INTERNATIONAL FINANCE

Assignment -1
Concept of multinational working capital management

Submitted to- Submitted by-

Dr.Kapil Arora Gaurav Agrawal
Major-Finance
Minor-Marketing
WORKING CAPITAL
• Current assets – Current liabilities
• It measures how much in liquid assets a company has
available to build its business.
• A short term loan which provides money to buy earning
assets.
• Allows to avail of unexpected opportunities.
• Positive working capital is required to ensure that a firm
is able to continue its operations and that it has
sufficient funds to satisfy both maturing short-term debt
and upcoming operational expenses. The management
of working capital involves managing inventories,
accounts receivable and payable and cash.
 WORKING CAPITAL
• An increase in working capital indicates that the business has
either increased current assets (that is received cash, or other
current assets) or has decreased current liabilities, for example
has paid off some short-term creditors.
 Working Capital Management
• Decisions relating to working capital and short term financing are referred to as
working capital management. Short term financial management concerned with
decisions regarding to CA and CL.
• Management of Working capital refers to management of CA as well as CL.
• If current assets are less than current liabilities, an entity has a working capital
deficiency, also called a working capital deficit.
• These involve managing the relationship between a firm's short-term assets and
its short-term liabilities.
 Working Capital Management
• The goal of working capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to satisfy both
maturing short-term debt and upcoming operational expenses.
• Businesses face ever increasing pressure on costs and financing requirements
as a result of intensified competition on globalised markets. When trying to
attain greater efficiency, it is important not to focus exclusively on income and
expense items, but to also take into account the capital structure, whose
improvement can free up valuable financial resources
WORKING CAPITAL MANAGEMENT

• Active working capital management is an

extremely effective way to increase enterprise
value. Optimising working capital results in a
rapid release of liquid resources and
contributes to an improvement in free cash
flow and to a permanent reduction in inventory
and capital costs, thereby increasing liquidity
for strategic investment and debt reduction.
Process optimisation then helps increase
profitability.
WORKING CAPITAL MANAGEMENT

• The fundamental principles of working capital management

are reducing the capital employed and improving efficiency in
the areas of receivables, inventories, and payables.
Concepts of Working Capital
• Gross Working Capital
• Net working Capital
Gross Working Capital
• Total Current assets
• Where Current assets are the assets that can be converted
into cash within an accounting year & include cash , debtors
etc.
• Referred as “Economics Concept” since assets are employed
to derive a rate of return.
Net Working Capital
• CA – CL
• Referred as ‘point of view of an Accountant’.
• It indicates liquidity position of a firm & suggests the extent to
which working capital needs may be financed by permanent
sources of funds.
CONSTITUENTS OF WORKING
CAPITAL
• CURRENT ASSETS
 Inventory
 Sundry Debtors
 Cash and Bank Balances
 Loans and advances
• CURRENT LIABILITIES
 Sundry creditors
 Short term loans
 Provisions
Need for Working Capital
• As profits earned depend upon magnitude of
sales and they donot convert into cash instantly,
thus there is a need for working capital in the
form of CA so as to deal with the problem arising
from lack of immediate realisation of cash
against goods sold.
• This is referred to as “Operating or Cash Cycle” .
• It is defined as “The continuing flow from cash to
suppliers, to inventory , to accounts receivable &
back into cash “.
Need for Working Capital
• Thus needs for working capital arises from cash
or operating cycle of a firm.
• Which refers to length of time required to
complete the sequence of events.
• Thus operating cycle creates the need for
working capital & its length in terms of time span
required to complete the cycle is the major
determinant of the firm’s working capital needs.
Operating or Cash Cycle
1. Conversion of cash into inventory
2. Conversion of inventory into Receivables
3. Conversion of Receivables into Cash
OPERATING CYCLE

Phase 3
Receivables
 
 
Phase 2
 
  Cash
Inventory
Phase 1
TYPES OF WORKING
CAPITAL
• PERMANENT WORKING CAPITAL
• VARIABLE WORKING CAPITAL
PERMANENT WORKING CAPITAL

• THERE IS ALWAYS A MINIMUM LEVEL OF CA

WHICH IS CONTINOUSLY REQUIRED BY A FIRM
TO CARRY ON ITS BUSINESS OPERATIONS.
• THUS , THE MINIMUM LEVEL OF INVESTMENT
IN CURRENT ASSETS THAT IS REQUIRED TO
CONTINUE THE BUSINESS WITHOUT
INTERRUPTION IS REFERRED AS PERMANENT
WORKING CAPITAL.
VARIABLE WORKING CAPITAL

• THIS IS THE AMOUNT OF INVESTMENT REQUIRED TO

TAKE CARE OF FLUCTUATIONS IN BUSINESS ACTIVITY OR
NEEDED TO MEET FLUCTUATIONS IN DEMAND
CONSEQUENT UPON CHANGES IN PRODUCTION & SALES
AS A RESULT OF SEASONAL CHANGES.
DISTINCTION
• PERMANENT IS STABLE OVER TIME WHEREAS VARIABLE
IS FLUCTUATING ACCORDING TO SEASONAL DEMANDS.
• INVESTMENT IN PERMANENT PORTION CAN BE
PREDICTED WITH SOME PROFITABILITY WHEREAS
INVESTMENT IN VARIABLE CANNOT BE PREDICTED
EASILY.
• WHILE PERMANENT IS MINIMUM INVESTMENT IN
VARIOUS CA , VARIABLE IS EXPECTED TO TAKE CARE FOR
PEAK IN BUSINESS ACTIVITY.
DISTINCTION
• WHILE PERMANENT COMPONENT REFLECTS THE NEED
FOR A CERTAIN IRREDUCIBLE LEVEL OF CURRENT
ASSETS ON A CONTINOUS AND UNINTERRUPTED BASIS ,
THE TEMPORARY PORTION IS NEEDED TO MEET
SEASONAL & OTHER TEMPORARY REQUIREMENTS.
• ALSO PERMANENT CAPITAL REQUIREMENTS SHOULD BE
FINANCED FROM L-T SOURCES , S-TFUNDS SHOULD BE
USED TO FINANCE TEMPORARY WORKING CAPITAL
NEEDS OF A FIRM,
Multinational WCM
• The management of working capital in the multinational
corporation is similar to its domestic counterparty. Both are
concerned with selecting that combination of current assets,
marketable securities, account receivable and inventory that
will maximize the value of the firm. The essential difference
between domestic and international working capital
management include the impact of currency fluctuations,
potential exchange controls, and multiple tax jurisdictions on
these decisions, in addition to the wider range of short term
financing and investment options available.