Policy Changes 3. Prasun Maheshwari. Cynthia Anggi Maulina. Md Zishan. Saira Banu. Rashmi Ranjan Panigrahi. Nitin Kaushik. Amal Jose. Sanjogta Mody. Rhx Gangblog. Afryna Shukri. Arun Choudhary. Vignesh Narayanan. Allan Angeles Orbita. Dhaval Tahelyani. Ramalingam Chandrasekharan. Zubair Bhatti. Karamchedu Vignani Vijayagopal. Apurv Gautam.
More From NabinSundar Nayak. NabinSundar Nayak. Popular in Working Capital. Aspiring Pua. Shikha Agarwal. Ana VB. Frank Agbeko Torho. Jonas Mondala. Fowziah Nahid Priya. Gauru nk. Dipak Mahalik. Maximum and minimum seasonal funding requirements. Mohomed Alawna. A short summary of this paper. Use the equation below to balance the costs and benefits of introducing the discount policy.
Aggressive versus conservative seasonal funding strategy LG 2; Intermediate a. In this case, the large difference in financing costs makes the aggressive strategy more attractive. Possibly the higher returns warrant higher risks. In general, since the conservative strategy requires the firm to pay interest on unneeded funds, its cost is higher. Thus, the aggressive strategy is more profitable but also more risky. This suggests the firm should carry the large inventory to minimize ordering costs.
The EOQ model is most useful when both carrying costs and ordering costs are present. As shown in part a, when either of these costs are absent the solution to the model is not realistic.
With zero ordering costs the firm is shown to never place an order. Assuming the minimum order size is one, Tiger Corporation would place 2. It refers to that part of total working capital, which is required by a business over and above permanent working capital. It is also called as variable or fluctuating working capital. Estimated production in units X Cost of production per unit without dep. Estimated credit sales in units X Cost of sales per unit without dep.
A large number of factors influence working capital needs of firms. All factors are of different importance. This is because, in such a case, inventories have to be maintained at a low level. Longer the manufacturing process the higher would be the requirements of working capital.
This is the reason why highly capital intensive industries require a large amount of working capital to run their sophisticated and long production process. Business cycle. The raw material procurement varies from industry to industry. In all such cases, the need for working capital will vary in accordance with production plans. Similarly, the decision of the management regarding automation, etc. Conditions of supply. However if supply is erratic, scanty, seasonal, channelised through government agencies etc.
An efficient firm may stock raw material for a smaller period and may, therefore, require lesser amount of working capital. Credit Policy. A firm, which allows liberal credit to its customers may have higher sales but consequently will have larger amount of funds tied up in sundry debtors.
Similarly a firm, which has a very efficient debt collection machinery and offers strict credit terms, may require lesser amount of working capital than the one where debt collection system is not so efficient or where the credit terms are liberal.
Reputed and established concerns can purchase raw material on credit and enjoy many other services also like door delivery, after sales service etc. This would mean that they can easily have large current liabilities.
Therefore the required working capital may not be very high. Market conditions. Growth and expansion:. However, the change may not be proportionate and the increased need for working capital is felt right from the initial stages of growth.
These amounts usually have to be paid in advance. Thus need for working capital varies with tax rates and advance tax provisions. Thus dividend policies affect working capital. Abnormal factors. Recessionary conditions, necessitate a higher amount of stock of finished goods remaining in stock. Similarly, inflationary conditions necessitate more funds for working capital to maintain the same amount of current assets.
Approach to working capital. Approaches 1. Matching or Hedging approach:. It relies heavily on long term financing and is less risky so far as solvency is concerned, however, the funds may be invested in such instruments, which fetch small returns to build up liquidity. This adversely affects profitability. The firm finances a part of its permanent current assets with short term financing. This is more risky but may add to the return on assets. Open navigation menu.
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