Working Capital Management

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Working Capital Management

  1. 1. WORKING CAPITAL MANAGEMENT <ul><li>PRESENTED BY: </li></ul><ul><li>NAZIA NAJ </li></ul>
  2. 2. DEFINITION Working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash marketable securities, debtors and inventories. It is also known as revolving or circulating capital or short-term capital.
  3. 3. Objectives of working capital <ul><li>• For the purchase of raw materials, components and spares. </li></ul><ul><li>• To pay wages and salaries. </li></ul><ul><li>• To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc. </li></ul><ul><li>• To provide credit facilities to customers etc. </li></ul>
  4. 4. NEED FOR WORKING CAPITAL <ul><li>Quick payments to suppliers </li></ul><ul><li>Cash discount </li></ul><ul><li>Easy availabilities of bank loans </li></ul><ul><li>Increase in the productivity of fixed assets </li></ul><ul><li>Meeting unseen contingencies </li></ul>
  5. 5. WORKING CAPITAL CYCLE
  6. 6. CONCEPTS OF WORKING CAPITAL <ul><li>Quantitative concept or gross working capital concept </li></ul><ul><li>Qualitative concept or net working capital concept </li></ul>
  7. 7. COMPONENTS <ul><li>Current Assets </li></ul><ul><li>These are those assets which change their form within a short period of time, generally within one year. </li></ul><ul><li>It includes-: </li></ul><ul><li>Debtors, B/R, Cash & Bank balance, Prepaid expenses etc. </li></ul>
  8. 8. Cont…. <ul><li>Current Liabilities </li></ul><ul><li>These are those liabilities which are payable within a short period of time, generally within one year. </li></ul><ul><li>It includes- </li></ul><ul><li>Creditors, B/P, Bank o/d, Short term loan, Proposed dividend etc. </li></ul>
  9. 9. Types of working capital Basis of concept Basis of nature Gross working capital Net working capital Fixed working capital Variable working capital Seasonal Precautionary Speculative
  10. 10. DIFFERENCE BETWEEN TEMPORARY AND PERMANENT CURRENT ASSETS Permanent current assets TIME AMOUNT (Rs.) Temporary current assets The amount of current assets that varies with seasonal requirements.
  11. 11. Sources of working capital Long term sources Short term sources Owned sources Borrowed sources Internal sources External sources Issue of shares Retained earnings Reserves Sale of fixed assets Debentures Long term debts Depreciation funds Provision for taxation Trade credit Advance from customers Public deposits Bank credit
  12. 12. FACTORS DETERMINING WORKING CAPITAL <ul><li>Nature of business </li></ul><ul><li>Size of business </li></ul><ul><li>Production process </li></ul><ul><li>Requirement of cash </li></ul><ul><li>Banking relations </li></ul><ul><li>Business growth and expansion </li></ul><ul><li>Profit margin </li></ul><ul><li>Seasonal nature of business </li></ul>
  13. 13. METHODS OF ESTIMATING WORKING CAPITAL <ul><li>Operating cycle method </li></ul><ul><li>Traditional or forecasting method </li></ul><ul><li>Projected balance sheet method </li></ul><ul><li>Profit and loss adjustment method </li></ul><ul><li>Sales forecasting method </li></ul>
  14. 14. Advantages of working capital <ul><li>• It helps the business concern in maintaining the goodwill. </li></ul><ul><li>• It can arrange loans from banks and others on easy and favorable terms. </li></ul><ul><li>• It enables a concern to face business crisis in emergencies such as depression. </li></ul><ul><li>• It creates an environment of security, confidence, and over all efficiency in a business. </li></ul><ul><li>• It helps in maintaining solvency of the business. </li></ul>
  15. 15. Disadvantages of working capital <ul><li>• Rate of return on investments also fall with the shortage of working capital. </li></ul><ul><li>• Excess working capital may result into over all inefficiency in organization. </li></ul><ul><li>• Excess working capital means idle funds which earn no profits. </li></ul><ul><li>• Inadequate working capital can not pay its short term liabilities in time. </li></ul>

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