Working Capital

Management
 Meaning of Working Capital

The capital which is required for day to day

routine activities like payment of wages,
purchase of raw material etc. is known as
working capital.
 Definition of Working Capital
According to Genestenberg,
“ Circulation capital means current assets of a
company that are changed in the ordinary
course of business from one form to another,
as for example, from cash to inventories ,
inventories to receivables, receivables into
cash”.
 Concept of Working Capital
 There are two concepts:
Gross working capital = Current Assets

Net working capital = Current assets –

Current Liabilities
 Kinds of working Capital
Kinds
of
Working Capital

On the basis of On the basis of

Concept Time

Gross Net Permanent Temporary

Working Capital Working Capital Working Capital Working Capital

Regular Seasonal
working Capital Working Capital

Reserve Special
working Capital Working Capital
 Graphic presentation of
Working Capital

Temporary or Variable
Temporary or Variable Working Capital
Working Capital

Permanent or Fixed
Permanent or Fixed
working capital
working capital
kr o wf o t nuo mA

r o wf o t nuo mA

Time
Time
Working Capital Cycle

Finished
Debtors
Goods

Work –in - progress Cash

Raw
Material
 Factors affecting working capital
1. Nature of Business
2. Size of Business
3. Production Policy
4. Manufacturing process
5. Seasonal Variations
6. Credit policy
7. Rate of Growth of Business
8. Price level changes
9. Rate of stock turnover
10. Working capital cycle
Factors affecting estimation
of
working capital
1. Total cost incurred on material, wages,
overheads.
2. The length of time for which raw material
are to remain in stores before they are
issued to production.
3. The length of production cycle.
4. The average debt- collection period.
5. The amount of cash required to pay day – to
– day expenses.
6. The average debt payment period.
7. Time lag in the payment of wages and other
expenses.
8. The average amount of cash required to
make advance payments.
 Determining the working capital
financing mix

Approaches to
Financing Mix

Hedging or
Conservative Aggressive
Matching
Approach Approach
Approach
 Sources
of
Long- term/
Fixed/
Permanent Working Capital
1. Shares

2. Debentures

3. Public Deposits

4. Retained Earnings

5. Long term Loans from Financial

Institution
 Sources
of
Temporary/
Variable/
Short-term Working Capital
 Sources are:

1. Indigenous Bankers
2. Trade Credit
3. Advances
4. Factoring
5. Accrued Expenses
6. Deferred Incomes
7. Commercial Paper
8. Commercial Banks
 Question:
 From the following information you are required
to estimate the net working capital:
Cost per unit (Rs.)
Raw Material 400
Direct Labour 150
Overheads (excluding Depreciation) 300
Total Cost 850
 Additional information
 Selling price Rs. 1000p.u.
 Output 52000 units p.a
 Raw Material in stock Average 4 weeks
 Work- in – process
(Assume 50% completion stage with full material consumption)
 Finished goods in stock average 2
weeks
 Credit allowed by suppliers average 4 weeks
 Credit allowed to Debtors average 4 weeks
 Cash at bank is expected to be Rs. 50000
Assume that the production is sustained at an even
pace during the 52 weeks of the year. All sales
are in credit basis.