forma Income statement :
Moving picture of Firms profitability over time

Pro Forma Balance Sheet :


Snapshot of Business position

Pro Forma Cash flow statements : Ratio analysis and its interpretation Break Even Analysis

Balance for xyz co year ended March 31,2010


ASSETS
Current Assets (A) Cash Accounts Receivable Inventory Other CA Long Term Assets (B) Land, building Plant & Machinery Less: accumulated depreciation Goodwill Other Long term Assets TOTAL ASSETS(A+B)

LIABLITIES & OWNERS FUND

Current Liabilities & Provisions (D) Accounts Payable Short term bank borrowing Other current liabilities Provisions Long term Liabilities (E) Secured & Unsecured loan Shareholders equity (F) Ordinary share capital Preference share capital Reserves and Surplus TOTAL LIABLITY & EQUITY (D+E+F)

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