MEANING OF WORKING CAPITAL

The term working capital literally means the capital required For day to day
working in a business concern such as for purchasing raw material, payment
of wages, payment of sundry expenses etc.

CONCEPT OF WORKING CAPITAL

There are two concept of working capital –

o Gross working capital

It refers to total current assets.
o Net working capital
It refers to difference between total current assets and total
current liability.

WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that arise in
managing the current assets, current liabilities and interrelationship between
them. Its operational goal is to manage the current assets and liability in such a
way that a satisfactory level of net working capital is maintained.

WORKING CAPITAL FINANCING STRATEGY

Generally following three approaches followed for financing or sourcing
working capital

o Headging approach.
 o Conservative approach.
o Trade off between Headging and Conservative approach.

OBJECTIVES OF WORKING CAPITAL MANAGEMENT

o Maintenance of working capital at appropriate level.
o Availability of sufficient funds at the times of need.

The primary objectives of working capital management are to manage the

firm’s current assets and current liabilities in such a way that a satisfactory
level of working capital is maintained.The firm is likely to become insolvent if it
cannot maintain a satisfactory level of working capital.

Working capital assists in increasing the profitability of the concern. The

management has to consider the composition of current assets pool in the
accomplishment of these two objectives. The working capital position decides
the various policies in the business with respect to general operation viz.,
purchasing financing expansion, dividend etc.

IMPORTANCE OF MANAGEMENT OF WORKING CAPITAL

Positive Correlation Between Sales And Current Assets:-There is a positive

correlation between the sale of the product of the firm and current assets
increase in the sale of the product require a corresponding increase in current
assets . Therefore the current assets must be managed properly.
Investment In Current Assets:-Generally more than half of the total capital of
the firm is invested in current asset thus less than half of the capital is blocked
in fixed assets therefore , management of working capital attract the attention
of the management.

No Alternative For Current Assets:-While fixed assets can be acquired on lease

in emergency there is no alternative for current assets. Investment in current
assets cannot be avoided without substantial loss.

Financed Through Outside Sources:- Working capital needs are often financed
through outside sources. Hence, it is necessary to utilise them in the best
possible way.

Important For Small Units:-The management of working capital is more

important for small units because they do not rely on the long term capital
market and have easy access to short-term financial sources such as trade
credit , short –term bank loan etc.

NEEDS AND SIGNIFICANCE OF WORKING CAPITAL

The objective of a business corporation is to maximize shareholders wealth by
earning profit through effective operation and increased sale.a firm need
working capital for its daily operation due to the time lag between
manufacturing of finished goods and sales a firm needs cash for financing
inventories. if adequate amount of working capital not available for period firm
will not be in position to sustain business operation. Regular availability of
adequate working capital is inevitable for sustained business operations
company therefore have adequate working capital as much as needed by
company neither be excessive nor inadequate both are dangerous importance
are as follows:-
 Increase in debts capacity and goodwill:- adequate working capital
represents the financial soundness of a company regular availability of
adequate working capital creates confidence among investors and
lenders they will get interest in time.
 Facility in obtaining loans from financial institution:- adequate working
capital representing excess of current assets over current liabilities is
considered as an ideal security of trade credits.
 Increase in production efficiency:- if adequate working capital is
maintained the business firm can successfully carry own its
operation,research and development programmes atc which lead to
increased production efficiency.
 High executive morale:- maintenance of adequate working capital also
up the morale of executive in so far as they have an environment of
creativity,security and confidence which is important factor in improving
efficiency and morale of business executives
 Attractive dividend to shareholders:- adequate working capital enables a
company to declare and distribute attractive dividend to shareholders.
 WORKING CAPITAL OPERATING CYCLE

For production unit:

CASH

RAW MATERIAL

WORK IN
PROGRESSS

FINISHED GOODS

DEBTORS

For trading unit:

CASH

INVENTORY

DEBTORS
 TYPE OF WORKING CAPITAL
There are two types of working capital

o Permanent or Fixed working capital

Certain minimum level of working capital which is required

on continuous basis without any change.

o Temporary or Fluctuating or Variable working capital

It is the working capital needed to meet seasonal as well as

unforeseen requirements.

A
M
O
U
N
T TEMPORARY WORKING CAPITAL

O
F
PERMANENT WORKING CAPITAL
W
C

TIME

DETERMINANTS OF WORKING CAPITAL

Following are the main factor influencing requirement of working capital

o General nature of business

o Production cycle (for manufacturing)
o Business cycle (for trading)
o Production policy
o Credit policy
o Future growth and expansion plan
o Availability of raw material
o Level of profit
o Level of tax
o Dividend policy
o Depreciation change
o Price change
o Operating efficiency