·
APPROACHES TO WORKING CAPITAL MANAGEMENT
·
MGMT OF WORKING CAPITAL
·
FINANCIAL MANAGEMENT
·
STRATEGIC MGMT
1. CONSERVATIVE
APPROACH
2. AGGRESSIVE
APPROACH
3. MATCHING
4. ZERO WORKING
CAPITAL APPROACH
•
CONSERVATIVE APPROACH
1. RISK FREE
STRATEGY OF WORKING CAPITAL FINANCING
2. A COMPANY
ADOPTING THIS STRATEGY MAINTAINS A HIGHER LEVEL OF CURRENT ASSETS AND THERFORE
HIGHER WORKING CAPITAL
3. ENTIRE
ESTIMATED INVESTMENT IN CURRENT ASSETS SHOULD BE FINANCED FROM LONG TERM
SOURCES LIKE EQUITY,DEBENTURES,TERM LOANS SO THE RISK ASSOCIATED WITH SHORT
TERM FINANCING IS ABOLISHED TO GREAT EXTENT
4. SHORT TERM
SOURCES SHOULD BE USED ONLY FOR EMERGENCY
5. FIXED
ASSETS,PERMANENT WORKING CAPITAL AND A PART OF TEMPORARY WORKING CAPITAL IS
FINANCED BY LONG TERM FINANCING AND THE REMAINING PART IS ONLY FINANCED BY
SHORT TERM FINANCING SOURCES.
6. PRIMARY
OBJECTIVE IS ENSURED
•
FINANCING STRATEGY
1. LONG TERM
FUNDS =FIXED ASSETS+PERMANENT WORKING CAPITAL PLUS A PART OF TEMPORARY WORKING
CAPITAL
2. SHORT TERM
FUNDS WILL FINANCE=REMAINING PART OF TEMPORARY WORKING CAPITAL
•
CONSERVATIVE APPROACH
• D
•
ADVANTAGE
1. SMOOTH OPERATIONS AND NO STOPPAGE:-LEVEL OF WORKING CAPITAL AND CURRENT ASSETS IS
HIGH. A HIGHER LEVEL OF INVENTORY ABSORBS THE SUDDEN SPURT IN PRODUCT
SALES,PRODUCTION PLANS AND ANY ABNORMAL DELAY.
2. NO INSOLVENCY
RISK:- HIGHER LEVEL OF CASH AND WORKING CAPITAL AVOIDS THE RISK OF REFINANCING
WHICH EXIST IN CASE IT IS FINANCED BY SHORT TERM SOURCES OF FINANCE
•
DISADVANTAGE
1. HIGHER
INTEREST COST
2. IDLE FUNDS:
AS THE LONG TERM LOANS CAN NOT BE PAID OFF WHEN WISHED AND IF PAID CAN NOT BE
EASILY AVAILED.
3. A HIGHER
LEVEL OF INVENTORY AND DEBTORS IMPLIES CARRYING AND HOLDING COST WHICH HAS
DIRECT IMPACT ON PROFITABILITY
4. INEFFICIENT
WORKING CAPITAL MANAGEMENT IN CASE OF MARGINS ARE LOW
•
HEDGING ( MATURITY) STRATEGY
1. EACH OF THE
ASSETS WOULD BE FINANCED BY A DEBT INSTRUMENT OF ALMOST OF THE SAME MATURITY
2. IF THE ASSET
IS MATURING IN 30 DAYS THE PAYMENT OF THE DEBT WHICH HAS FINANCED IT WILL ALSO
HAVE ITS DUE DATE OF PAYMENT AFTER ALMOST 30 DAYS
3. THE BASIC
OBJECTIVE OF THIS METHOD OF FINANCING IS THAT THE PERMANENT COMPONENT OF
CURRENT ASSETS ,FIXED ASSETS WOULD BE MET THROUGH LONG TERM FUNDS
4. SHORT TERM OR
SEASONAL VARIATIONS IN CURRENT ASSETS WOULD BE FINANCED WITH SHORT TERM FUNDS
•
HEDGING ( MATURITY) STRATEGY
1. LONG TERM
FUNDS=FIXED ASSETS + TOTAL PERMANENT CURRENT ASSETS
2. SHORT TERM
FUNDS= TOTAL TEMPORARY CURRENT ASSETS
•
MATCHING( HEDGING)
• D
•
TRADE OFF BETWEEN THE HEDGING AND THE
CONSERVATIVE
1. THE HEDGING
APPROACH IMPLIES LOW COST,HIGH PROFIT AND HIGH RISK
2. CONSERVATIVE
APPROACH LEADS TO HIGH COST,LOW PROFIT AND LOW RISK
3. BOTH THE
APPROACHES ARE EXTREME AND NEITHER OF THEM SERVES THE PURPOSE OF EFFICIENT
WORKING CAPITAL MGMT
4. TARDE OFF IS REQUIRED AND IT MAY DIFFER FROM
CASE TO CASE
5. ONE WAY IS TO
DETERMINE THE TRADE OFF IS BY THE FINDING TH AVERAGE OF MAXIMUM AND MINIMUM REQUIREMENTS OF WORKING CAPITAL. THE AVERAGE REQUIREMENT WILL BE FINANCED OUT OF
LONG TERM FUNDS AND EXCESS CAPITAL REQUIRED THROUGH SHORT TERM SOURCES
•
THE AGGRESSIVE APPROACH
1. THE ENTIRE
ESTIMATED REQUIREMENTS OF CURRENT ASSETS SHOULD BE FINANCED FROM SHORT TERM
SOURCES AND EVEN A PART OF THE FIXED ASSETS ALSO FROM SHORT TERM
2. MAKES THE FINANCE MIX MORE RISKY,LESS COSTLY AND MORE PROFITABLE
•
AGGRESSIVE APPROACH
• D
•
ZERO WORKING CAPITAL APPROACH
- TOTAL OF
CURRENT ASSETS= TOTAL OF CURRENT LIABILITIES
- WHICH AIMS AT
SAVING IN OPPORTUNITY COST OF FUNDS INVESTED IN CURRENT ASSETS AND
ENSURING A SMOOTH AND UNINTERRUPTED WORKING CAPITAL CYCLE
3. CAN BE USED
WHERE CURRENT ASSERTS ARE FAST MOVING,GOOD QUALITY ACCOUNTED AT REALISABLE
VALUES.
4. ZERO WORKING
CAPITAL APPROACH ALSO HELPS IN BETTER MGMT OF PAYABLE OR CURRENT LIABILITIES
No comments:
Post a Comment