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1. Working Capital
Management
Class-One
Presented By:
CA. Bhupesh Anand
FCA, ACMA, FCS, Dip-IFRS (London)
Qualified Valuer, Mind Trainer
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2. Concept 1
Introduction
Financial Management is effective & efficient
utilisation of finance. It includes 3 Decisions.
 Investment Decision (what is the Requirement of
finance).
 Financial Decision (From where Funds can be
Procured).
 Dividend Decision (whether to pay Dividend or
not).
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3. Concept 2
Types of Investment Decisions
 Short Term Investment Decisions.
(Working Capital Decision)
 Long term Investments.
(Capital Budgeting Decisions)
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4. Concept 3
Short Term investment Decisions
a) By Short Term Investment Decisions we mean to
run an entity, Funds Required to meet Revenue
Expenditures/ Day to day operations.
b) Short term I. Decisions are also named as Working
Capital Requirement Decisions.
c) Working Capital
= Current Assets – Current Liabilities
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5. Concept 4
Importance of Working Capital
a) Working Capital is life Blood of any organisation
without which smooth functioning of operating
Activities is not possible.
Ex- In case Apollo tyres funds Required for
 Purchase of raw material .
 Payment of salaries, wages.
 Payment of expenses, overheads etc.
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6. Concept 5
Meaning of Working Capital MGT
Working Capital Management consists of two Steps.
Step 1 – Estimation of working capital Requirement
i.e. How much funds are required for smooth
Functioning of operating Activities.
Step 2 – From Where Funds can be Procured for
Working Capital requirement.
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7. Concept 6
Types of Working Capital
a) Working Capital can be two types.
 Gross working Capital
 Net Working Capital.
Contd.
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8. b) Gross Working Capital is total of current assets &
Net working Capital means i.e
Total of current assets
-
Total of current Liabilities
Contd.
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9. c) Those assets which can be converted into cash
with in 12 months are named as current assets.
As per Revised Schedule VI
Ex- Balance of
Raw material stock
Work in progress stock (Semi-Finished goods)
Finished Goods Stock
Sundry Debtors.
Cash & Bank Balance. Etc.
T = 0 T = 12
Contd.
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10. d) Those Liabilities which are to be paid with in 12
months are named as current Liabilities as per
Revised Schedule VI.
Ex- Outstanding Expenses,
Outstanding overheads,
Sundry creditors. Etc
T=0 T = 12
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11. e) Factor’s affecting Working Capital Requirement
Nature of Business.
Mgt thinking
Operating Cycle etc.
Operating Cycle: Operating Cycle is defined as the
time duration which the firm requires to manufacture
and sell the product and collect cash, Thus Operating
Cycle refers to the acquisition of resources,
conversion of raw materials into work in progress into
finished goods into sales and collection of sale.
Contd.
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12. Contd.
Longer the operating cycle, higher the investment in
current assets. In Practice, firms are allowed to
acquire resources on credit, to that extent firms need
to raise working finance is reduced.
Operating Cycle (O) can be divided into five stages :
(a) Raw Material Stage (R)
(b) Work in Progress Stage (W)
(c) Finished Goods Stage (F)
(d) Debtors Collection Stage (P)
(e) Creditors Payment Stage (C)

14. Concept 7
Optimum Requirement of working capital.
a) As a Finance Manager, it is important to estimate
adequate/optimum Req. of working Capital i.e.
Funds Required to be invested in Working Capital
for smooth Functioning of operating activities.
b) In case of Optimum Requirement of working capital
is not estimated then over trading situations will
arise.
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15. Concept 8
Steps for Estimation of W.C Requirement
a) Following are the 3 steps to be followed while
Estimating W.C Requirements.
Step 1 Preparation of cost sheet (on Annual & totality
basis)
Contd.
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16. Step 2 Preparation of statement showing Estimation
of working Capital Requirement.
Step 3- Preparation of a table showing operating
Cycle/Ratios/Stages & their Relationships.
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17. Concept 9
Following is the format of cost sheet.
R. Purchases
Add; Op. Stock of R.M
Less; Cl. Stock of R.M ( )
R.M. Consumed
Add; Direct Labour
Add; Direct Expenses
Prime Cost
Add; Factory overheads (I.M, IL, IE)
Gross Factory cost
Contd.
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18. Add; Op. Stock of W.I.P
Less; Cl. Stock of W.I.P ( )
Net Factory Cost
Add; Office & Administrative O/H
Total cost of Production
Add; Opening stock of F. Goods
Less; Cl. Stock of F. Goods ( )
Total cost of Goods Sold
Add; Selling & Distribution O/H
Total cost of sales
Profit/(Loss) (B/F)
Sales
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19. Concept 10
Points to be kept in Mind while Preparing
cost sheet.
a) Cost per unit i.e. C.P.U
= Total cost of production
No. Of Units Produced
b) Factory O/H are related with No. of units
produced.
c) Selling O/H are related with no. of units sold.
Contd.
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20. d) In case Opening Stock of Raw materials & cl. Stock
of R. Material has not been specified then assume.
Op. stock of R. M = Cl. Stock of R.M
& Hence
R.M Consumed = R.M Purchased
e) In case of WIP & Cl. Stock of WIP has not been
specified then assume both are same so,
Gross Factory cost = Net factory cost
Contd.
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21. f) In case Op. Stock of Finished Goods & Cl. Stock of
Finished goods is not given then we will assume
total cost of Production = Total cost of Goods sold
g) Cost can be divided on the basis of element wise
as follows.
Contd.
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22. Cost
Material Labour Expenses
Direct Indirect Direct Indirect Direct Indirect
Mat. Mat. Lab. Lab. Exp. Exp.
Overheads (O/H)
Factory O/H Office O/H Selling O/H
Contd.
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23. h) In case Credit sales has not been specified then
assume total sales as credit sales.
i) In case credit Purchases is not given then we will
assume total Purchases as credit Purchases.
j) In Case nature of overheads is missing then we will
assume overheads as.
 Factory Overheads Preference I
 Office Overheads Preference II
 Selling Overheads Preference III
Contd.
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24. k) In case Degree of Completion for WIP is not
specified in the Question then we will assume
100% As Degree of Completion for R. Materials.
50% as degree of completion for Direct Labour,
Direct Expenses & Factory Overheads.
l) In case it is mentioned that 60% is completion
stage then it implies that for all elements material,
Labour & Overheads Degree is 50%.
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25. Concept 11
Following is the Format for Estimating
Working Capital.
A) Funds Invested/ Blocked in Amt. (Rs.)
i) Current Assets
Closing Stock of R. Mat. xxx
Closing Stock of W.I.P xxx
Closing Stock of Goods xxx
ii) Debtors xxx
iii) Prepaid Expenses xxx
Contd.
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26. iv) Cash Bal. xxx
v) Any Other Current asset xxx
Total Amt. invested in current Asset
B) Credit Enjoyed from current liabilities
i) Creditors xxx
ii) O/S Expenses xxx
iii) O/S Overheads xxx
Total of current liabilities
A- B = Net Working Capital xxx
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