Detailed Contents xiii Preface About the Book About the Author Acknowledgements iii v vii ix CHAPTER 1 Introduction 1 Introduction 2 Definitions 2 Review of Literature 3 Types of Working Capital 3 Gross Working Capital 4 Net Working Capital 4 Permanent Working Capital 4 Temporary Working Capital 4 The Working Capital Cycle 4 Factors Determining Working Capital 5 Production Policies 5 Nature of the Business 5 Length of Manufacturing Process 5 Credit Policy 5 Rapidity of Turnover 6 Seasonal Fluctuations 6 Fluctuations of Supply 6 Growth and Expansion Activities 6
xiv Working Capital Management Estimating the Amount of Working Capital 6 Estimation of Components of Working Capital 6 Percent of Sales Method 6 Operating Cycle Approach 7 Operating Cycle 7 Management of Different Components 8 Management of Cash 9 Motives for Holding Cash 9 Cash Management Basic Problems 10 Management of Inventories 11 New Trends in Financing Working Capital by Banks 13 Summary 14 Keywords 15 References 15 Practical Problems 16 CHAPTER 2 Operating Cycle & Estimation of Working Capital 23 Introduction 24 Permanent and Temporary Working Capital of Arising Firm 25 Sources of Working Capital 26 Long-term Loans 26 Short-term Loans 26 Line of Credit 26 Trade Credit 26 Inventory Financing 27 Asset-based Financing 27 Raising Working Capital by Financing its Current Assets 27 Long-term Sources of Working Capital 27 Short-term Sources of Working Capital 28 Sources of Additional Working Capital 29 Summary 29 Keywords 30 References 30 Practical Problems 31
Detailed Contents xv CHAPTER 3 Cash Management 61 Introduction 62 Cash Management 62 Motives for Holding Cash 63 Transaction Motive 63 Precautionary Motive 63 Speculative Motive 63 Compensation Motive 63 Objectives of Cash Management 63 Cash Management Basic Problems 64 Controlling Level of Cash 64 Preparing Cash Budget 64 Consideration of Short Cost 64 Availability of other Sources of Funds 64 Controlling Inflows of Cash 64 Concentration Banking 65 Lock-box System 65 Control Over Cash Flows 65 Investing Surplus Cash 66 Determination of Surplus Cash 66 Determination of Channels of Investment 66 Cash Management Models 66 Baumol Model 66 Miller-Orr Model 68 Cash Budget 70 Preparation of Cash Budget 70 Summary 78 Review Questions 78 Keywords 78 References 79 Practical Problems 79
xvi Working Capital Management CHAPTER 4 Marketable Securities/Money Market Instruments 91 Introduction 92 Reasons for Holding Marketable Securities 92 GAAP Treatment of Marketable Securities 92 Benefits and Functions of Money Market 92 Money Market & Capital Market 93 Money Market Futures and Options 93 Money Market Instruments 93 Treasury Bills (T-Bills) 93 Repurchase Agreements 94 Commercial Papers 94 Certificate of Deposit 95 Banker s Acceptance 95 Money Market Account 96 Money Market Index 96 Methods 96 Source of Short-term Finance 97 Trade Credit 97 Bank Credit 97 Customer s Advances 98 Instalment Credit 99 Loans from Cooperative Banks 99 International Money Market Instruments 99 New Trends in the Stock Markets 102 Stock Market Alliances 102 Crosslisting 103 Stock Market Concentration 103 Interbank Clearinghouse Systems 104 The International Bond Financing 104 Foreign Bonds 105 Eurobonds 105 Global Bonds 106 Currency Option Bonds 106 Currency Cocktail Bonds 106 Types of International Bonds 106 Straight Bonds 107
Detailed Contents xvii Fixed-rate Bonds 107 Floating-rate Notes 107 Convertible Bonds 107 Bonds with Warrants 108 Other Bonds 108 International Loans 108 The Spread and the Reference Rate 108 Risk Sharing and Reduction 109 Advantages of International Loans 109 Disadvantages of International Loans 109 Syndicated Loans 110 Direct Loans 110 Intracompany Loans 111 Drawbacks of Parallel and Back-to-back Loans 112 Summary 114 Review Questions 114 Keywords 115 References 115 CHAPTER 5 Management of Receivables 117 Introduction 118 Meaning of Receivables Management 119 Features of Receivables Management 119 Costs Associated with Maintaining Receivables 119 Capital Costs 120 Administration Costs 120 Delinquency Costs 120 Bad-debts or Default Costs 121 Control of Accounts Receivables 121 Ratios Controlling Accounts Receivables 121 Objectives of Receivables Management 123 Factors Involving in Receivable Management 124 Credit Management 124 Optimum Credit Policy 124 Credit Reating 125
