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PRESENTED BY

:
REHAN KHAN
SANA BASHIR SHAH
SHAMAEL.Z.KHAN
SHOAIB SHAMIM
SULAIMAN SHAKIL TAJI

WORKING CAPITAL
 Current assets – Current liabilities
 It measures how much in liquid assets a company has
available to build its business.
 A short term loan which provides money to buy earning
assets.
 Allows to avail of unexpected opportunities.
 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. The management of
working capital involves managing inventories, accounts
receivable and payable and cash.

WORKING CAPITAL
 An increase in working capital indicates that the
business has either increased current assets (that
is received cash, or other current assets) or has
decreased current liabilities, for example has paid
off some short-term creditors.

Working Capital
Management
 Decisions relating to working capital and short term
financing are referred to as working capital management.
Short term financial management concerned with decisions
regarding to CA and CL.
 Management of Working capital refers to management of
CA as well as CL.
 If current assets are less than current liabilities, an entity has
a working capital deficiency, also called a working capital
deficit.
 These involve managing the relationship between a firm's
short-term assets and its short-term liabilities.

Working Capital
Management
 The goal of working capital management is to ensure that
the firm is able to continue its operations and that it has
sufficient cash flow to satisfy both maturing short-term debt
and upcoming operational expenses.
 Businesses face ever increasing pressure on costs and
financing requirements as a result of intensified competition
on globalised markets. When trying to attain greater
efficiency, it is important not to focus exclusively on income
and expense items, but to also take into account the capital
structure, whose improvement can free up valuable financial
resources

.WORKING CAPITAL MANAGEMENT  Active working capital management is an extremely effective way to increase enterprise value. Process optimisation then helps increase profitability. thereby increasing liquidity for strategic investment and debt reduction. Optimising working capital results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a permanent reduction in inventory and capital costs.

and payables.WORKING CAPITAL MANAGEMENT  The fundamental principles of working capital management are reducing the capital employed and improving efficiency in the areas of receivables. . inventories.

Why working Capital is important?  Investment in CA represents a substantial portion of total investment. .  Investment in CA and level of CL have to be geared quickly to changes in sales.

.

Concepts of Working Capital  Gross Working Capital  Net working Capital .

 Referred as “Economics Concept” since assets are employed to derive a rate of return. .Gross Working Capital  Total Current assets  Where Current assets are the assets that can be converted into cash within an accounting year & include cash . debtors etc.

 It indicates liquidity position of a firm & suggests the extent to which working capital needs may be financed by permanent sources of funds. .Net Working Capital  CA – CL  Referred as ‘point of view of an Accountant’.

CONSTITUENTS OF WORKING CAPITAL  CURRENT ASSETS  Inventory  Sundry Debtors  Cash and Bank Balances  Loans and advances  CURRENT LIABILITIES  Sundry creditors  Short term loans  Provisions .

. thus a/c may have a life span of 30-60 days etc.  Swift Transformation into other Asset forms I.each CA is swiftly transformed into other asset forms like cash is used for acquiring raw materials .Characteristics of Current Assets  Short Life Span I.e. raw materials are transformed into finished goods and these sold on credit are convertible into A/R & finlly into cash. cash balances may be held idle for a week or two .e.

Matching Principle  If a firm finances a long term asset(like machinery) with a S-T Debt then it will have to be periodically finance the asset which will be risky as well as inconvenient.  i.e. .  Thus Fixed Assets & permanent CA should be supported with L-T sources of finance & fluctuating CA by S-T sources. maturity of sources of financing should be properly matched with maturity of assets being financed.

MATCHING PRINCIPLE .

.Need for Working Capital  As profits earned depend upon magnitude of sales and they donot convert into cash instantly. to inventory .  It is defined as “The continuing flow from cash to suppliers. to accounts receivable & back into cash “. thus there is a need for working capital in the form of CA so as to deal with the problem arising from lack of immediate realisation of cash against goods sold.  This is referred to as “Operating or Cash Cycle” .

.  Thus operating cycle creates the need for working capital & its length in terms of time span required to complete the cycle is the major determinant of the firm’s working capital needs.  Which refers to length of time required to complete the sequence of events.Need for Working Capital  Thus needs for working capital arises from cash or operating cycle of a firm.

Operating or Cash Cycle 1. Conversion of cash into inventory 2. Conversion of inventory into Receivables 3. Conversion of Receivables into Cash .

OPERATING CYCLE Phase 3 Receivables Phase 2 Cash Inventory Phase 1 .

TYPES OF WORKING CAPITAL  PERMANENT WORKING CAPITAL  VARIABLE WORKING CAPITAL .

