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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

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

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 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

Average collection period:


Annual credit sales Average daily credit sales= Annual credit 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 Payment Period:


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