xviii Working Capital Management Credit Period 125 Credit Standard 126 Collection Policy 127 Credit Evaluation 127 Approches for Credit Evaluation 128 Traditional Credit Analysis 128 Sequential Credit Analysis 128 Numerical Credit Scoring 128 Discriminant Analysis 128 Risk Classification Scheme 129 Credit Grainting Decision 129 Methods for Monitoring Accounts Receivables 130 Traditional Approach 130 Collection Margin Approch or Payment Pattern Approach 131 Accounts Receivables Aging Schedule 131 Credit Scoring Model 133 Credit Rating Agencies 133 Rating Related Products and Activities 136 Non-rating Related Activities 137 The Rating Process 137 Analytical Framework Used by CRAs 138 Credit Risk Management Practices of Commercial Banks in India 139 New Basel Accord Issues in the Indian Context 139 Summary 140 Review Questions 140 Keywords 141 References 141 Practical Problems 142 Case Study 150 Accounts Receivable Inventory Post-sale 150 Kadent Healthcare Winds-down Burdensome Hospital 150 CHAPTER 6 Inventory Management 153 Introduction 154 Inventories 154 Nature of Inventories 154
Detailed Contents xix Need to Hold Inventories/Purpose of Materials Management 155 Alternative Reasons for Inventories 156 Materials Systems and Related Costs 156 Functions of Materials 157 Materials Systems 158 Lot Size Recorder Point Policy 158 Fixed Order Interval Schduling Policy 158 Optional Replenishment Policy 158 Other Types of Materials Systems 158 Deterministic Materials Models 159 Finite Replenishment Rates 160 Model with Quantity Discounts 161 Sensitivity Analysis 161 Probabilistic Materials Models 162 Safety Stock And Service Levels 162 Materials Control of Slow Moving Items 163 Nature of Slow Moving Items 163 Some Materials Policies for Slow Moving Spares 163 Multi-echelon Materials Systems 163 Materials Requirement Planning 164 Materials Control Decisions 164 Evils of Excess Materials 165 Determination of Stock Levels 165 Control Through Ratio Analysis 166 Input-output Ratio Analysis 167 Perpetual Materials System 167 Other Materials Control Systems 168 Scientific Inventory Control 168 Scientific Inventory Management 168 Selective Inventory Management 169 Inventory Control Decisions 169 Economic Order Quantity (EOQ) 170 Assumptions of EOQ 170 Inventory Turnover Ratio 171 ABC Analysis 172 Advantages of ABC Analysis 173 Disadvantages of ABC Analysis 174 Ved Analysis 174 Superimposition of Ved on ABC 174
xx Working Capital Management FSN Analysis 175 FNS Analysis 175 SDE Analysis 176 HML Analysis 176 Just In Time (JIT) 177 Exchange Curve 177 Use of Exchange Curve 177 Summary 178 Review Questions 178 Keywords 179 References 180 Practical Problems 180 CHAPTER 7 Ratio Analysis for Working Capital 195 Introduction 196 Ratio Analysis 197 Meaning of Ratio Analysis 197 Important Uses of Ratio Analysis 197 Other Uses of Ratio Analysis 197 Financial Statement Analysis 198 Ratios for Measuring Efficiency of Working Capital 198 Objectives 198 Standard of Comparison 199 Types of Ratios 199 Liquidity Ratios 199 Activity Ratios 200 Profitability Ratios 201 Capital Structure/Liverage Ratios 202 Classification of Ratios by Different Authors 204 List of Various Ratios 204 Terminology Used in Ratios 204 Formulae of Ratios Used for Performance of Working Capital 205 Liquidity Ratios 205 Working Capital Ratios 205 Turnover Ratios/Investiment Civilization Ratios 206 Expenses Ratios 207
Detailed Contents xxi Meaning and Concept of Flow of Funds 207 Procedures for Preparing a Funds Flow Statement 207 Calculation of Funds from Operations 209 Summary 211 Review Questions 211 Keywords 212 References 213 Practical Problems 214 CHAPTER 8 Liquidity & Government Policy 231 Introduction 232 Measurement and Determinant of Liquidity 232 Meaning of Liquidity 232 Definition of Liquidity 232 Bill Financing Historical Perspective 233 Pattern of Working Capital Management in India 235 Liquidity Management in Banks 237 Quality of Assets 237 Liquidity 237 Risk 238 Trends in Financing Working Capital by Banks 238 Dhejia Committee Report 239 Narasimham Committee 240 Tandon Committee Report 240 Chore Committee 243 The Sukhamoy Chakravarty Committee (1985) 244 Vaghul Committee 244 Kalyana Sundaram Committee 244 Kannan Committee 244 Kapur Committee 250 Measures to Promote Bill Market 250 Bill Financing 253 Trends Abroad 253 Domestic Trends 254 Removal of Operational Constraints 258 Recommendations of Working Group on Discounting of Bills 259
