Working Capital Management

Meaning • Working capital is the amount of funds necessary to cover the cost of operating the enterprise. • Concepts of Working Capital – Gross Working Capital – Funds invested in current assets – Net Working Capital = Current assets – current liabilities – Permanent working capital – Temporary working capital .

Importance of Working Capital • • • • • • • • Solvency of business Goodwill Cash discounts Regular supply of raw materials Regular payments Exploitation of favourable market conditions Easy loans Ability to face crisis .

Factors determining Working Capital Requirement • • • • • • • • Nature of business Size of business Seasonality of operations Length of production cycle Working capital cycle Credit policy Conditions of raw material supply Rate of stock turnover .

Financing of Working Capital Approaches • Conservative approach – Long term Funds = FA + PCA +Part of temporary CA Short term funds = Part of temporary CA • Aggressive approach – Long term funds = FA+ Part of PCA Short term funds = Part of PCA + Temporary CA • Matching approach – Long term funds = FA+ PCA Short term funds = Temporary CA .

Operating Cycle Approach to Working Capital Management Cash Raw Material Debtors Gross Operating Cycle period Work-in-progress Sales Finished Goods .

• Net operating cycle period = Gross operating cycle period – average payment period • Operating cycle period = Raw material storage period + conversion period + Finished goods storage period + Average collection period – Average payment period .

• Raw material storage period : – Annual consumption of raw material – Average daily consumption – Annual consumption of raw material / No. of days in a year – Average stock = opening stock + closing stock/2 – Raw material storage period = average stock/ average daily consumption .

I. power + Depreciation – closing W. of days in a year – Average stock of W.I.I.P/2 – Average conversion period = Average stock of W.I.I.I.P – Average daily cost of production = Annual cost of production / no.P = opening stock of W.P + closing stock of W.P/ average daily cost of production .P + consumption of raw material + other manufacturing cost like wages.• Conversion period: – Annual cost of production = opening stock of W.

of days in a year – Average stock of finished goods = opening stock of finished goods + closing stock of finished goods /2 – Finished goods storage period = average stock of finished goods/ average daily cost of sales .• Finished goods storage period: – Annual cost of sales = opening stock of finished goods + cost of production +excise duty+ selling and distribution cost +general administrative cost +financial cost – closing stock of finished goods – Average daily cost of sales = Annual cost of sales / no.

of days in a year – Average balance of debtors = opening debtors + closing debtors / 2 – Average collection period = Average balance of debtors / average daily credit sales .• Average collection period: – Annual credit sales – Average daily credit sales= Annual credit sales / no.

of days in a year – Average creditors = opening creditors + closing creditors / 2 – Average payment period = average creditors / average daily credit purchases .• Average Payment Period: – Annual credit purchases – Average daily credit purchases = Annual credit purchases / no.