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Working Capital Management : Strategic Techniques and Choices
By Bhavesh P. Chadamiya

First Published : 2013
ISBN : 9788177083439
Pages : 198
Binding : Hardbound
Size : 5 x 9
Price : US$ 37

Financial needs of a modern enterprise may be classified into two categories: (a) fixed capital, and (b) working capital. Fixed capital includes land and buildings, plant and machinery, and tools and implements. The requirement of finance to purchase fixed capital is essentially long-term in nature. Working capital, short-term in nature, is required to purchase raw materials and meet day-to-day administrative and other such expenses.

Management of working capital is important because efficient handling of working capital plays a crucial role in the successful functioning of a business enterprise. Working capital facilitates the utilisation of capacities created by fixed capital.

     Excessive working capital leads to unremunerative use of scarce funds while inadequate working capital interrupts the smooth run of business activity. Hence, both the situations impair profitability. 

Sound working capital management, by optimising the use of funds, enhances profitability. It improves liquidity by focusing attention on flow of funds through proper management of cash, receivables, inventories and short-term sources of funds. While efficient working capital management can do much to ensure the success of a business, its inefficient management can lead not only to loss of profits but also to ultimate downfall of what otherwise might be considered as a promising concern.

This book provides a comprehensive account of different aspects of working capital management, including, inter alia, size and adequacy of working capital, structure and efficient utilisation of working capital, financing pattern of working capital and factors influencing investment in working capital.

1. Working Capital: Conceptual Framework
1.1 Introduction
1.2 Meaning of Working Capital
1.3 Classification of Working Capital
1.3.1 On the Basis of Concept
1.3.2 On the Basis of Time
1.4 Characteristics of Working Capital
1.5 Principles of Working Capital Management
1.5.1 Principle of Risk Variation
1.5.2 Principle of Cost of Capital
1.5.3 Principle of Equity Position
1.5.4 Principle of Maturity of Payment
1.6 Objectives of Working Capital Management
1.7 Components of Working Capital
1.7.1 Current Assets
1.7.2 Current Liabilities
1.8 Factors Determining Need for Working Capital
1.8.1 Nature of Business
1.8.2 Size of Business
1.8.3 Production Cycle Process
1.8.4 Production Policy
1.8.5 Terms of Purchase and Sales
1.8.6 Seasonal Variation
1.8.7 Growth and Expansion
1.8.8 Level of Taxes
1.9.9 Dividend Policy
1.8.10 Other Factors
1.9 Importance of Working Capital Management
1.9.1 Raises Goodwill
1.9.2 Maintains Liquidity
1.9.3 Offers Security
1.9.4 Benefit of Economical Purchase
1.9.5 Increasing Production Efficiency
1.9.6 Easily Borrowing of Funds
1.10 Sources of Working Capital
1.10.1 Permanent or Fixed Sources
1.10.2 Temporary or Variable Sources
1.11 Steps in the Determination of Working Capital
1.12 Working Capital Management: Profitability and Risk
1.13 Financing Current Assets: Different Approaches
1.13.1 Matching Approach
1.13.2 Conservative Approach
1.13.3 Aggressive Approach
1.14 Adequacy of Working Capital
1.14.1 Advantages of Adequate Working Capital
1.14.2 Disadvantages of Inadequate Working Capital
1.14.3 Disadvantages of Excessive Working Capital
2. Inventory Management
2.1 Introduction
2.2 Concept of Inventory
2.2.1 Meaning
2.2.2 Definition
2.3 Concept of Inventory Management
2.3.1 Meaning
2.4 Objectives of Inventory Management
2.5 Type of Inventory
2.6 Motive for Holding Inventory
2.7 Inventory Management
2.8 Inventory Control Techniques
2.8.1 ABC Analysis
2.8.2 Bin Card (Stock Card)
2.8.3 Economic Order Quantity (EOQ)
2.8.4 Stock Levels
3. Management of Receivables
3.1 Introduction
3.2 Meaning of Receivables
3.3 Objectives of Maintaining Receivables
3.3.1 Achieving Growth in Sales
3.3.2 Increasing Profits
3.3.3 Meeting Competition
3.4 Costs of Maintaining Receivables
3.4.1 Capital Cost
3.4.2 Collection Cost
3.4.3 Administrative Cost
3.4.4 Default Cost
3.5 Optimum Credit Policy
3.6 Credit Policy Variables
3.6.1 Credit Standards
3.6.2 Credit Terms
3.6.3 Collection Policy
3.7 Determinants of Size of the Receivables
3.7.1 Volume of Credit Sales
3.7.2 Credit Policies
3.7.3 Period of Credit
3.7.4 Cash Discount
3.8 Benefits of Receivables
3.8.1 Growth in Sales
3.8.2 Increase in Profits
3.8.3 Capability to Face Competition
3.9 Factors Affecting Investment in Receivables
3.9.1 General Factors
3.9.2 Specific Factors
3.10 Formulation of Credit Policy
3.10.1 Lenient Credit Policy
3.10.2 Stringent Credit Policy
3.11 Components of Credit Policy
3.11.1 Credit Term
3.11.2 Credit Standard
3.11.3 Collection Policy
3.12 Credit Evaluation
3.12.1 Collection of Information
3.12.2 Credit Analysis
3.12.3 Credit Decision or Credit Limit
3.13 Credit Control
3.13.1 Formulation of Collection Procedure
3.13.2 Monitoring and Controlling Receivables
4. Management of Cash
4.1 Introduction
4.2 Meaning of Cash
4.2.1 What is Cash
4.3 Nature or Characteristics of Cash
4.3.1 Cash is an unproductive Asset
4.3.2 Minimum Cash Balance
4.3.3 Shortage of Cash
4.4 Objective of Cash Management
4.4.1 Meaning of Cash Outflows
4.4.2 Minimizing the Cash Balance
4.4.3 Effective Control of Cash
4.5 Significance of Cash Management
4.5.1 Bank Relations
4.5.2 Shield of Technical Inefficiency
4.5.3 Maintenance of Goodwill
4.5.4 Availing Cash Discount
4.5.5 Exploitation of Business Opportunities
4.5.6 Facing Unexpected Events
4.6 Motives for Holding Cash
4.6.1 Transaction Motive
4.6.2 Precautionary Motive
4.6.3 Speculative Motive
4.7 Determining Optimal Level of Cash
4.7.1 Factor Affecting Level of Cash
4.7.2 Optimal Level of Cash
4.7.3 Sources of Cash
4.8 Effective Control of Cash
4.9 Control of Cash
4.10 Cash Flow Analysis (AS-3)
4.10.1 Introduction
4.10.2 Scope
4.10.3 Certain Terms
4.10.4 Purpose of the Statement of Cash Flow
4.10.5 Classification of Cash Flow
4.10.6 Interest and Dividends
4.10.7 Taxes on Income
4.10.8 Data Required
4.10.9 Disclosure Requirements
4.11 Models of Cash Management
4.11.1 Baumol’s Model
4.11.2 Miller-Orr Model
4.12 Cash Conversion Cycle
4.12.1 Types of Float
4.13 What is Cash Budget?
4.13.1 Cash Budget and Working Capital Budget
4.13.2 Importance of Cash Budget
4.13.3 Methods of Preparing Cash Budget
5. Techniques of Leverage Analysis
5.1 Introduction
5.2 Concept of Leverage
5.2.1 Operating Leverage
5.2.2 Financial Leverage
5.2.3 Combined Leverage
6. Various Sources of Finance
6.1 Need for Finance
6.2 Internal Sources of Finance
6.2.1 Personal Savings
6.2.2 Retained Profits
6.2.3 Working Capital
6.2.4 Sale of Fixed Assets
6.3 External Sources of Finance
6.3.1 Ownership Capital
6.3.2 Non-ownership Capital
6.4 Sources of Long-term Finance
6.4.1 Introduction
6.4.2 Meaning and Purpose
6.4.3 Factors Determining Long-term Financial Requirements
6.4.4 Sources of Long-term Finance
6.5 Sources of Short-term Finance
6.5.1 Introduction
6.5.2 Purpose of Short-term Finance
6.5.3 Sources of Short-term Finance
6.5.4 Merits and Demerits of Short-term Finance
6.6 Venture Capital
6.6.1 Features of Venture Capital

