In this presentation, we will talk about the importance of working capital in marketing set up, several components of working capital and criticality of inventory. To know more about Welingkar School’s Distance Learning Program and courses offered, visit: http://www.welingkaronline.org/distance-learning/online-mba.html

1. Learning Objectives
Understand
The role and importance of working capital in a
marketing set up.
The several components of working capital
and how to control them.
Criticality of inventory and credit management.
Chapter Seven Working Capital 1

2. Structure
7.1 Introduction.
7.2 Credit Checks
7.3 Stocks / Inventory
7.4 Summary
Chapter Seven Working Capital 2

3. 7.1 Introduction.
Working capital in simple terms means capital required for
day to day running of the business. In accounting terms it is a
difference between current assets and current liabilities.
Any business will need money to invest in stocks and
inventory so necessary to service orders received and its
customers. The actual amount of inventory required varies
from company to company depending on nature of business
requirements, raw materials used and procedure for
procuring them. Stocks block funds which are available for
use elsewhere. Thus they cost the company. Marketing ,
therefore, must plan inventory critically.
Chapter Seven Working Capital 3

4. 7.1 Introduction.
Working capital is also required to finance sales made on
credit. Here until money is received from customers
company’s funds are blocked in receivables. Credit sales are,
however, essential to maintain healthy volume of sales.
Sales on credit have to be made if industry conditions require
them. Credit has to be extended to beat competition.
Extended credit terms are to be offered to important large
clients. This is particularly so in B2B markets.
To manage funds so blocked in receivables, marketing must
ensure speedy recovery of dues as per terms of sale.
Chapter Seven Working Capital 4

5. 7.1 Introduction.
Credit sales have following associated costs :
Cost of capital blocked in receivables.
Cost of control to limit receivables to secure recovery.
Cost of collection involved in recovering outstanding,
maintaining follow up, restricting period of collection etc.
Cost of delinquency where buyer fails to adhere to terms
of credit. There are delays and funds are blocked for a longer
period.
Cost of default where party does not pay and debt has to
written off. This is a major cost.
Chapter Seven Working Capital 5

6. 7.2 Credit Checks
To ensure that the benefits accrued out of credit extension ,
do more than cover the several costs associated with such
sales on credit, adequate credit checks need to be exercised
by the marketing function. To reduce the risks of sales on
credit one must very carefully evaluate the creditworthiness of
the party to whom credit is being granted.
The best tool available for this purpose is ‘spot ground
checks’.
While granting credit it is essential that assessment is carried
on the basis of business standing, resource ownership,
impressions of associates and also history of party’s past
business dealings.
Chapter Seven Working Capital 6

7. 7.2 Credit Checks
While granting credit to a distributor you must survey his
retailers and find out business behaviour and credentials of
the distributor in respect of other products. Any gap in market
servicing of particular products may indicate supply
interruption. Cause for such stoppage in service must be
examined to rule out payment defaults.
In case of industrial buyer a visit to the buyer can reveal a lot
of data required for credit rating.
While granting credit, limits must be set and they must be
adhered under all circumstances. Your banker assists you in
credit evaluation of your customers.
In case of default greater care, including cash sales for a
certain period, has to be exercised before resuming credit.
Chapter Seven Working Capital 7

8. 7.3 Stocks / Inventory
In a manufacturing industry inventory forms a major part of
working capital.
Costs associated with Inventory.
Cost of capital since the company’s funds which can be
employed elsewhere are blocked in stocks.
Cost of controlling inventory , keeping track of all items to
ensure customer is continuously serviced and all items are
moving.
Cost of holding inventory covers warehousing, security,
insurance, license fees [if applicable] and salaries of staff
handling and accounting for inventory.
Cost of damages in storage and movements.
Cost of shrinkage , pilferages, thefts and obsolescence.
Chapter Seven Working Capital 8

9. 7.3 Stocks / Inventory
Inventory management is critical, as if there is more of
inventory, you incur extra costs of capital, holding and
obsolescence.
On the other hand if you have less than required stocks, you
will have interrupted supplies to customers leading to
customer dissatisfaction, loss of sales and even lost
customers.
Working capital control also requires cash collected from
customers to be immediately transferred into operations.
Expenses paid in advance, deposits with outside parties and
advances paid to suppliers form balance part of working
capital. Hence it is prudent to obtain credit from suppliers of
goods as well as from transporters or forwarding agents.
Chapter Seven Working Capital 9

10. 7.4 Summary
Working capital in simple terms means the capital required fro
day to day running of the business.
In accounting terms the amount is the difference between
current assets and current liabilities.
Cost associated with Credit Sales
1. Cost of capital.
2. Cost of control.
3. Cost of collection.
4. Cost of delinquency.
5. Cost of default.
To reduce the risks of sales on credit one must very carefully
evaluate the credit worthiness of the party to whom credit
is being extended.
Chapter Seven Working Capital 10

11. 7.4 Summary
Post evaluation of credit worthiness of the party one must
also set limits of credit to be extended. These limits can
be both time limit and amount limit. Time limit will set up to
what length of time credit will be extended to that party
and similarly amount limit will specify the maximum
amount for which credit can be extended.
Cost associated with Inventory
1. Cost of capital.
2. Cost of control.
3. Cost of holding.
4. Cost of damages.
5. Cost of shrinkage
6. Cost of obsolescence.
Chapter Seven Working Capital 11

12. 7.4 Summary
Excess inventories can lead to following costs:
1. Cost of capital.
2. Cost of holding. [storage, insurance, damages etc.]
3. Cost of obsolescence. [ products getting unusable either
due to date expiry or newer versions coming in the
market]
Chapter Seven Working Capital 12

13. This brings an end to our session seven on Working Capital.
Next we move to session eight on
“Budgets”
Till then
“Best Luck”
Chapter Seven Working Capital 13

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