Falcon Invoice Discounting: The best investment platform in india for investors
Business reorganisation (2)
1. CP: 303
A
PRESENTATION
ON THE
DIFFERENT APPROACHES
TO
WORKING CAPITAL
Presented to:
Presented by:-
ASST. Amit kr .gupta(07)
PROFESSOR Rameshwar Baidya(60)
Prasenjit Dhar()
DR. RANJIT SINGH Jabed H. Laskar(31)
2. WORKING CAPITAL
Working Capital refers to that part of the firm’s
capital, which is required for financing short-
term or current assets such a cash marketable
securities, debtors and inventories. Funds thus,
invested in current assets keep revolving fast
and are constantly converted into cash and this
cash flow out again in exchange for other
current assets. Working Capital is also known as
revolving or circulating capital or short-term
capital.
3. APPROACHES TO WORKING CAPITAL
MATCHING APPROACH
CONSERVATIVE APPROACH
AGGRESSIVE APPROACH
ZERO CAPITAL APPROACH
4. MATCHING APPROACH
The matching or balancing approach makes
distinction between fluctuating current assets
and permanent current assets with the
suggestion that to finance working capital;
short-term source of finance should be used to
finance fluctuating current assets, whiles long-
term source of finance should be used to
finance permanent current assets. This
matches the source of finance with the
character of the assets.
5. Balance between cost and risk, leading to a
balance between profitability and liquidity.
This approach refers to a process of
matching the maturities of debt with the
maturities of financial need i.e, the maturity
of source of fund should match the nature of
asset to be financed
6. Total Assets
Short-term
Debt
Fluctuating Current Assets
Long-term
Permanent Current Assets Debt +
Equity
Capital
Fixed Assets
7. CONSERVATIVE APPROACH
This approach favours maximum reliance on long-term sources
of financing. A firm following this approach would finance not
only its fixed assets and its permanent working capital from
long sources but also partly finance its temporary (seasonal)
working capital requirement from long term sources as can be
seen in figure given below:-
8. Conservative Approach
Total Assets
Short-term
Sources
$10M
Temporary Current Assets
$7M
} Permanent
Long-term
Sources
Current Assets
$5M
}
Time
Fixed
Assets
8
9.
*The conservative approach is termed as low profitability and high liquidity
approach to working capital financing because more reliance on the long
term funds would have an impact on returns, although its strengthen the
liquidity position of the business.
*This utilization of funds under this approach may be restricted due to the
capacity of the firm to bear its day to day obligation and to hold the firm in
order to meet the future contingencies, replacement of any fixed assets, to
prevent the insolvency and to provide the sufficient funds to meet the
pressure of seasonal requirement or to meet the peak level working capital
need.
10. Advantages of the conservative approach:
*High liquidity.
*Solvency.
*Less risk.
*Opportunity to earn income by investing the
idle fund in short term marketable securities,
which explained by the diagram below:-
11. Conservative approach to working capital financing
Short term
source of
financing
Level of assets
b
a
Y
X
Long term
source of
financing
Fixed assets
Time
13. AGGRESSIVE APPROACH
Under this approach C.A are maintained just to make the C.L
without keeping any cushion for the variation in working
capital need. This core W.C. is financed by long term
sources of capital and seasonal variation are meet through
short term borrowing. Adaptation of this strategy will
minimize the investment in the net working capital and it
lowers the cost of financing W.C.
14. A working capital policy is called an aggressive policy if the firm
decides to finance a part of the permanent working capital by
short term sources. So, the short term financing under
aggressive policy is more than the short term financing under the
hedging approach. The aggressive policy seeks to minimize excess
liquidity while meeting the short term requirements. The firm may
accept even greater risk of insolvency in order to save cost of
long term financing and thus in order to earn greater return.
15. “Financing strategy” in Aggressive approach:
• Long-term funds = fixed asset + part of permanent current
assets.
• Short- term funds = part of permanent current assets +
total temporary current asset
16.
17. ZERO WORKING CAPITAL:
Zero Working capital of a company is the situation where it has neither positive
working capital nor negative working capital but the total of current asset may just
be equal to the total of current liabilities. Such a situation is called as Zero
Working capital situation.
When, Total of Current Assets= Total of Current Liabilities
Total of Current Assets-Total of Current Liabilities = 0
18. Explanation of the Concept
In financial terms, zero working capital is the state
where the total accounts receivable, accounts
payable, and inventory is zero. Inventory + Account
Receivables – Accounts Payables = 0.
A company uses its working capital to purchase inventory, sell goods on
credit, collects accounts receivable, and then again purchase inventory.
The amount of working capital deployed in a cash conversion cycle bases
itself as an optimal trade-off between reducing working capital deployed to
purchase inventory, and the potential loss of sales owing to reduced
inventory levels or higher costs owing to longer periods of deferred
payments.
Zero working capital tries to minimize the working capital deployed in the
cash conversion cycle to the extent possible, and if possible, continuing the
process without any working capital at all.
19. One way to implement Zero Working Capital :
is to have a demand-based organization. Demand-based organizations
do everything only as they are demanded: Fill customer orders, receive
supplies, manufacture products, and other functions are done only as
needed. The production facilities run 24 hours a day non-stop
according to the demands within the marketplace. There are no
inventories; everything is supplied immediately as needed.
When is the methodology of a zero working capital process used?
Companies such as Dell, General Electric, and Campbell Soup have implemented zero working
capital to improve their financials.
The shift of zero working capital becomes easy when the company's products are in high
demand, there are few competing products, and when the company commands a demanding
position in the supply chain, with suppliers valuing the company's order.
20. Advantages: ZWC helps the company attain financial and production
economies by-------------------------------
freeing up blocked cash permanently and thereby
raising the company’s earnings
speeding up the production and sales process to reduce lag in cash inflows
As competitive pressure forces companies to make maximum advantage of its
resources, more and more companies look into what is zero working capital
Disadvantage
It is not possible for most firm to achieve zero working capital and infinitely
efficient production.
Liquidity less.
More risky in nature