[WORKING CAPITAL MANAGEMENT]

This is the hard copy of the presentation on working capital management. The presentation consists of
various topics like definition of the term, its objectives, cash conversion cycle, cash operating cycle,
demerits of excess working capital etc… and a case study of working capital management of Big Bazaar.
Did You Know…???
• Working capital is a financial metric which represents

operating liquidity available to a business. Along with fixed

assets such as plant and equipment, working capital is

considered a part of operating capital.

• Working Capital = Current Assets − Current Liabilities

• A company can be endowed with assets and profitability but

short of liquidity if its assets cannot readily be converted into

cash. 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.

Working Capital Management

• Working Capital Management is concerned with the problems

that arise in attempting to manage the Current Assets, the

Current Liabilities and the inter-relationship that exists

between them.

• The goal of Working Capital Management is to manage the

firm's Assets and Liabilities in such a way that a satisfactory

level of working capital is maintained. This is so because if the

firm cannot maintain a satisfactory level of working capital, it

 is likely to become insolvent and may even be forced into

bankruptcy.

• The interaction between current assets and current liabilities

is, therefore, the main theme of the theory of management of

working capital.

Objectives
1) Liquidity: The quantum of Investment in Current Assets has to

be made in a manner that it not only meets the needs of the

forecasted sales but also provides a built in cushion in the form

of safety stocks to meet unforeseen contingencies arising out of

factors such as delays in arrival of Raw Material, sudden

spurts in demand etc.

2) Profitability: Once we recognize the fact that the total amount

of financial resources at the disposal of a company is limited

and these can be put to alternative uses, the larger the

amount of investment in current assets, the smaller will be the

amount available for investment in other profitable avenues at

hand with the company. A conservative approach in respect of

Investment in Current Assets leaves fewer amounts for other

Investments than an aggressive approach does.

Management of Working Capital
• Management will use a combination of policies and techniques

for the management of working capital. These policies aim at

managing the current assets (generally cash and cash

equivalents, inventories and debtors) and the short term

financing, such that cash flows and returns are acceptable.

• Cash management: Identify the cash balance which allows for

the business to meet day to day expenses, but reduces cash

holding costs.

• Inventory management: Identify the level of inventory which

allows for uninterrupted production but reduces the

investment in raw materials - and minimizes reordering costs

- and hence increases cash flow.

• Debtor’s management. Identify the appropriate credit policy,

i.e. credit terms which will attract customers, such that any

impact on cash flows and the cash conversion cycle will be

offset by increased revenue and hence return on Capital.

• Short term financing. Identify the appropriate source of

financing, given the cash conversion cycle: the inventory is

ideally financed by credit granted by the supplier; however, it

may be necessary to utilize a bank loan (or overdraft), or to

"convert debtors to cash" through "factoring.

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Operating Cycle

Cash Conversion Cycle

• The cash conversion cycle, also known as the asset conversion

cycle, is an expression of time, in days, that it takes to

purchase raw materials for production, convert them into

goods, sell them, and collect the accounts receivable for those

sales. 

• It is a very important management efficiency ratio; generally

speaking, a shorter CCC is an indication of high levels of

liquidity while a higher CCC may indicate the firm’s inability

to manage the process of the production or even issues with

 qualifying borrowers accurately.  In some cases, it is possible

for the CCC to be negative and this could indicate a problem

with the company’s ability to repay its creditors and these

needs to be taken very seriously. 

• Cash conversion cycle = stock conversion period + Debtors

conversion period – credit period.

• Raw materials stock period = ( Avg. value of R.M stock/ Avg.

purchase of R.M per day)

• Work in progress period= ( Avg. value of W.I.P / Avg. cost of

goods sold per day)

• Finished goods inventory period =( Avg. value of F.G in stock/

Avg. C.O.G sold per day)

• Debtors conversion period = (Avg. value of debtors/ Avg. value

of sales per day)

• Credit period granted by suppliers = ( Avg. level of creditors/

purchases on credit per day)

Case Study: WCM in Big Bazaar

• BIG BAZAAR is the big hyper market in India. It manages its

working capital in different ways and effectively they are

managing.

• Working capital cycle is more popularly known as the

operating cycle and it starts with cash; go through the

successive segments of the operation cycle, viz. raw material

storage period, conversion period, finished goods storage

period and average collection period before getting back cash

along with profit.

• BIG BAZAAR doest have collection period because it will sell

the goods to customer through cash only not in the credit

basis. Even though they accept the credit cards from the

customer that will become cash in 24 hours because they have

agreement with the banks.

