Working

Capital
Management
 Meaning of working capital (WC)
Funds required for short term purposes
or day to day expenses are working
capital.
WC refers to part of firm’s capital reqd.
for financing short term or current
assets
also known as revolving or short term
capital or circulating capital.
 Concepts of Working Capital
 Balance sheet concept.
 Two interpretations of W.C. under this concept are:-
 gross working capital:-
 capital invested in total current assets of an enterprise.
 gross concept sometimes preferred over networking concept
due to:-
a). enables enterprise to provide correct amount of WC at
the right time.
b). every management is interested in total current assets
with which it has to operate than the sources.
c). gross concepts takes into considerations that every
increase in the funds would increase the working capital.
d). gross concepts of WC is more useful in determining rate
of return on investments in WC.
 Importance of Net Working Capital

 It is a qualitative concept which indicates

firm’s ability to meet its operating
expenses and short term liabilities.
 It indicates the margin of protection
available to the short term creditors.
 Indicator of financial soundness of an
enterprise.
 Net WC is refered to as working capital.
 Operating cycle or circular flow
concept

 Start with raw material.

 Raw material -> work in progress ->
finished goods ->
 Sales -> debtors -> Cash -> raw material.
 This is a cycle.
 CLASSIFICATION OF WC:-

WC may be classified in two ways:-

 On the basis of concept
- gross working capital
- net working capital
 On the basis of time
- permanent or fixed WC
a). regular WC
b). reserve WC
- temporary or variable WC
a). seasonal WC
b). special WC
 IMPORTANCE OR ADVANTAGES OF
ADEQUATE WC:-

 Maintains solvency of business.

 Helps in creating & maintaining goodwill.
 Helps in arranging loans from banks & others on easy and
favourable terms.
 Enables a concern to avail cash discount and hence reduce
cost.
 Ensures regular supply of raw materials.
 Regular payment of salaries, wages & other day to day
commitment.
 Exploitation of favourable market condition.
 Enables a concern to face business crisis.
 EXCESS OR INADEQUATE WC:-

Disadvantages of redundant or excessive WC:-

 Excessive WC means idle funds which earn no profit for the
business & hence, business cannot earn a proper rate of
return on its investments.
 When there is redundant WC, it may lead to unnecessary
purchasing & accumulation of inventories causing more
chance of theft, waste & losses.
 Excessive WC implies excessive debtors & defective credit
policy which may cause higher incidences of bad-debts.
 It may result in overall inefficiency in org.
 When there is excessive WC, relationships with banks &other
financial institutions may not be maintained due to low rate
of returns on investments, the value of share may also fall.
 DISADVANTAGES OR DANGERS OF
INADEQUATE WC:-
 A concern which has inadequate WC cannot pay
its short term liabilities in time. Thus, loose its
reputation & shall not be able to get good credit
facilities.
 Cannot buy its requirements in bulk & cannot
avail of discounts etc.
 Becomes difficult for the firm to exploit favourable
market conditions & undertake profitable projects.
 Firm cannot pay its day to day expenses and it
create inefficiency.
 Becomes impossible to use efficiently fixed assets
due to non availability of liquid funds.
THE NEED OR OBJECTS OF WC:-

WC is needed for the following purposes:-

 For the purchase of raw material.
 To pay wages & salaries.
 To incur day to day expenses and overhead costs.
 To meet selling costs.
 To provide credit facilities to the customer.
 To maintain the inventories of raw material, work
in progress, stores and spares and finished stock.
 ANALYSIS OF WC

Funds Working
Ratio Flow Capital
Analysis Analysis Budget
 Ratio Analysis

It is a simple arithmetical expression of one number to another.

The technique of ratio analysis can be employed for measuring
short term liquidity or working capital position of the firm. The
following ratios may be calculated for this purpose:-
 Current ratio.
 Acid test ratio.
 Absolute liquid ratio.
 Inventory turnover ratio.
 Receivables turnover ratio.
 Payables turnover ratio.
 Working capital turnover ratio.
 Working capital leverage.
 Ratio of current liabilities to tangible net worth.
 FUNDS FLOW ANALYSIS

 Fund flow analysis is a technical device designated

to study the sources from which additional funds
were derived and the use to which these sources
were put. It is an effective management tool to
study changes in the financial position (WC) of a
business enterprise between beginning and ending
financial statements. Funds flow analysis consists
of:-
 Preparing schedules of changes in WC.
 Statement of sources and application of funds.
 WORKING CAPITAL BUDGET

Budget is a financial or quantitative expression of business

plans & policies to be pursued in the future period of time.
WC budget as a part of total budgeting process of a
business is prepared estimating future long term & short
term WC capital needs & sources to finance them & then
comparing the budgeted figures with the actual performance
for calculating variances. The successful implementation of
WC budget involves the preparing of separate budgets for
various elements of WC such as cash inventories and
receivables etc. The objectives of a WC budget is to ensure
availability of funds as and when needed and to ensure
effective utilization of these resources.
 References

 www.wikipedia.com
 www.google.co.in
 www.investopedia.com
Thank You…….