7. Calculation of Cost of Capital
7.1 Introduction
7.2 Significance of the Cost of Capital
7.3 Computation of the Cost of Capital
7.4 Weighted Average Cost of Capital
7.5 Marginal Cost of Capital
8. Finance Institutions for Medium and Long-term Finance
8.1 Establishment of Financial Institutions
8.2 All-India Financial Institutions (AIFIs)
8.2.1 All-India Development Banks
8.2.2 Specialised Financial Institutions
8.2.3 Investment Institutions
8.3 State Level Institutions
8.3.1 State Financial Corporations (SFCs)
8.3.2 State Industrial Development Corporations (SIDCs)
8.4 Regulation and Supervision of Financial Institutions
8.5 Finance Institutions: An Assessment
9. Credit Policy Reforms in India
9.1 Allocation of Credit
9.1.1 Allocation of Credit between Government and the Private Sector
9.1.2 Inter-sectoral Allocation of Institutional Credit
9.1.3 Inter-regional Allocation of Credit
9.2 Credit Market Reforms
9.2.1 Measures to Reduce Non-performing Assets (NPAs)
9.2.2 Development of Securitisation Market
9.2.3 Roadmap for Foreign Banks
9.2.4 Complex Financial Products
9.2.5 Credit Derivatives
9.2.6 Credit Information Services



     Bhavesh P. Chadamiya is Assistant Professor at Om Vindhyavasini College of IT and Management, Morbi, Rajkot. He is a Ph.D. scholar in the area of accounting and finance. He has published a number of articles in reputed journals including Journal of Applied Management and Investment; Indian Journal of Applied Research; and Spark International Journal of Management. He has attended more than 20 conferences/seminars at international, national and state levels. He specializes in financial management and cost accounting.

Mital R. Menapara is Assistant Professor at Om Vindhyavasini College of IT and Management, Morbi, Rajkot. She has 3 books to her credit dealing with corporate finance and cost accounting. She did her M.Phil. in 2007 and is currently a Ph.D. scholar. She has published widely in professional journals on subjects related to accounting and finance.

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