WORKING

CAPITAL
MANAGEMENT

INTRODUCTION
Working Capital Management involves
managing the balance between firms
short-term assets and its short-term
liabilities .
The goal is to ensure that the firm has
sufficient cash to carryon with its business
operations and also meet its short-term
debt obligations and operational expenses .

IMPORTANT TERMINILOGIES
CURRENT ASSETS :Those assets which can be
converted into cash within an accounting year .
ex. Raw materials , Work-in progress ,Trade
debtors , Cash balances etc .
CURRENT LIABILITIES :Refers to claims of
outsiders repayable by the company within an
accounting year .
ex. Trade creditors , Taxation payable ,Bills
payable , Outstanding expenses , Short term
loans etc

CONCEPT OF WORKING
CAPITAL
WORKING
GROSS
NET
CAPITAL
WORKING
WORKING
MANAGEMENT
CAPITAL
CAPITAL
CURRENT
ASSETS(less)CURRENT
LIABILITIES
INVESTMENT
MINIMUM
OVER
AND
INVESTMENT
ABOVE
IN FIRMS
PERMANENT
IN
CURRENT
CURRENT
WORKING
ASSETS
ASSETS
CAPITAL

DETERMINANTS OF WORKING
CAPITAL
NATURE OF COMPANY

: Service oriented or

manufacturing concern or trading concern.

SIZE OF BUSINESS : Refers to scale of operation.

MANUFRACTURING CYCLES :Depends on length
of production process.

VOLUME OF SALES :

Direct relation with working

capital .

BUSINESS CYCLE :It includes Introduction ,Growth ,

Prosperity and Decline .

FLUCTUATIONS IN SUPPLY OF MATERIAL :

Ex. Petroleum .

MARKET CONDITIONS :

If demand greater
than production , working capital requirement will be less as
there will be minimal investment in storage of finished
goods.

OPERATING EFFICIENCY :

Enhanced
efficiency can be achieved through elimination of wastage ,
improving co ordination among departments etc

PRICE LEVEL CHANGES :

This involves
increase in prices of raw materials resulting in need for
increased working capital requirement.

CAPITAL STRUCTURE OF COMPANY :

Shareholders contribution towards working capital
requirement.

PROFIT APPROPRIATION : Taxation retention and

dividend policy of the concern too influences the working
capital .

OPERATING CYCLE

OPERATING CYCLE DURATION =R+W+F+D(-)C

R=Raw material storage period , W= Work-in-progress holding period ,
F= finished goods storage period , D= debtors collection period ,
C=credit period availed

ISSUES DUE TO EXCESS

WORKING CAPITAL
Unnecessary accumulation of inventory.
Defective credit policy leading to bad
debts.
Creates complacence among
management.
Accumulation of inventories to make
speculative profits.
Excess spending.

ISSUES DUE TO INADEQUATE

WORKING CAPITAL
Freezes the company growth.
Inability to achieve profit targets.
Inefficiency to pay for the operating
expenses.
Under utilization of fixed assets.
Decreases credibility of concern.
Loss of reputation due to inability to meet
short term liabilities.
Has a direct hit on the liquidity of the
concern.

SOURCES OF WORKING
CAPITAL
LONG TERM FINANCING
Loans from financial institutions.
Floating of debentures.
Accepting public deposits.
Issue of shares.
Raising funds by internal financing.

SHORT TERM FINANCING

Short term bank loans.
Commercial papers.
Factoring of receivables.
SPONTANEOUS FINANCING :

MANAGEMENT OF CASH
Cash is the most liquid asset.
Cash for a business is like blood for human body.
It includes cheques , money orders and bank
drafts.
Cash management involves maintaining a
balance between two distinct objectives of a firm
namely LIQUIDITY and PROFITABLITY.
Cash management involves determination of cash
requirements.
It involves spotting opportunities for safe and
profitable investment of cash.

MOTIVES FOR HOLDING CASH

Cash is held by a firm for the following
purposes
Transaction motive
Precautionary motive.
Speculative motive.
Compensatory motive.

STRATEGIES OF CASH
MANAGEMENT
CASH PLANNING :Control over inflow and
outflow of cash.

MANAGING THE CASH FLOWS:

Efforts to
create a hike in inflow and fall in outflow of cash.

OPTIMUM CAH LEVEL:

Balance between
minimum liquidity level and cost of excess cash
balance should be matched.

INVESTING IDLE CASH FLOW:

Excess
cash balance is invested in profitable ventures or
assets.

THANK
YOU