Module – 3:
Current Assets Management.
Working Capital Management: Concept/Definition, Elements.
Assessment of Working Capital requirement, working capital Forecasting
Techniques, Theories & approaches of working capital Management.
Cash Management: Nature, Functions of Cash Management, Cash
Management, Objectives, Cash surplus Vs. Cash Deficit cash Management Techniques/Processes.
Current
Assets Management.
What
are 'Current Assets?'
Current assets are balance sheet accounts that
represent the value of all assets that can reasonably expect to be converted
into cash within one year. Current assets include cash and cash
equivalents, accounts receivable, inventory, marketable
securities, prepaid expenses and other liquid assets that can be readily
converted to cash.
In the United Kingdom, current assets are also
known as current accounts.
Working
Capital Management
Concept/Definition: Working capital management refers to a company's
managerial accounting strategy designed to monitor and utilize the two
components of working capital,
current assets and current liabilities, to ensure the most financially
efficient operation of the company.
APPROACHES OF THE
WORKING CAPITAL
The approaches of the working capital are classified into two
categories viz the hedging approach and conservative approach:
The hedging approach: Under this approach, the
maturity of the financial resources are matched with the nature of assets to be
financed.
Permanent working capital are financed by the long-term
financial resources and the seasonal working capital requirements are met out
through short term financial resources.
The conservative approach: Acc to this approach, all
requirement of the funds should met out long-term sources. The short-term
resources should be only for emergency requirements
Cash
Management:
Functions
of Cash Management
So as to achieve the
objectives stated above, a finance manager has to ensure that investment in
cash is efficiently utilised. For that matter, he has to manage cash
collections and disbursements efficaciously, determine the appropriate working
cash balances and invest surplus cash. Efficient cash management function calls
for cash planning, evaluation of benefits and costs, evaluation of policies,
procedures and practices and synchronization of cash inflows and outflows.
It is significant to
note that cash management functions, as depicted, are intimately interrelated
and inter-wined.
Cash Management
Goals of Cash Management:
Precisely speaking, the primary
goal of cash management in a firm is to trade-off between liquidity and
profitability in order to maximise long-term profit. This is possible only when
the firm aims at optimizing the use of funds in the working capital pool.
This overall objective can be translated into the following
operational goals:
(i) To satisfy day-to-day
business requirements;
(ii) To provide for scheduled major payments;
(iii) To face unexpected cash
drains;
(iv) To seize potential
opportunities for profitable long-term investment;
(v) To meet requirements of
bank relationships;
Cash
surplus Vs. Cash Deficit cash
Budgeting
A budget is the cornerstone of any sound financial plan. Budgeting
is simply the process of tracking your monthly expenses to determine how you're
really spending your money. By making a list of monthly expenses you can
discover areas where you can reduce or even eliminate spending and expenses. By
preparing a budget, there's a good chance you will free up extra cash to use
for other purposes, like investing.
Investing
Speaking of investing, there is no shortage of places where you
can put that extra cash you uncovered by budgeting. An effective way to manage
your investment dollars is to start a systematic program that allows you to
invest with little pain and effort. If you have a 401(k) plan at work, for
example, you can set it up so that money is automatically deducted from each
paycheck and invested into the plan. You'll get used to the "missing"
income and you'll be ensuring that you're saving for the future.
Credit
Credit can help you in times where you're a little short on cash
or facing a financial emergency. Credit cards are probably the most common and
easily accessible form of credit, but they must be used judiciously to avoid
falling into debt. If you own a home, and have built up some equity, you can
borrow against it in the form of an equity loan or line of credit to obtain
needed cash at a relatively low interest rate.
Generating
Income
Don't overlook the option of generating additional income as an
effective cash management technique. There are many ways you can bring in more
dollars, such as getting a second job, selling unwanted stuff on eBay or
adjusting your tax withholding on your W-4 form to reduce the amount deducted
from your paycheck. If you have a set of unique skills, you could put them to
use by starting a small side business online or out of your home.
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