• Several terms and their preposition in BIG BAZAAR in order

to calculate the working capital cycle.

• Opening stock: - It has different lines of business and it is

maintaining the stock by purchasing the inventory to meet

their requirements
• Closing stock:- the closing stock also they are maintaining as

opening stock for every month

• Purchases: - it has many suppliers and they purchase every

product from the manufacturer itself not from any

distributors and they also purchase the agricultural products

directly from farmers.

• Cost of production:- it is purchasing rice, wheat, dal, subji etc

from formers and they are separately packing them according

to weights. They are purchasing the cloth from the

manufacturers and they are stitching. For the food section

they are purchasing and cooking the food. Like above many

functions the company is doing by its own soothe cost is

involved in conversion so I take it as the cost of production.

• Selling cost:- it incurs some selling cost in the every product.

• Administrative cost:- it has huge administrative cost because it

has different verticals in addition they have multiplex so the

administrative cost is high.

• Financial cost:- like every company it has also the financial

cost.

• Average collection period:- the company is not selling the

product in the credit basis and it has hard liquid cash only. So

the average collection period is zero for the BIG BAZAAR.

RAW METERIAL STORAGE PERIOD
• Raw material storage period= (avg. stock of raw material /

avg. consumption of R.M).Here raw material are the goods

that are purchasing from the manufacturer

• Monthly usage of raw material

• Opening stock = Rs. 7, 60, 00, 000.

• Closing stock = Rs. 9, 60, 00, 000.

• Purchases= Rs. 18, 32, 00, 000.

• Average stock of raw material = (Opening stock + Closing

stock) / 2 = Rs. 8, 60, 00, 000.

• Annual usage of raw material = Opening stock+ Purchases-

Closing stock = Rs. 16, 32, 00, 000.

• Average daily usage of raw material = (Annual usage of raw

material / 365)= Rs. 447123.

• Raw material storage period= (avg. stock of R.M / avg. Daily

consumption of R.M) = (86000000 / 447123) = 193 days

• RAW METERIAL STORAGE PERIOD is 193 days

AVERAGE CONVERSION PERIOD
• Average conversion period = (avg. stock of work in process /

avg. daily cost of production)

• Other manufacturing cost

• Labour charges = Rs. 6, 87, 461.

• Packing material = Rs. 22, 52, 645.

• Power = Rs. 31, 08, 935.

• Rent = Rs. 76, 65, 893

• Advertisement cost = Rs. 49, 73, 322.

• Transportation cost = Rs. 83, 070.

• Depreciation = Rs. 95,000.

• Opening work in progress = Rs. 26, 75, 541

• Closing work in progress = Rs. 39, 24, 755.

• Annual Cost of conversion = Opening work in progress +

Labour charges + Packing material + Power + Rent +

Advertisement cost + Transportation cost + Depreciation -

Closing work in progress = Rs. 20, 08, 90, 447

• Monthly cost of conversion = ( cost of production / 365)

• = Rs. 5, 50, 384.

 • Average stock in work in progress = (Opening work in progress

+ Closing work in progress)/2 = Rs. 33, 00, 147.

• Average conversion period = (avg. stock of work in process /

avg. daily cost of production) = (3300147 / 550384) = 6

days

• AVERAGE CONVESION PERIOD is 6 days

FINISHED GOODS STORAGE PERIOD

• Finished goods storage period =( avg. inventory of F.G / avg .

daily cost of sales)

• Opening finished goods= Rs. 7, 35, 89, 604.

• Closing finished goods = Rs. 8, 23, 58, 195.

• Cost of conversion= Rs. 20, 08, 90, 447.

• Selling and admin exp. = Rs. 56, 71, 06, 300.

• Finance and other costs= Rs. 4, 36, 83, 460.

• Annual cost of sales = Opening finished goods + Cost of

conversion + Selling and admin exp. + Finance and other costs

- Closing finished goods = Rs. 80, 29, 11, 616.

• Average daily cost of sales = (Annual cost of sales / 365) =

Rs. 21, 99, 758.

 • Average inventory of finished goods = (Opening finished goods

+ Closing finished goods) /2 = Rs. 7, 79, 73, 899.

• Finished goods storage period = ( avg. inventory of F.G / avg .

daily cost of sales)= (77973899 / 2199758) = 35 days

• FINISHED GOODS STORAGE PERIOD is 35 days

AVERAGE PAYMENT PERIOD

• Average payment period = (Average balance of trade creditors

/ Average daily purchases)

• Opening accounts payables = Rs. 2, 13, 24, 150.

• Closing account payables = Rs. 2, 45, 07, 720

• Annual credit purchases = Rs. 5, 90, 69, 220.

