A briref understanding on Working capital and Cashflow. How it is relevant and how it shall be monitored.

1. By CA Aditya Singhvi

2. Wednesday, June 3, 2020 2
• What is working capital?
• Working capital cycle and major components
• Factors affecting WC and other points
• Cash flow and its importance
• Breakup of Activities
• Cash flow in today’s scenario

3. Wednesday, June 3, 2020 3
What is working capital?
• Capital required for day to day business
activities or business cycle
• Refers to operating liquidity for time gap
between receivables and payables
• Working capital = Current Assets – Current
Liabilities
• Current portion refers to asset or liability
maturing within 12 months
Liabilities Assets
Reserves and Surplus
Long term Liabilities
Fixed Assets
Current Liabilities
• Creditors
• Other payable
Current Assets
• Debtors
• Inventory
• Cash and bank

4. Wednesday, June 3, 2020 4
Cash
Raw
Material
WIP
Finished
Goods
Sales
Receivables
• Time from buying of raw material and
realizing the cash against sale of final
product is working capital cycle(WCC)
• WCC = Inventory days
+Debtor days
-Creditor days
• Days= Number of days taken to be
converted into cash or final realization
• For Eg. Debtor Days mean for every
debtor cash will be received after x
number of days
• Duration of business cycle determines
requirement of funds or cash to run
business operations in normal course

5. Wednesday, June 3, 2020 5
April 1 2020
RM Delivery to
Factory after
30days as
agreed
RM of Rs.1,000
April 30 2020
May 30 2020
Processing done.
Converted into
Final product
Processing and
other charges-
Rs 500
June 15 2020
FG holding and
converted into
sales
Margin of Rs
200
Credit period of
30 days
July 15 2020
Transaction Amount Head Date of
transactio
n
Days
Raising order 1-Apr-20 0
Order
delivered
1000 RM
(Inventory)
30-Apr-20 30
Processing 1500 WIP
(Inventory)
30-may-20 30
Delivered to
customer
1500 FG
(Inventory)
15-jun-20 15
Credit period 1700 Debtors 15-jul-20 30
Total Days
Fund blocked
105
Less:
Credit
allowed by
Vendor
1000 Creditor 30
WCC 1580 75
Ramesh(Vendor)
Suresh(Customer)

6. Wednesday, June 3, 2020 6
Nature
of
Busines
s
Productio
n Cycle
Credit
Policy
Time lag
between
Activities
Sales
Policy
Type of
Industry
Vendor
Negotiat
ion
Company
Policy
 Changes in production/ sales affect WC
 External factors like Covid, Market slowdown, Seasonal market
 Nature of business determines requirement of WC to a larger extent. Eg KEC and CEAT
 Industry performance and competition acts as external factors

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 Ideal Ratio for WC is 2:1 i.e. Current Assets: Current Liabilities= 2:1
 The ideal ratio differs for industry to industry. For eg. Retail industry can have lower than
1.50 :1 because it has high turnover and lower debtors
 Higher ratio need not be always good. It means either company is not realizing debtors on time
or money is getting blocked in inventory or cash is remaining idle.
 Lower ratio means company is not having enough capital to sustain its operations in regular
course.
 Negative Working capital- Receiving in advance and paying at deferred terms. Certain
companies do work on this model.
 Continuous monitoring is required to reduce the cycle and maximize working capital

8. Wednesday, June 3, 2020 8
 Timely collection from debtors and reduction in overdue
 Negotiate for deferred payment terms with vendor rather than advance
 Identify Non value added assets and try to recover dues
 Continuous monitoring of inventory so that same is converted in cycle
asap

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What is CashFlow?

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 Movement of money is cashflow. Simple though!!!!
 Why it is important?
 Solvency
 Liquidity
 Financial position
 Timing of cashflow
 Inflow (Kaha se aa raha he?)
 Outflow (Kaha gaya?)

11. Wednesday, June 3, 2020 11
Sample Cash Flow
Liabilities Assets
Reserves and Surplus
Long term Borrowings
Fixed Assets
Short term Borrowings
Other Current
Liabilities
• Creditors
• Other payable
Current Assets
• Debtors
• Inventory
• Cash and bank
Financing Investing
Operating

12. Wednesday, June 3, 2020 12
 Earnings before non cash expenditure and finance is starting point i.e. Earnings before
Depreciation, Finance cost, Amortization
 Adjustments are done with respect to change in debtors, inventory and creditors and any other
current asset or liability
 Any increase in CA line item i.e. Increase in Debtors or inventory will be seen as reduction of
cash balance as funds are getting blocked and cash has not come in
 Any decrease in similar line item will be seen as Increase in cash balance
 Any increase in CL line item i.e. Creditors to be seen as increase in cash and vice versa for
reduction in CL will be seen as decrease in cash and bank
 This head denotes movement of cash in regular operations of business

13. Wednesday, June 3, 2020 13
 Assets purchased – Decrease in Cash
 Assets sold- Increase in Cash
 Assets here refer to Fixed Assets and investments other than cash
 Eg. Machinery, IT assets, Buildings, Fixed Deposits for long term

14. Wednesday, June 3, 2020 14
 Names suggests any mode of financing either equity or debt will come under this head
 All other line items related to these will be considered under this
 Loans taken, Infusion of equity, Dividend received- Increase in Cash
 Loans repaid, dividend paid, interest cost- Decrease in cash

15. Wednesday, June 3, 2020 15
Importance
 Projection of future cashflows
 To understand surplus and deficit and understand requirement of same
 To plan future activites in much better way
 To take action in disaster situation like COVID
How to Improve?
 Payment to be done only when due.
 Incentivize customers to make quick payments
 Reduction in overdue
 Have a standard payment cycle
 Planning of investing activities i.e. capex in line with business scenario
 Try to get additional credit from suppliers
 Plan your payment well in advance