Working Capital Management

Meaning of Working Capital
The capital which is required for day to day routine activities like payment of wages, purchase of raw material etc. is known as working capital.

Definition of Working Capital
According to Genestenberg, “ Circulation capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories , inventories to receivables, receivables into cash”.

Concept of Working Capital
 There

are two concepts:
working capital = Current Assets

Gross Net

working capital = Current assets – Current Liabilities

Kinds of working Capital
Kinds of Working Capital On the basis of Concept
Gross Working Capital Net Working Capital

On the basis of Time
Permanent Working Capital Temporary Working Capital

Regular working Capital

Seasonal Working Capital

Reserve working Capital

Special Working Capital

Graphic presentation of Working Capital

Temporary or Variable Working Capital

Temporary or Variable Working Capital

Permanent or Fixed working capital

Permanent or Fixed working capital

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Working Capital Cycle
Finished Goods Debtors

Work –in - progress


Raw Material

Factors affecting working capital
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Nature of Business Size of Business Production Policy Manufacturing process Seasonal Variations Credit policy Rate of Growth of Business Price level changes Rate of stock turnover Working capital cycle

Factors affecting estimation of working capital

1. 2.

3. 4.

Total cost incurred on material, wages, overheads. The length of time for which raw material are to remain in stores before they are issued to production. The length of production cycle. The average debt- collection period.

The amount of cash required to pay day – to – day expenses. 6. The average debt payment period. 7. Time lag in the payment of wages and other expenses. 8. The average amount of cash required to make advance payments.

Determining the working capital financing mix
Approaches to Financing Mix

Hedging or Matching Approach

Conservative Approach

Aggressive Approach

Sources of Long- term/ Fixed/ Permanent Working Capital

1. 2. 3. 4. 5.

Shares Debentures Public Deposits Retained Earnings Long term Loans from Financial Institution

Sources of Temporary/ Variable/ Short-term Working Capital

Sources are:

1. 2. 3. 4. 5. 6. 7. 8.

Indigenous Bankers Trade Credit Advances Factoring Accrued Expenses Deferred Incomes Commercial Paper Commercial Banks

 From

the following information you are required to estimate the net working capital: Cost per unit (Rs.) Raw Material 400 Direct Labour 150 Overheads (excluding Depreciation) 300 Total Cost 850

Additional information
    

Selling price Output Raw Material in stock Work- in – process

Rs. 1000p.u. 52000 units p.a Average 4 weeks

(Assume 50% completion stage with full material consumption)

Finished goods in stock average 2 weeks  Credit allowed by suppliers average 4 weeks  Credit allowed to Debtors average 4 weeks  Cash at bank is expected to be Rs. 50000 Assume that the production is sustained at an even pace during the 52 weeks of the year. All sales are in credit basis.

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