Working Capital Management

- Concept & Theories

By: Ms. Manjari Sharma
 Working Capital
Capital-

Capital
Working
( Money Working
( Day To
R i d By
Required B C i l
Capital
Day Task)
Business)
 Definition
Definition-
‰Working Capital- The amount of Capital that is
required for day to day functioning of the
business.
business
‰It is that amount of Capital that covers Current
assets.
assets
 Concepts of Working Capital
Capital-
Gross Working Capital = Total Current Assets

Net Working
ki Capital
C i l = Totall Current
C Assets
A
–
Total Current Liabilities
 Net Working Capital
Capital- Definition
“Technically
Technically Current Assets over Current
Liabilities is termed as Net Working Capital”.
 Components of Net Working Capital
¾Current Assets- Those supporting capital that
is necessary to flow for the Fixed Assets
existence.
existence
¾Current Liabilities-That source of finance
through which current assets are financed.
financed
Such liabilities should be disbursed within a
short period of time.
time
 C
Current
t Assets
A t C
Current
t Liabilities
Li biliti

• Inventory/
y Stock • Creditors
• Debtors • Bills Payable
• Bills Receivable • Outstanding Expenses
• P
Prepaid
id E
Expenses • B kO
Bank Overdraft
d f
• Short Term
Investment
• Marketable Securities
• Cash & Bank
 Working Capital Requirements-
Requirements
• To support the efficient functioning and working
of Fixed Assets or Long Term Investment
projects.
• Effective Management of Working Capital is
required for the success of the business.
• Risk that has to be covered in the short term
assets is the liquidity.
• The
Th level
l l off working
ki capital
i l required
i d in
i the
h
business is determined by the nature & type of the
business.
business
 Composition or Planning of Working
Capital-
¾Permanent Working Capital
¾Temporary Working Capital
 Permanent Working Capital
¾ It is that minimum level of Working Capital
which is required by the business on a continuous
basis to run the business smoothly.y
¾ It is that part of Total Working Capital which is of
permanent in nature.
¾ It is used as the full time working capital, which a
firm requires in its life.
life
¾ It cannot be utilized as other source of income. It
remains as a working capital whether used or not.
not
 Temporary Working Capital
¾It is that part of Total Working Capital which is
kept with the name of a working capital and is
required by the business to meet its seasonal or
unforeseen requirements.
Categorization of Current Assets

Current Assets

Trade Cash
Stock Debtors
Short
Work in Finished Account Bank
k Term
Raw Progress Stock s Account Securitie
Receiva s
ble
Therefore Working Capital management
consist of –
- Management of Stock
- Management of Receivables
- Management of Cash