.  THUS .PERMANENT WORKING CAPITAL  THERE IS ALWAYS A MINIMUM LEVEL OF CA WHICH IS CONTINOUSLY REQUIRED BY A FIRM TO CARRY ON ITS BUSINESS OPERATIONS. THE MINIMUM LEVEL OF INVESTMENT IN CURRENT ASSETS THAT IS REQUIRED TO CONTINUE THE BUSINESS WITHOUT INTERRUPTION IS REFERRED AS PERMANENT WORKING CAPITAL.

.VARIABLE WORKING CAPITAL  THIS IS THE AMOUNT OF INVESTMENT REQUIRED TO TAKE CARE OF FLUCTUATIONS IN BUSINESS ACTIVITY OR NEEDED TO MEET FLUCTUATIONS IN DEMAND CONSEQUENT UPON CHANGES IN PRODUCTION & SALES AS A RESULT OF SEASONAL CHANGES.

VARIABLE IS EXPECTED TO TAKE CARE FOR PEAK IN BUSINESS ACTIVITY.  WHILE PERMANENT IS MINIMUM INVESTMENT IN VARIOUS CA .  INVESTMENT IN PERMANENT PORTION CAN BE PREDICTED WITH SOME PROFITABILITY WHEREAS INVESTMENT IN VARIABLE CANNOT BE PREDICTED EASILY. .DISTINCTION  PERMANENT IS STABLE OVER TIME WHEREAS VARIABLE IS FLUCTUATING ACCORDING TO SEASONAL DEMANDS.

. S-TFUNDS SHOULD BE USED TO FINANCE TEMPORARY WORKING CAPITAL NEEDS OF A FIRM. THE TEMPORARY PORTION IS NEEDED TO MEET SEASONAL & OTHER TEMPORARY REQUIREMENTS.  ALSO PERMANENT CAPITAL REQUIREMENTS SHOULD BE FINANCED FROM L-T SOURCES .DISTINCTION  WHILE PERMANENT COMPONENT REFLECTS THE NEED FOR A CERTAIN IRREDUCIBLE LEVEL OF CURRENT ASSETS ON A CONTINOUS AND UNINTERRUPTED BASIS .

OPERATING ENVIRONMENT OF WORKING CAPITAL CHAPTER 2 .

. and (iii) cost of money or rate of interest. lending by commercial banks etc.  Monetary policy is the process by which the government. or monetary authority of a country controls (i) the supply of money. . in order to attain a set of objectives oriented towards the growth and stability of the economy.Monetary theory provides insight into how to craft optimal monetary policy. in order to attain a set of objectives oriented towards the growth and stability of the economy.central bank.  Monetary policy involves variations in money supply .Monetary and Credit Policies  Monetary policy is the process by which the govt. interest rates . central bank. or monetary authority of a country controls (i) the supply of money. (ii) availability of money. and (iii) cost of money or rate of interest. (ii) availability of money.

and pay for them at a later date.Credit Policy  Credit gives the customer the opportunity to buy goods and services. written guidelines that set (1) the terms and conditions for supplying goods on credit . and (4) steps to be taken in case of customer delinquency .  Where delinquency means Failure to repay an obligation when due or as agreed. missing two successive payments will normally make the account delinquent .  Clear. (2) customer qualification criteria (3) procedure for making collections . Also called collection policy. Thus in consumer installment loans.

 Can charge more for goods to cover the risk of bad debt.  Stimulates agricultural and industrial production and commerce. . and pay for them only after the harvest.  Gain goodwill and loyalty of customers.  Farmers can buy seeds and implements.  Increase the sales.  People can buy goods and pay for them at a later date.Advantages of credit trade  Usually results in more customers than cash trade.  Can be used as a promotional tool.

 Risk of Bankruptcy.  High administration expenses.  People can buy more than they can afford. .Disadvantages of credit trade  Risk of bad debt.  More working capital needed.

Instruments of Monetary Policy in India  Money Supply  Bank Rate  Reserve Ratios  Interest Rates  Selective Credit Controls  Flow of Credit .

 Money supply = Notes and coins with public + Demand deposits with Commercial papers .Money Supply  This is the sum total of money public funds and can be used for settling transactions to buy and sell things and make other payments constitutes the money supply of a nation.

This exerts pressure to bring about the rise in interest rates (lending rates) charged by commercial banks on their lending to public.  The rate of interest charged by central bank on their loans to commercial banks is called bank rate(Discount rate).  Whereas decrease in bank rate has the opposite effect and leads to general easing of credit in the economy.1934.  An increase in bank rate makes it more expensive for commercial banks to borrow . . This leads to a general tightening in economy.Bank Rate  Standard rate at which bank is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under Reserve bank of India Act.

borrowing. and would normally be in the form of fiat currency stored in a bank vault(vault cash).RESERVE REQUIREMENTS  The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. influencing the country's economy. and interest rates .  The reserve ratio is sometimes used as a tool in the monetary policy.Western central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves. they prefer to use open market operations to implement their monetary policy . These reserves are designed to satisfy withdrawal demands. or with a central bank.

