TOPIC-8

WORKING CAPITAL MANGEMENT

CLASSIFICATION OF CAPITAL

• FIXED CAPITAL

• WORKING CAPITAL
FIXED / BLOCK CAPITAL

• PORTION OF CAPITAL INVESTED IN FIXED ASSETS

• [ PURCHASE OF PLANT AND MACHINERY, LAND & BUILDING,
FURNITURE, ETC…]
WORKING CAPITAL/ REVOLVING/CIRCULATING
CAPITAL
• CAPITAL REQUIRED FOR DAY TO DAY OPERATION

• FUNDS INVESTED IN CURRENT ASSETS

CONCEPTS OF WORKING CAPITAL

• GROSS WORKING CAPITAL

• NET WORKING CAPITAL

GROSS WORKING CAPITAL

• SUM TOTAL OF ALL CURRENT ASSETS

• EXAMPLE ;-
• CASH IN HAND, CASH AT BANK, SUNDRY DEBTORS, INVENTORY,
• SHORT TERM INVESTMENT, PREPAID EXPENSES, ACCRUED
INCOMES
NET WORKING CAPITAL

• EXCESS OF CURRENT ASSETS OVER CURRENT LIABILITIES

• CA CL
• EXAMPLES OF CURRENT LIABILITIES;-
• BILLS PAYABLE, SUNDRY CREDITORS, OUTSTANDING EXPENSE,
• SHORT TERM LOANS, BANK OVERDRAFT, DIVIDENDS PAYABLE
 FACTORS DETERMINING WORKING CAPITAL
REQUIREMENTS

• NATURE / CHARACTER OF BUSINESS

• SIZE OF BUSINESS/ SCALE OF OPERATIONS

• PRODUCTION POLICY

• MANUFACTURING PROCESS/ LENGH OF PRODUCTION CYCLE

• SEASONAL VARIATIONS
 CONTD-------
• WORKING CAPITAL CYCLE
• CASH RAW MATERIALS WORK IN PROGRESS FINISHED GOODS
SALES DEBTORS CASH
• CREDIT POLICY

• BUSINESS CYCLES

• RATE OF GROWTH OF BUSINESS

• EARNING CAPACITY AND DIVIDEND POLICY

CONTD………….

• PRICE LEVEL CHANGES

• OTHER FACTORS
NATURE / CHARACTER OF BUSINESS

• PUBLIC UTILITY CONCERNS- LESS WORKING CAPITAL, STRICT

CASH SALES

• TRADING / FINANCIAL FIRMS- LESS INVESTMENT IN FA, MORE

INVESTMENT IN CURRENT ASSETS

• MANUFACURING FIRMS- NEED SIZABLE WORKING CAPITAL

SIZE OF BUSINESS/ SCALE OF OPERATIONS

• BIG BUSINESS FIRMS- LARGER WORKING CAPITAL REQUIREMENTS

• SMALL BUSINESS FIRMS- LESS WORKING CAPITAL . EG- MATCH

BOX FACTORY
PRODUCTION POLICY

• REQUIREMENT OF WORKING CAPITAL DEPENDS UPON

PRODUCTION POLICY

• DURING SLACK PERIOD, INVENTORY/ RAW MATERIAL SHOULD BE

COLLECTED

• NEED HIGHER WORKING CAPITAL

MANUFACTURING PROCESS/ LENGH OF
PRODUCTION CYCLE
• LONG PROCESS OF MANUFACTURE- LARGE AMOUNT OF
WORKING CAPITAL. EG TEXTILE INDUSTRY, COIR INDUSTRY,
CONSTRUCTION ETC..

• VICE VERSA
SEASONAL VARIATION

• SLACK SEASON- LESS WORKING CAPITAL

• PEACK SEASON- MORE WORKING CAPITAL

• EG- CASHEW INDUSTRY IN KOLLAM DISTRICT, KERALA

WORKING CAPITAL CYCLE

• CASH RAW MATERIALS WORK IN PROGRESS FINISHED GOODS

SALES DEBTORS CASH

• THE SPEED WITH WHICH THE WORKING CAPITAL COMPLETES ONE CYCLE
DETERMINES WORKING CAPITAL REQUIREMENTS

• LONGER THE PERIOD OF CYCLE LARGER IS THE REQUIREMENTS OF WORKING

CAPITAL
CREDIT POLICY

• LIBERAL CREDIT POLICY MORE WORKING CAPITAL

• STRINGENT CREDIT POLICY LESS WORKING CAPITAL

BUSINESS CYCLES

• BOOMS MORE WORKING CAPITAL

• DEPRESSION LESS WORKING CAPITAL

RATE OF GROWTH OF BUSINESS

• FAST GROWING CONCERNS MORE WORKING CAPITAL

• SLOW GROWING CONCERNS LESS WORKING CAPITAL

EARNING CAPACITY AND DIVIDEND POLICY

• FIRMS WITH HIGH RATE OF DIVIDEND- MORE WORKING CAPITAL

• FIRMS WITH LOW RATE OF DIVIDEND- LESS WORKING CAPITAL

OVER TRADING

• COMPANY DOES MORE BUSINESS

• BEYOND ITS FINANCIAL CAPACITY
• COMPANY EXPANDS ITS SCALE OF OPERATIONS
• WITH INSUFFICIENT CASH RESOURCE
 UNDER- TRADING

• JUST OPPOSITE OF OVER TRADING

• FUNDS OF A COMPANY ARE NOT FULLY UTILISED
• DUE TO INEFFICIENT MANAGEMENT
• CONSEQUENCES ;-
• REDUCED PROFIT
• LOW RATE OF RETURN ON INVESTMENT
• DECLINE IN SHARE PRICE
• LOSS OF GOODWILL
CAPITAL GEARING
• MEANS COMBINATION OF EQUITY SHARE AND LONG TERM DEBT

• RATIO / PROPORTION BETWEEN OWNED CAPITAL AND

BORROWED CAPITAL

• HIGH GEAR- LARGE ISSUE OF DEBENTURE

• LOW GEAR - LARGER ISSUE OF EQUITY SHARES