Financial Management

Guided by -: Dr. Butalal Ajmera

Prepared by

Submitted To : Dept. Of Business Admi.

Bhavnagar Univercity, Bhavnagar.
 PRINCIPLES OF WORKING
CAPITAL
1) PRINCIPLE OF OPTIMIZATION

2) PRINCIPLE OF RISK VARIATION

3) PRINCIPLE OF COST CAPITAL

4) PRINCIPLE OF MATURITY OF PAYMENT

APPROACHES FOR FINANCING
CURRENT ASSETS

1. Matching or Hedging Approach

2. Conservative Approach

3. Aggressive Approach
 ESTIMATION OF WORKING
CAPITAL
1. Cash Forecasting Method
2. Working Capital as a Percentage of Net
Sales
3. Balance Sheet Method
4. Adjusted Profit and Loss Account
Method
5. Working Capital as a Percentage of Total
Assets or Fixed Assets
CONT….
6. Working Capital Based on Operating
Cycle
7. Regression Analysis Method
 Management of component
of working capital

 working capital management involves

decision regarding the level of
investment in each of the component
of current assets and liabilities.
 There are 3 important
component of net current
assets
 inventory management

 Debtor management

 Cash management
 Inventory management
• Inventory is define as the sum of the
value of raw materials and supplies
including semi-processed materials or
work-in-progress and finished goods.

• The nature of inventory is largely

dependent on the types of operation
carried on and the efficiency of the
firm.
 Main objective of inventory
management
• Materials are available for use in production
and production services as when required.

• Finish goods are available for delivery to

customer to fulfill orders.

• Minimize investment in inventories

• Protect the inventory against deterioration

obsolescence and unauthorized use.
 Debtors management
• The term debtor may define as debt
owed to the firm by customers arising
from sale of goods or services in the
ordinary course of business.

• It has to be mentioned that the credit

that is granted to the customer is done
in the ordinary course of business.
 The objective of maintaining
debtor

• Achieving growth in sales and profit

• Meeting competition
 Cash management
• Cash is common purchasing power or
medium of exchange.

• It forms the most important

component of working capital
 There are three primary
motive for holding cash

• Transaction motive

• Precautionary motive

• Speculative motive
 Working Capital Finance

DEFINITION

• Working Capital refers to that part of the firm’s capital,

which is required for financing short-term or current assets
such as cash marketable securities, debtors and
inventories.

• Funds thus, invested in current assets keep revolving fast

and are constantly converted into cash and this cash flow
out again in exchange for other current assets.

• Working Capital is also known as revolving or circulating

capital or short-term capital.
Working Capital Cycle
 Arranging the sources of
working capital:
It depends mainly upon the availability of funds
and different application of this working capital.
Current assets or working capital includes
mainly three components
• Inventories
• Cash
• Receivables
In short we can also say that the working capital
management means to manage all these three
components in the firm.
 Inventory
Inventory refers to the stockpile of the
products a firm would sell in future in the
normal course of business operations
and the components that make up the
product. The firm stores three types of
inventories, namely, raw materials, work-
in-process/semi-finished goods and
finished good.
 Objective Of Inventory

The objectives of inventory management consists of two

counterbalancing parts:

1) to minimize investments in inventory and

2) to meet the demand for products by efficiently
organizing the production and sales operations.
 Cash
• Cash :
Cash is the ready currency to which all
liquid assets can be reduced.

• Near Cash :
Near cash implies marketable
securities viewed the same way as cash because of
their high liquidity.
 Objective Of Cash Management
• The Basic Objective of cash management
are two-fold:

– To meet the cash disbursement needs

– To minimize funds committed to cash
balances.
 Receivables Management
• The term receivables is defined as ‘debt owed to the
firm by customers arising from sale of goods or
services in the ordinary course of business’. When a
firm makes an ordinary sale of goods or services
and does not receive payment, the firm grants trade
credit and creates accounts receivable which could
be collected in the future. Receivables management
is also called trade credit management. Thus,
accounts receivable represent an extension of credit
to customers, allowing them a reasonable period of
time in which to pay for the goods received.
 Types of Working Capital.
There are two broad classifications of the working
capital.
– Gross Working Capital
– Net Working Capital
There are two more classifications which are also
very important.
– Permanent Working Capital
– Temporary Working Capital
 Gross Working Capital:
• It refers to the firm’s investment in current
assets which include mainly cash, short
term securities, and debtors, bills
receivable and stock. The concept of the
current assets is the assets which can be
converted in to cash within one accounting
year.
 Net Working Capital:
• It refers to the difference between current assets and
current liabilities. Current liabilities are those which are
expected to mature for claim within one accounting year
and which include trade creditors, bills payables and
outstanding expenses.

• The net working capital may be positive or negative.

Positive working capital shows the surplus of current
assets over current liabilities and negative shows
deficiencies.
 Permanent Working Capital:
• It refers to the amount of working capital
which is required by the firm every time. It
shows the minimum level of working
capital which required maintaining day to
day operations of the firm.
 Temporary Working Capital:
• It is required by the when while some
changes in production or sales volume or
change in the price level of any factors of
production.
 Sources of Working Capital:
• On the basis of sources, we can classify it
in to three broad categories-
• Long Term Financing
• Short Term Financing
• Spontaneous Financing
 Long Term Financing:
It includes the following
• Term loans from financial institutions
• Issue of Debentures
• Issue of Shares
• Accepting Public Deposit
• Internal Financing (Retained Earnings)
 Short Term Financing:
It includes following-

• Short term bank loan (Bank Overdraft)

• Commercial Papers (like bills hundies etc.)
 Spontaneous Financing:
• This source of finance is cost free sources.
It includes following-

• Trade Creditors
• Outstanding Expenses etc.
 Bibliography
• Khan & Jain, Financial Management, 7th
Edition
• Bhabhatosh Banneji, Financial
Management.
• Prassana Chandra, Financial
Management