Working

Capital
Management

Presented By
Vasim ansari
MBA IInd Sem
Meaning of working
capital
(WC)
Funds required for short term purposes or
day to day expenses are working capital.
WC refers to part of firm’s capital reqd. for
financing short term or current assets also
known as revolving or short term capital or
circulating capital.
Concepts of

• Balance sheet concept.

• Two interpretations of W.C. under this concept are:-
• gross working capital:-
• capital invested in total current assets of an
• enterprise.
• gross concept sometimes preferred over
• networking concept due to:-
• a). enables enterprise to provide correct amount of WC at
the right time.
• b). every management is interested in total current assets
with which it has to operate than the sources.
• c). gross concepts takes into considerations that every
increase in the funds would increase the Working capital.
 Importance of net working
capital
• It is a qualitative concept which
indicates firm’s ability to meet its
operating expenses and short term
liabilities.
• It indicates the margin of protection
available to the short term creditors.
• Indicator of financial soundness of an
enterprise.
• Net WC is refered to as working capital.
Operating cycle or circular flow
concept

• Start with raw material.

• Raw material -> work in progress ->
• finished goods ->
• Sales -> debtors -> Cash -> raw
material.
• This is a cycle.
 CLASSIFICATION OF WC:-
WC may be classified in two ways:-

• On the basis of concept

- gross working capital
- net working capital
• On the basis of time
- permanent or fixed WC
a). regular WC
b). reserve WC
- temporary or variable WC
a). seasonal WC
b). special WC
 IMPORTANCE OR ADVANTAGES
OF ADEQUATE WC:-
• Maintains solvency of business.
• Helps in creating & maintaining goodwill.
• Helps in arranging loans from banks &
others on easy and favorable terms.
• Enables a concern to avail cash discount
and hence reduce cost.
• Ensures regular supply of raw materials.
Regular payment of salaries, wages &
other day to day commitment.
• Exploitation of favorable market condition.
• Enables a concern to face business crisis
EXCESS OR INADEQUATE WC:-
• Disadvantages of redundant or excessive
WC:-
• Excessive WC means idle funds which earn no profit for the
business & hence, business cannot earn a proper rate of return on
its investments.
• When there is redundant WC, it may lead to unnecessary
purchasing & accumulation of inventories causing more chance of
theft, waste & losses.
• Excessive WC implies excessive debtors & defective credit policy
which may cause higher incidences of bad-debts. incidences of
bad-debts.
• It may result in overall inefficiency in org.
• When there is excessive WC, relationships with banks &other
financial institutions may not be maintained due to low rate of
returns on
 DISADVANTAGES OR DANGERS
OF INADEQUATE WC:-
• A concern which has inadequate WC cannot pay
its short term liabilities in time. Thus, loose its
reputation & shall not be able to get good credit
facilities.

• Cannot buy its requirements in bulk & cannot

avail of discounts etc
• Becomes difficult for the firm to exploit favorable
market conditions & undertake profitable projects.
• Firm cannot pay its day to day expenses and it
create inefficiency.
• Becomes impossible to use efficiently fixed assets
due to non availability of liquid funds
 THE NEED OR OB JECTS OF

WC is needed for the following purposes:-

• For the purchase of raw material.
• To pay wages & salaries
• To incur day to day expenses and overhead costs.
• To meet selling costs.

• To provide credit facilities to the customer.

• To maintain the inventories of raw material, work
in progress, stores and spares and finished
stocks.
ANALYSIS OF

Categories into three parts

Ratio Analysis
Fund flow analysis
Working capital Analysis
• It is a simple arithmetical expression of one
number to another. The technique of ratio analysis
can be employed for measuring short term
liquidity or working capital position of the firm.
The following ratios may be calculated for this
purpose:-
• Current ratio.
• Acid test ratio.
• Absolute liquid ratio.
• Inventory turnover ratio.
• Receivables turnover ratio.
• Payables turnover ratio.
• Working capital turnover ratio.
• Working capital leverage.
• Ratio of current liabilities to tanible net worth.
 FUNDS FLOW ANALYSIS
Fund flow analysis is a technical device
designated to study the sources from which
additional funds were derived and the use to
which these sources were put. It is an effective
management tool to study changes in the
financial position (WC) of a business enterprise
between beginning and ending financial
statements. Funds flow analysis consists of:-
• Preparing schedules of changes in WC.
• Statement of sources and application of funds
WORKING CAPITAL BUDGET
• Budget is a financial or quantitative expression of
business plans & policies to be pursued in the
future period of time. WC budget as a part of total
budgeting process of a business is prepared
estimating future long term & short term WC
capital needs & sources to finance them & then
comparing the budgeted figures with the actual
performance for calculating variances. The
successful implementation of WC budget involves
the preparing of separate budgets for various
elements of WC such as cash inventories and
receivables etc. The objectives of a WC budget is
to ensure availability of funds as and when
needed and to ensure effective utilization of these
resources