• Average balance of trade creditors = ( Opening accounts

payables+ Closing account payables) / 2 = Rs. 2, 29, 15, 935.

• Average daily purchases = (Annual credit purchases / 365) =

Rs. 1, 61, 833.

• Average payment period= (Average balance of trade creditors

/ Average daily purchases) = ( 22915935 / 161833) = 141

days

• AVERAGE PAYMENT PERIOD is 141 days

• Therefore the all the periods are collectively represented as:

 • RAW METERIAL STORAGE PERIOD is 193 days

• AVERAGE CONVERSION PERIOD is 6 days

• FINISHED GOODS STORAGE PERIOD is 35 days

• AVERAGE COLLECTION PERIOD is 0 days

• AVERAGE PAYMENT PERIOD is 141 days

• GROSS OPERATING CYCLE PERIOD = 193 + 6 + 35 +0 =

233 days

• NET OPERAING CYCLE PERIOD = 193 + 6 + 35 + 0 – 141=

93 days

Analysis
• From the above calculations we found that the cash conversion

cycle (CCC) of BIG BAZAAR is 93 days, and it says that the

company needs 93 days to convert the procured goods to cash

(from receivables). It may be noted that goods storage period

is the maximum compared to other segments. The greater

goods storage period has also increased the operating cycle.

• The average conversion period has 6 days it indicates that 6

days worth of cost of conversion on average is held in the form

of work in process inventory reflecting efficiency in the

management of work in process inventories.

 • The finished goods storage is 35 days which represents the

cost of sales has been held in the form of finished goods

inventory on the average

• The account payment period 141 days indicating that 141

days worth of credit purchases are held in the form of sundry

creditors. The BIG BAZAAR is directly purchasing from

manufacturers, and manufacturers normally give more periods

to re pay the amount because there is no distributor.

• So this is a benefit as well as a threat for the business when

the company need more cash at some particular time, in the

credit payment the company will face the problem because it

doesn’t have the account receivables.

• Considering the overall operating cycle period, it is quicker and

implies that the less amount of working capital is needed and

it improves the profitability. Some of the reasons for the

company having such a operating period are failure to get

trade discount and cash discount, inability to purchase during

seasons.

Working Capital Analysis

• Company working capital requirement is Rs.11,44, 73, 501.

• The company’s working capital financing has three options and

how much portion of funds they financing is as listed below:

 • Financing from the banks is 73%

• Financing through the portion of long term sources is 25%

• Financing through the promotion of other companies is 2%

• So BIG BAZAAR is financing more of its working capital from

the bank. This says that the retail major has adopted

negotiated finance as the main source of working capital

finance. In order to meet the activities in a year they need

Rs. 11, 44, 73, 501.

Conclusion
• The net working capital cycle (or) cash conversion cycle and

working capital requirements. Compared other retailers they

have high cash conversion cycle so it is doing its business

effectively but overall the cash conversion cycle is less so the

company has the locking up of funds in the current assets is

for a relatively short duration and company can obtain

greater mileage from each rupee invested in current assets.

And it is relying on its working capital requirement on banks

and its portion of its long term sources.

Excess And Inadequate Working Capital

• This is very important aspect of working capital management

that excessive as well as inadequate working capitals both are

harmful to the organization. Excess working capital creates idle

 funds, which cannot earn any return, whereas shortages of

working capital will hamper the production process and other

business operations. In both the situations firm has to suffer

loss

Excessive Working Capital: Demerits

There may be following problems

• It can accumulate unnecessary inventories. Thus chance of

mishandling, theft, wastage of inventories may occur.

• It also indicates poor collection of receivable and very liberal

credit policy regarding sales. The bad debts will increase it such

situation continues for long time.

• It allows to the management to inefficiently

• Accumulation of excessive inventories also leads to speculative

profit. This may tend to make dividend policy liberal, which

may create serious problems in future.

• Excessive availability of cash tempts the executive to spend

more.

Inadequate Working Capital: Demerits

• There may be following problems-

• It becomes difficult for the firms to undertake profitable

projects due to shortage of working capital.

• The firm may face problems in implementing the operating

plans and achieve the firm’s profit target.

• It also creates problem in meeting out day-to-day or routine

expenses.

• Fixed assets can be utilized more effectively, thus the overall

return may go down.

• Due to inadequate working capital firm may lose some good

credit opportunities

• The firm may spoil its fame and reputation if it fails to honor

short-term obligations. As a result, the firm faces tight credit

terms.

• It directly affects the liquidity positions of the business firms.