Cash reserves 2.RESERVE REQUIREMENTS  Thus central bank makes it legally obligatory for commercial banks to keep a certain minimum percentage of deposits in reserve. Liquidity reserves .  These are of 2 types:- 1.

. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio.CRR  CASH RESERVE RATIO  THIS IS DEFINED AS A cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes.

It is the amount which a bank has to maintain in the form:  Cash  Gold valued at a price not exceeding the current market price.STATUTORY LIQUIDITY RATIO  Statutory Liquidity Ratio (SLR) is a term used in the regulation of banking in India. .  Unencumbered approved securities (G Secs or Gilts come under this) valued at a price as specified by the RBI from time to time.

and those liabilities which are accruing in one months time due to maturity) of a bank. Presently the SLR is 24% with effect from 8 November.STATUTORY LIQUIDITY RATIO  The quantum is specified as some percentage of the total demand and time liabilities ( i. the floor rate of 25% for SLR was removed.  The objectives of SLR are:  To restrict the expansion of bank credit. . the liabilities of the bank which are payable on demand anytime. This percentage is fixed by the Reserve Bank of India. 2008.  Following the amendment of the Banking regulation Act(1949) in January 2007.  To augment the investment of the banks in Government securities.e. A reduction of SLR rates looks eminent to support the credit growth in India.  To ensure solvency of banks. The maximum and minimum limits for the SLR are 40% and 25% respectively.

behind fixing rates on deposits are to avoid unhealthy competition amongst the banks for deposits and keep the level of deposit rates in alignment with lending rates of banks for deposits. .INTEREST RATES  This is generally done by stipulating min. concessive or ceiling rates of interest are made applicable to advances for certain purposes ao to certain sectors to reduce the interest burden and thus facilitate their development.  Further obj. rates of interest for extending credit against commodities covetred under selective credit control.  Also.

Selective Credit Controls  These are Qualitative instruments which are aimed at affecting changes in the availability of credit with respect to particular sectors of the economy.  Thus selective controls are called selective because they are aimed at movement of credit towards selective sectors of the economy. .

Selective Credit Controls  The general instruments such as Reserve ratios.  Quantitative instruments are called quantitative because they affect the total volume(quantity) of money supply and credit in the country. .  They are called so because they influence the nation’s money supply and general availability of credit. Bank rate and open market operations.

Selective Credit Controls  The most widely used qualitative techniques are selective control and moral suasion. selective credit controls relate to tools available with the monetary authority for regulating the distrubution or direction of bank resources to particular sectors of economyin accordance with broad national priorities considered necessary for achieving the set. .  While the general credit controls operate on the cost and total volume of credit .

.MORAL SUASION  IT IMPLIES THE CENTRAL BANK EXERTING PRESSURE ON BANKS BY USING ORAL AND WRITTEN APPEALS TO EXPAND OR RESTRICT CREDIT IN LINE WITH ITS CREDIT POLICY.

DETERMINATION OF WORKING CAPITAL NEEDS CHAPTER 3 .

Different approaches in determination of working capital  Industry norm approach  Economic modeling approach  Strategic choice approach .

.INDUSTRY NORM APPROACH  THIS APPROACH IS BASED ON THE PREMISE THAT EVERY COMPANY IS GUIDED BY THE INDUSTRY PRACTICE.  LIKE IF MAJORITY OF FIRMS HAVE BEEN GRANTING 3 MONTHS CREDIT TO A CUSTOMER THEN OTHERS WILL HAVE TO ALSO FOLLOW THE MAJORITY DUE TO FEAR OF LOSING CUSTOMERS.

ECONOMIC MODELLING APPROACH  TO ESTIMATE OPTIMUM INVENTORY IS DECIDED WITH THE HELP OF EOQ MODEL. .

STRATEGIC CHOICE APPROACH  THIS APPROACH RECOGNISES THE VARIATIONS IN BUSINESS PRACTICE AND ADVOCATES USE OF STRATEGYIN TAKING WORKING CAPITAL DECISIONS.  THE PURPOSE BEHIND THIS APPROACH IS TO PREPARE THE UNIT TO FACE CHALLENGES OF COMPETITION & TAKE A STRATEGIC POSITION IN THE MARKET PLACE. .

.STRATEGIC CHOICE APPROACH  THEEMPHASIS IS ON STRATEGIC BEHAVIOUR OF BUSINESS UNIT.THUS THE FIRM IS INDEPENDENT IN CHOOSING ITS OWN COURSE OF ACTION WHICH IS NOT GUIDED BY THE RULES OF INDUSTRY.

Determinants of working capital  General nature of business  Production cycle  Business cycle  Credit policy  Production policy  Growth and expansion  Profit level  Operating efficiency .