Working Capital Decision

Presented By:
Saurabh Rajput
MBA(ISM)
500011393
 Theory of Working Capital
Management:
 Working capital represents the value of current
assets in the firm. The management of short term
assets is so important for a firm that it can survive
only after keeping adequate level of short term
assets.
 The working capital plays a role in business firm like
a lubricants and fuel in automobile. It converts an
asset from non productive to productive one and
vice versa.
 It applies for all the factors of production. In every
business the receipts are uncertain where as the
payments are certain.
 Contd.
Working capital management involves
two main processes.
 Determining the size of the working
capital
 Arranging the sources of working
capital
 Determining the size of the
working capital:
It is determined on the basis of certain
factors, like –
– Nature of Industry
– Size of Business
– Manufacturing Cycle
– Production Policy
– Volume of Sales
– Terms of purchase & Sales
 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
Planning of working capital
 Every firm must maintain a sound working
capital otherwise; its business activities may
be adversely affected.
 The objective of financial management i.e. to
maximize the wealth of the shareholder
cannot be attained if operations the firm are
not optimized.
 Thus, every firm has to maintain adequate
working capital. It should have neither the
excessive working capital nor inadequate
working capital.
 Need
 To increase operating profit, the firm should
increase its sales.
 In practical life it has been seen that when
firm increases its sales the profit may
increase but it is not necessary that the cash
profit may increase, because sales include
the cash and credit sales.
 Cash sales increase the cash position
whereas credit sales increase the
receivables.
 The collection of cash from receivables
require some times span. So, to meet out
day to day expenses the firm needs some
sort of funds to run uninterrupted business
operations, the amount will be locked up in
the current assets.
 It happens due to operating cycles. The
need of working capital is based on the
length of operating cycles. The length of
operating cycle depends mainly on the
nature of business it self.
Problems Associated with Excess
and Inadequate Working Capital:
 This is very important aspect of working capital
management that excessive as well as inadequate
working capital both are harmful to the
organization. Excess working capital creates idle
funds, which cannot earn any return, whereas
shortages of working capital will hamper the
production process and other business operations.
In both the situations firm has to suffer loss.