Working Capital Management Unit-IV

Note: This is study material, must be used for studying /education

purpose. These all PPTs are only for reference. Study from book/s and
attending lectures are must.
Receivables Management
• Refers to the decisions a business makes regarding its overall credit
and collection polices and the evaluation of individual credit
applicants.
• In this we can understand by motives of RM –
1. Financial Motive
2. Operating Motive
3. Contracting cost Motive
4. Price Motive
Factors in determining receivables policy:
Cost- Collection cost
Capital cost
Default or bad debts cost
Benefits – Profitable business
More revenue
Evaluation of credit applicant
1. Past record
2. Present transactions
3. Bank dealings
4. Profit margin
5. Others – Market Image
6. Personality or merits, etc.
Determining the appropriate receivable policy
1. Study of actual cost and benefits
2. Cost must be reduced and profits must be increased
3. Benefits associated with credit
4. For providing credit, you have to study market which includes:
Competitors, companies, existence of self, potentials
5. Credit administration is involved in establishment of credit policy.
6. Credit should be at structured terms and conditions. Ex- mood of
administrator – not at determining factor.
Analysis of credit standards
1. Credit standards have a significant influence on sales.
2. Enlargement of administrative expenses
Ex- collection cost, calling cost, etc.
3. Chances of bad debts
4. Others - reputation, goodwill, etc.
Note: there is also the profitability of additional sales, additional
demand for the product and required return on investment.
Inventory Management
• Refers to stockpile of product a firm is offering for sale.
• Inventory means raw material, work in progress and finished goods.
• Motives of Inventory management
1. Transaction motive
2. Precautionary motive
3. Speculative motive
4. Contractual motive
• Types of cost
1. Purchase cost
2. Ordering cost
3. Holding cost/ storage and handling cost
4. Stock-out cost
5. Insurance
6. The cost of funds invested in inventories
7. Financing cost of Inventory
8. Others
• Inventory Management
1. FIFO
2. LIFO
3. HIFO
4. Av cost method
5. Weighted method
Inventory Model
• Inventory model is a mathematical model that helps business in determining the
optimum level of inventories that should be maintained in a production process,
managing frequency of ordering, deciding on quantity of goods or raw materials
to be stored, tracking flow of supply of raw materials and goods to provide
uninterrupted service to customers without any delay in delivery.
• There are two types of Inventory model widely used in business
1. Fixed Reorder Quantity System
2. Fixed Reorder Period System.
1. Fixed Reorder Quantity System.
Fixed Reorder Quantity System is an Inventory Model, where an alarm is raised
immediately when the inventory level drops below a fixed quantity and new orders
are raised to replenish the inventory to an optimum level based on the demand.

The point at which the inventory is ordered for replenishment is termed as Reorder
Point. The inventory quantity at Reorder Point is termed as Reorder Level and the
quantity of new inventory ordered is referred as Order Quantity.
2. Fixed Reorder Period System
• It is an Inventory Model of managing inventories, where an alarm is
raised after every fixed period of time and orders are raised to replenish
the inventory to an optimum level based on the demand. In this case
replenishment of inventory is a continuous process done after every
fixed interval of time.
• Regular Intervals (R): Regular Interval is the fixed time interval at the
end of which the inventories would be reviewed and orders would be
raised to replenish the inventory
• Inventory on Hand (It): Inventory on hand is the Inventory level
measured at any given point of time.
• Maximum Level (M): It is the maximum level of inventory allowed
as per the production guidelines. The maximum level is derived by
analysing historical data.
• Order Quantity: In this system, inventory is reviewed at regular
intervals (R), inventory on hand (It) is noted at the time of review and
order quantity is placed for a quantity of (M) – (It).
• Order Quantity (O) = (M) – (It).
Inventory Management
Bulk shipment

• This method banks on the notion that it is almost always cheaper to purchase and
ship goods in bulk. Bulk shipping is one of the predominant techniques in the
industry, which can be applied for goods with high customer demand.
• The downside to bulk shipping is that you will need to lay out extra money on
warehousing the inventory, which will most likely be offset by the amount of
money saved from purchasing products in huge volumes and selling them off fast.

