Working Capital Management

• Net Working Capital = C.A – C.L.

• = 8000 – 5000 = 3,000
• What is Current Assets?
• What is Current Liability?
• There should be an optimum amount of Working Capital.
• There should not be excessive working capital. Excess
amount remains idle and does not yield any return.
Hence profitability will hamper.
• There should not be inadequate amount of working
capital. It hampers the liquidity.
• There should be a tradeoff between profitability and
liquidity.
• Cash Conversion Cycle and Operating Cycle
• Operating Cycle =
• Inventory holding Period + Average debtors collection
period.
•  
• Cash Conversion Cycle
• = Operating Cycle – average payment period
• = Inventory holding period + Average collection period –
average payment period.
• Suppose,
• Average inventory holding period = 60 days
• Average collection period = 40 days
• Average Payment Period = 35 days
Calculation of CCC
• Cash Conversion Cycle
• = Inventory holding period + debtors collection
• period – Average Payment Period
• = (72+36-40) days
• = 68 days
• X company has annual sales of Rs. 10 Lacs, a
cost of goods sold is 75% of sales and
purchases is 65% of the cost of goods sold.
•  
• Average Inventory Holding period = 60
Days
• Average Collection Period = 40 days
• Average Payment Period = 35 days
• The resources of X company has invested in this cash
conversion cycle:
• Inventory = 1, 25,000
• Debtors = 1, 11,111
• ________
• 2, 36,111
• Less: Creditors = 47,396
• _________
• Net Working Capital = 1, 88,155
Significance of cash conversion cycle.
• Strategy for managing the CCC.
• A positive cash flow conversion cycle means the firm must use bank
loan or equity to support this operating assets. Debt or equity capital
carry on explicit cost, so the firm benefits by minimizing their use in
supporting operating assets.

• How to minimize CCC.

• Turn over inventory as quickly as possible without stock out that result in
lost sales.
• Collect debtor as quickly as possible without losing sales form high
pressure collection techniques.
• Pay to creditors as slowly as possible without damaging the firm’s credit
rating.
•