Optimize Working Capital Management with these Strategies

WORKING CAPITAL
MANAGEMENT
DR. R.S.AURORA
PROFESSOR IN SOFT SKILLS,
CONTROL SYSTEMS AND STRATEGY
Dr.Rajinder S. Aurora 1
What is Capital?
 Amount invested in business for starting

an enterprise or for expansion and
diversification
 Amount invested depends on the size and

nature of the enterprise
Classification of Capital:
 Owned Capital and Borrowed Capital
 Long Term and Short Term Capital
 Fixed and Working Capital
Working Capital is…
• Excess of Current Assets over Current

Liabilities
• Also known as Circulating Capital, Fluctuating

Capital or Revolving Capital
• Magnitude and composition keep changing

continuously
Current Assets and Current
Liabilities:
 Current Assets  Current Liabilities
represents assets represents claims of
which can be outsiders expected to
converted into cash in mature for payment
less than a year within a year
 Include cash, short-  Include creditors, bills

term securities, payable, bank
debtors, bills overdraft and
receivables and stock outstanding expenses
Concepts of Working Capital:
Gross Working Capital:
• Investments in Current Assets
Net Working Capital:
• Difference between Current Assets and

Current Liabilities
• Can be Positive or Negative or Zero
Working Capital Cycle
Equity and Loans

CASH
Purchase of
Material
Bills
Receivable
Stock of WIP
S.Debtors
Stock of
Finished Goods
Credit Sales Cash Sales
Sales
Adequacy of Working Capital:
• Adequacy implies having the right amount of

working capital
• Avoid excessive and paucity of funds
• Excess funds results in idle capital
• Paucity impairs profitability, interrupts

production and generates inefficiencies
Dangers of Excessive Capital:
• Unnecessary accumulation of inventories
• Indication of defective credit policy and slack

collection period
• Makes management complacent
• Tendencies of accumulating inventories to

make speculative profits grow
Dangers of Inadequate Working
Capital:
• Stagnates growth
• Difficult to achieve profit targets
• Operating inefficiencies creep in
• Ineffective utilization of fixed assets
• Unable to avail attractive credit opportunities
• Loss of reputation
Determinants of Working Capital:
• Nature and Size of business
• Manufacturing Cycle
• Sales Growth
• Demand Conditions
• Production Policy
Contd…
Contd…
• Operating efficiency and performance
• Price level changes
• Firms credit Policy
• Availability of credit
Symptoms of Poor Working Capital
Management :
• Excessive inventory
• Slow down in collection from debtors
• Purchase of capital goods with working capital
resources
• Unplanned production schedules
• Inefficient use of trade credit
• Overtrading
• Dependency on short-term funds for permanent
working capital
• Inefficient cash management
• Inability to get working capital limits
Operating Cycle:
 The time duration required to convert sales,

after the conversion of resources into
inventories, into cash.
Involves four stages:
• Acquisition of Raw Materials and Stores
• Work-in-Process
• Sales of the Finished Product
• The Recovery of Receivables

Operating Cycle:
Raw Materials
Purchased
Finished
Goods Cash
Order Stock Received
Sold
Placed Arrives
WIP Inventory
Period Accounts Receivable Period
Time
Accounts
payable
period
Invoice Cash paid
Received for Materials
Operating Cycle
Cash Cycle
Reasons for Prolonged
Operating Cycle:
• Purchase of materials in excess
• Buying inferior or defective materials
• Failure to get trade and cash discount
• Inability to purchase during seasons
• Defective Inventory policy
• Lack of production planning
• Use of outdated technology
• Defective credit policy
• Poor maintenance and upkeep
How to reduce
Operating Cycle?
• Purchase Management
• Production Management
• Sound credit and collection policies
• Proper monitoring of External Environment
• Proper personnel policy
Gross and Net Operating Cycle:
Gross Operating Capital:
Raw Material Conversion Period + WIP Conversion Period +

Finished Goods Conversion Period + Book Debts Conversion
Period
Net Operating Period:
Gross Operating Period – Payment Deferral Period
Components of Operating Cycle:
• Raw Material Conversion Period:

(Average value of raw material stock / Average consumption of
raw material) x 365
• WIP Conversion Period:

(Average WIP / Average cost of goods sold) x 365
• Finished Goods Conversion Period:

(Average stock of finished goods / Average cost of goods sold) x 365
• Book Debts Conversion Period:

(Average value of receivables / Average value of sales) x 365
• Payment Deferral Period:

(Average level of creditors / Average purchase of raw materials) x
365
Types of Capital based on
Operating Cycle:
Permanent Working Capital:
Minimum level of current assets continuously

Required for carrying on business operations
Fluctuating Working Capital:
Extra capital needed to support changing

Production and sales activities
Permanent and Temporary
Working Capital:
Temporary
Permanent
ANY
QUESTIONS
PLEASE ???
THANK YOU

Optimize Working Capital Management with these Strategies

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Optimize Working Capital Management with these Strategies

Uploaded by

Copyright:

Available Formats

WORKING CAPITAL

 Amount invested in business for starting

 Amount invested depends on the size and

 Owned Capital and Borrowed Capital

 Long Term and Short Term Capital

 Fixed and Working Capital

• Excess of Current Assets over Current

• Also known as Circulating Capital, Fluctuating

• Magnitude and composition keep changing

 Include cash, short-  Include creditors, bills

Gross Working Capital:

• Investments in Current Assets

Net Working Capital:

• Difference between Current Assets and

• Can be Positive or Negative or Zero

Equity and Loans

• Adequacy implies having the right amount of

• Avoid excessive and paucity of funds

• Excess funds results in idle capital

• Paucity impairs profitability, interrupts

• Unnecessary accumulation of inventories

• Indication of defective credit policy and slack

• Makes management complacent

• Tendencies of accumulating inventories to

• Difficult to achieve profit targets

• Operating inefficiencies creep in

• Ineffective utilization of fixed assets

• Unable to avail attractive credit opportunities

• Nature and Size of business

• Operating efficiency and performance

• Price level changes

• Firms credit Policy

 The time duration required to convert sales,

• Acquisition of Raw Materials and Stores

• Sales of the Finished Product

• The Recovery of Receivables

• Sound credit and collection policies

• Proper monitoring of External Environment

• Proper personnel policy

Gross Operating Capital:

Raw Material Conversion Period + WIP Conversion Period +

Net Operating Period:

Gross Operating Period – Payment Deferral Period

• Raw Material Conversion Period:

• WIP Conversion Period:

• Finished Goods Conversion Period:

• Book Debts Conversion Period:

• Payment Deferral Period:

Permanent Working Capital:

Minimum level of current assets continuously

Fluctuating Working Capital:

Extra capital needed to support changing

You might also like