• Pros of bulk shipments

• Highest potential for profitability
• Fewer shipments mean lower shipping costs
• Works well for staple products with predictable demand and long shelf lives
Cons of bulk shipments
• Highest capital risk potential
• Increased holding costs for storage
• Difficult to adjust quickly when demand fluctuates
ABC inventory management

• It is a technique that’s based on putting products into categories in order of

importance, with A being the most valuable and C being the least. Not all products
are of equal value and more attention should be paid to more popular products.
• Although there are no hard-and-fast rules, ABC analysis leans on annual
consumption units, inventory value, and cost significance.

Pros of ABC inventory management

• Aids demand forecasting by analyzing a product’s popularity over time
• Allows for better time management and resource allocation
• Helps determine a tiered customer service approach
• Enables accuracy in inventory
• Fosters strategic pricing

Cons of ABC inventory management

• Could ignore products that are just starting to trend upwards
• Often conflicts with other inventory strategies
• Requires time and human resources
 Just in Time (JIT)
• This method lowers the volume of inventory that a business keeps on hand. It is
considered a risky technique because you only purchase inventory a few days before
it is needed for distribution or sale.
• JIT helps organizations save on inventory holding costs by keeping stock levels low
and eliminates situations where deadstock - essentially frozen capital - sits on shelves
for months on end.
• However, it also requires businesses to be highly agile with the capability to handle a
much shorter production cycle.
Pros of JIT
• Lower inventory holding costs
• Improved cash flow
• Less deadstock
Cons of JIT
• Problems fulfilling orders on time
• Minimal room for errors
• Risk of stockouts
Consignment
• It involves a wholesaler placing stock in the hands of a retailer, but
retaining ownership until the product is sold, at which point the retailer
purchases the consumed stock. Typically, selling on consignment involves
a high degree of demand uncertainty from the retailer’s point of view and
a high degree of confidence from the wholesaler’s point of view.
• For retailers, selling on consignment can have several benefits, including
the ability to:
• Offer a wider product range to customers without tying up capital
• Decrease lag times when restocking products
• Return unsold goods at no cost
• While most of the risk in selling on consignment falls on the wholesaler, there
are still a number of potential advantages for the supplier:
• Test new products
• Transfer marketing to the retailer
• Collect useful information about product performance
• If you consider selling on consignment — as either a retailer or wholesaler —
set terms clearly regarding the:
• Return, freight, and insurance policies
• How, when, and what customer data is exchanged
• Percentage of the purchase price retailer will be taking as sales commission
Inventory Cycle counting
• It involves counting a small amount of inventory on a specific day without
having to do an entire manual stock. It’s a type of sampling that allows you to
see how accurately your inventory records match up with what you actually
have in stock.
• This method is a common part of many businesses’ inventory management
practices, as it ultimately helps ensure that customers can get what they want,
when they want it, while keeping inventory holding costs as low as possible.
Pros of cycle counting
• More time- and cost-efficient than doing a full stock-taken
• Can be done without disrupting operations
• Keeps inventory holding costs low
Cons of cycle counting
• Less comprehensive and accurate than a full stocktake
• May not account for seasonality
Inventory issue method (Example)
• The Delta company uses two inventory system. The beginning balance of
inventory and purchases made by the company during the month of July, 2021 are
given below:
• July 01: Beginning inventory, 500 units @ Rs. 20 per unit.
• July 18: Inventory purchased, 800 units @ Rs. 24 per unit.
• July 25: Inventory purchased, 700 units @ Rs. 26 per unit.
• The Delta company sold 1,400 units during the month of July.
• Required: Compute inventory on July 31, 2021 and cost of goods sold for the
month of July using following inventory costing methods:
• First in, first out (FIFO) method
• Last in, first out (LIFO) method