APPROACHES TO WORKING CAPITAL MANAGEMENT

·         APPROACHES TO WORKING CAPITAL MANAGEMENT

·         MGMT OF WORKING CAPITAL

·         FINANCIAL MANAGEMENT

·         STRATEGIC MGMT

1.       CONSERVATIVE APPROACH

2.       AGGRESSIVE APPROACH

3.       MATCHING APPROACH

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 REQUIREMENTS

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

1. TOTAL OF CURRENT ASSETS= TOTAL OF CURRENT LIABILITIES
2. 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