WORKING CAPITAL

MANAGEMENT

Dr. Arti Chandani, Associate Professor, SIMS

 INTRODUCTION

 Working capital management is the

administration of the firm’s current assets and
the financing needed to support current assets.
 RATIONALE FOR WORKING
CAPITAL

 Current assets can be managed in a shorter time

span as they are short lived, therefore the time
value of money is not a consideration here.
 Managing current assets directly affects the
liquidity of the firm.
 Current assets can be easily adjusted to the
demand and supply variation of the products and
in accordance with the variance in the estimated
sales.
WORKING CAPITAL CONCEPTS

 Net working Capital= Current Assets minus

current liabilities. This is also known as the liquid
surplus of the firm as it denotes the surplus or
extra current assets left with the firm after
meeting all its current liabilities.
 Gross working capital= The firm’s investment in
current assets like cash and marketable
securities, receivable and inventory.
 PROFITABILITY AND
RISK

 Underlying sound working capital management lie

two fundamental decision issue for the firm. They are
the determination of :-
 The optimum level of investment in current assets
 The appropriate mix of Short term and long term
financing used to support this investment in current
assets.
 DETERMINANTS OF
WORKING CAPITAL
 Nature of business

 Public utilities-low

 Trading firm- high

 Market & demand condition

 Technology & manufacturing policy

 Credit policy

 Availability of credit from suppliers

 Operating efficiency
 WORKING CAPITAL

 Permanent Working capital

 Fluctuating or variable
working capital
 PERMANENT
WORKING
CAPITAL
The amount of current assets required to meet a firm’s long-term
minimum needs consists of permanent CA and variable CA.
AMOUNT

Permanent current assets

TIME
 FLUCTUATING
WORKING
CAPITAL
The amount of current assets required to meet a firm’s long-term
minimum needs consist of increasing permanent CA and variable CA.
AMOUNT

Permanent current assets

TIME
 POLICIES FOR FINANCING
CURRENT ASSETS

 Matching Approach
 Conservative approach
 Aggressive Approach
 MATCHING APPROACH
Hedging or maturity or matching approach

Temporary CA
ST financing
Amount

Permanent CA

Long-term financing
Fixed assets

Time
 CONSERVATIVE
APPROACH

Temporary CA
ST Financing
AMOUNT

Permanent CA

Long-term financing
Fixed assets

TIME
 Aggressive Approach

Temporary CA

ST Financing
AMOUNT

Permanent CA

LT Financing
Fixed assets

TIME
 OPERATING CYCLE

 Components of Operating Cycle

 RMCP
Inventory Conversion
 WIPCP Period

 FGCP
 ACP
 APP

 Operating Cycle = RMCP+ WIPCP+FGCP+ACP-APP

 OPERATING CYCLE

  RMCP

 

 

  365 𝑥 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝑅𝑀𝐶𝑃=
𝐶𝑂𝐺𝑆
 OPERATING CYCLE

  WIPCP
 FGCP
 ACP
 APP
 Statement of Cost of Sales (Amount in INR ' 000)
Year 2017 Question 1
Purchase of RM ₹ 45,000
Opening RM ₹ 10,000
Closing RM ₹ 7,500
Joyo limited manufactures
RM Consumed ₹ 47,500
blades of fan. The
Direct Labour ₹ 36,000
information of cost is given
Depreciation ₹ 8,200
here. You are required to
Other Manfu. Exp ₹ 6,000
Total Cost ₹ 97,700
calculate operating cycle
Opening WIP ₹ 1,800
and net operating cycle for
Closing WIP ₹ 3,200
Joyo limited. You may
Cost of production ₹ 96,300 assume 365 days in a year.
Other Information
Opening FG ₹ 3,000 Sales (credit) ₹ 61,000
Closing FG ₹ 5,200 Op debtor ₹ 5,500
COGS ₹ 94,100 Closing debtors ₹ 7,300
Op creditors ₹ 3,000
Selling and admin ₹ 30,000 Closing creditor ₹ 4,500
Cost of Sales ₹ 1,24,100