xxii Working Capital Management Constitution of Working Group 260 Members of the Working Group 261 Members Co-opted to the Main Group 261 Summary 262 Review Questions 262 Keywords 263 References 263 CHAPTER 9 Letters of Credit 265 Introduction 266 Methods of Settling Debts 267 Advance Remittance 267 Open Account 267 Consignment Sale 267 Bill for Collection 268 Letter of Credit 268 Parties to a Credit 268 Advantages of Letter of Credit 269 To the Exporter 269 To the Importer 270 Disadvantages/Limitations 270 Types of Letters of Credit 270 Payment, Acceptance and Negotiation Credits 271 Payment Credit 271 Negotiation Credit 272 Acceptance Credit 273 Deferred Payment Credit 273 Revocable and Irrevocable Credits 274 Article 9 (a) 276 Confirmed and Unconfirmed Credit 276 With Recourse and Without Recourse Credits 278 Fixed and Revolving Credits 279 Transferable Credits 281 Back-to-back Credits 283 Red Clause and Green Clause Credits 284
Detailed Contents xxiii Standby or Guarantee Credits 285 Summary 286 Review Questions 286 Keywords 287 References 288 CHAPTER 10 Dividend Policy & Working Capital 289 Introduction 290 Meaning and Definition 290 Dividend Payout 290 Dividend Payment 291 Cash Dividend 292 Forms of Payment 292 Cash 292 Stock 293 Property 293 Dates 293 Declaration Date 293 Ex-dividend Date 293 Record Date 294 Payment Date 294 Dividend-reinvestment Plans 294 Benefit to Shareholders 294 Cons 294 Factors Influencing the Dividend Policy of the Firm 295 Dividend Payment Ratio 295 Stability of Dividends 295 Legal, Contractual and Internal Constraints and Restrictions 296 Tax Consideration 296 Capital Market Consideration 296 Inflation 296 Dividend Theories 296 Miller-Modigliani Theory 297 Dividend Decision and Tax Considerations 297 Before Introduction of Dividend Tax 298 After Introduction of Dividend Tax 298
xxiv Working Capital Management Walter s Approach to Dividend Policy 298 Dividend Discount Model 300 Modigliani and Miller (M-M) Dividend Irrelevancy Model 300 Government Policies Regarding Dividend Practices in SOEs of India 300 Bonus Shares 301 Profit 301 Concept of Gross Profit and Net Profit 302 Profit Analysis 302 Nature of Profit 303 Function of Profit 303 Profits as a Residual Income 304 Measurement Policies 304 Depreciation 304 Inventory Valuation 305 Unaccounted Value Changes 305 Summary 306 Review Questions 306 Keywords 307 References 308 Practical Problems 308 CHAPTER 11 Logistics Management 311 Introduction 312 Logistical Competitive Advantage 313 Supply Chain Management 313 The Basic Tasks of the Supply Chain 314 Advantages 316 Strategic Logistics Planning Process 317 Step 1 Corporate Vision 317 Step 2 Logistics Strategic Analysis 318 Step 3 Logistics Planning 318 Step 4 Managing Change 319 Operational Objectives 319 Right Response 319 Right Quality 320 Right Quantity 320
Detailed Contents xxv Right Value 320 Right Costs Trade-offs 321 Right Information 321 Enterprise Resource Planning (ERP) Tools 321 Summary 322 Review Questions 322 Keywords 323 References 324 CHAPTER 12 Factoring in Small and Medium Enterprises 325 Introduction 326 Factoring Definition 326 Characteristics of Factoring 326 Different Types of Factoring 328 Disclosed 328 Undisclosed 328 Recourse Factoring 328 Non-recourse Factoring 328 Advantages of Factoring 329 Disadvantages of Factoring 329 The cost of factoring and invoice discounting 329 Discount Charges 330 Credit Management Fees 330 Credit Protection Charges 330 Customer Characteristics 330 Assessment of a Factoring Customer 331 Financial Performance 331 The Quality of the Security 331 The Quality of the Management 331 The Process of Factoring 332 Import and Export Factoring 332 Forfaiting 333 Characteristics of Forfaiting 333 Risks to Forfaiter 334 The Mechanics of Factoring 334
xxvi Working Capital Management Status of International Factoring 336 Factoring in India 337 Capital Infusion and Fund Raising 338 Presence of Factoring Facilities in India 338 Companies Offering Factoring Services in India 339 Keywords 340 Summary 340 Review Questions 340 References 341 Practical Problems 341 GLOSSARY 347 INDEX 353