Working Capital Management in Large Industries
Transcript of Working Capital Management in Large Industries
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Working Capital Management in
Large Industries
Presented by
Vishal Lanjekar
Rohit Shringarpure
Rameez Patel
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Agenda
� Introduction to Working Capital Management (WCM)
� Need for Working Capital Management
� Concepts of Working Capital Management
� Working Capital Types
� Sources of Working Capital
� Adequate working capital
� Good Working Capital?
� Estimation of Working Capital Management
� Case Study SIEMENS India Ltd
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Introduction to Working Capital Mgmt
� Working Capital is the excess of current assets over
current liabilities
� Core component of any business
� Adequate Working Capital key to company as the
objective is:
�Meet day to day cash flow needs.
�Pay wages and salaries when they fall due
�Pay creditors to ensure continued supplies of goods and
services.
�Pay government taxation and provider of capital
dividends and
�
Ensure the long term survival of the business entity.
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Need for Working Capital Management
� Profit gaining is the primeobjective of any company
�
Profit depends of magnitude if sales
� The Gap - Sales does not convertinto magnitude instantaneously
� Hence adequate Working capitalrequired for uninterruptedbusiness operations.
Operation Cycle
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Concepts of WCM
� Gross Working Capital - Sum of current assets
of a company
� Net Working Capital - Is difference of Current
assets and current liabilities
� Net Working Capital = Current Assets
Current Liabilities
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Types of Working Capital
� Fixed or Permanent working capital
± Investment in current assets permanent locked in
business.
� Variable or Temporary working capital
± Any amount over and above the fixed working
capital.
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Sources of Working Capital
� Long term sources (Permanent Working Capital)
± Issue of Shares
± Retained Earnings
± Issue of Debentures
± Long term Debt
� Short term sources (Temporary Working Capital)
± Commercial Banks
± Public deposits
± Various Credits
± Reserves and other Funds
� Combination of both
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Adequate Working Capital (Advantages)
� Increase in debt capacity and goodwill
� Increase in production inefficiency
� Exploitation of favorable opportunities
� Meeting contingencies adverse changes
� Available cash discount
� Solvency and efficiency fixed assets
� Attractive dividend to shareholders
Disadvantages
Vice versa of
the
advantages if
Working
Capital isinadequate
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Good Working Capital The Blueprint
� General Actions
± Planning standards for Stock days, Debtors days
and Creditors days
± Educate staff about working capital
� Action on Stocks
± Adequate Stock Management
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Good Working Capital The BlueprintContd
� Action of Debtors and Customers
± Granular assessment of new customers
± Avoid poor paying customers
± Focus on Quality than Quantity
� Action on Creditors
± Do not pay invoices too early to take advantage of
credit offers
± Establish a register of creditors to ensure they are paidon a given date
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Estimation of Working Capital
Percentage Sales Method
� Ratio is determined for estimating future working capitalrequirement
� Generally based on past history of management
� Varies from Industry to Industry
� Depends a lot on decision maker
� Hence not universally acceptable
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Estimation of Working CapitalContd
Operation Cycle Approach The known gap
� Raw materials and stores storage space - R
� Work in process stage -W
� Finished goods inventory stage -F
� Debtors collection stage - D
Duration of Operation Cycle
� Sum of all the above less credit (C)
So in short OC = R+W+F+D -C
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Case Study Siemens India Ltd
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Introduction
� SIEMENS India is a 55% subsidiary of SIEMENS AG
Germany
� Leader in Electrical and Electronic Engineering
Sector
� Established in 1957
� In India it has 15 manufacturing plants and 16
Sales offices.
� More than 500,000 people worldwide and
presence in more than 190 countries
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Objective of the Study
� To understand the working capital management
of SIEMENS India
� Analyze the Annual Reports of the company for
last 4 years
� Provide insight on observation and analysis of
the Annual Reports
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Analysis
� The reports analyzed were from 2006 to 2009 for
period of 4 months
� The Analysis was based on
± Statement of Working Capital Requirement
± Statement of Changes in Working Capital
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Particulars2005-06 2006-07 2007-08 2008-09
A) Current Assets: -
i) Inventories
ii) Sundry Debtors
iii) Cash & Bank Balance
iv) Other Current Assets
v) Loans & Advances
B) Current Liabilities:
i) Current Liabilities
ii) Provisions
Working Capital (A-B)
Add: Provision for Contingencies
Net Working Capital Requirement
4,842,246
11,097,716
9,394,447
3,597
4,164,082
29,502,088
24,275,052
3,415,310
27,690,362
1,811,726
--
1,811,726
7,490,509
23,810,524
4,636,219
-
4,754,188
40,691,440
30,003,464
5,283,371
35,286,835
5,404,605
--
5,404,605
7,621,143
34,327,991
9,130,895
-
6,173,220
57,253,249
41,868,243
7,272,047
49,140,290
8,112,959
--
8,112,959
9,721,971
34,583,115
14,449,022
-
10,457,640
69,211,748
40,585,370
12,695,145
53,280,515
15,931,233
--
15,931,233
Statement of Working Capital Requirement
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Observation Statement of Working Capital
� Observed that current asset keeps on increasing over the
years
�This is due to the increase in inventories, increase in debtors,loans & advances.
� There is rise in current liabilities
� This means the requirement of working capital is more for all
the years.
�The rise in working capital shows the positive trend.
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Statement of Changes in Working Capital
Particulars Previous Year Current Year Effect on Working Capital
ncrease Decrease
A) Current Assets: -
i) nventories
ii) Sundry Debtorsiii) Cash & Bank Balance
iv) Loans & Advances
Total Current Assets:
B) Current Liabilities:
i) Current Liabilities
ii) Provisions
Total Current Liabilities:
Working Capital (A-B)
Net ncrease Or Decrease n
Working Capital
7,621,143
34,327,9919,130,895
6,173,220
57,253,249
41,868,243
7,272,047
49,140,290
8,112,959
9,721,971
34,583,11514,449,022
10,457,640
69,211,748
40,585,370
12,695,145
51,280,515
17,931,233
9,818,274
2,100,828
255,1245,318,127
4,284,420
1,282,873
5,423,098
9,818,274
8,112,959 8,112,959 15,241,372 15,241,372
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Observation- Changes in Working Capital
� An increase in current asset increases working capital
� A decrease in current assets decreases in working capital
� An increase in current liabilities decreases working
capital.
� A decrease in current liabilities increase working capital
� The company should look in to the proper current
liabilities.
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Conclusion
� Working Capital Management is the one key
to any successful business
� It represents the direct relationship between
company sales and day to day operations
� Hence it is important to for every company to
focus on having an adequate working capital.
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Bibliography
� Siemens India website http:// www.siemens.co.in
� Siemens annual reports -ww.siemens.co.in/en/index/investor/annual_report.htm
� Book of working capital management Dr.P.Periasamy
� Economic Times website http://
economictimes.indiatimes.com
� Money Control website http://www.moneycontrol.com
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Thank You