Basics of working capital management.

1. By
Jagannath Das
Eastern Institute Of Management

2. Working Capital Management
The goal of working Capital
Management is to manage the firm’s
current asset and current liabilities
in such a way that a satisfactory level
of working capital is maintained

3. Concept of Working Capital
There are two concept of working
capital:
Gross and Net
Gross working Capital: it is the total
current assets which represents the
proportion of investment that circulates
from one form to another in the ordinary
conduct of business.

4. Net Working Capital
It is the difference between the current assets and
current liabilities or alternatively the portion of
current assets financed with long-term funds.
Net Working Capital measures the liquidity of the
firm.
The three basic measures of a firms overall liquidity are –
i) Current Ratio,
ii) Liquidity test Ratio, iii) The Net Working Capital

5. Need for Working Capital
A) Operating cycle or Cash cycle- It implies the
continuing flow from cash to suppliers, to
inventory, to accounts receivables and back to cash.
B)Permanent and temporary working capital-
Permanent working capital-is a certain minimum
level of working capital on a continuous and
uninterrupted basis.
Temporary working capital- is the working capital
needed to meet seasonal as well as unforeseen
requirements.

6. C)Changes in working capital-Changes in the level
of working capital occurs due to, i)changes in the
level of sales or operating expenses, ii)policy
change, iii)changes in technology
Need for Working Capital

7. Computation of working capital
Estimation of current
assets:
i) Raw materials Inventory:

8. ii)Work-in-progress Inventory

11. Estimation of current liabilities:

14. I)Estimation of current assets: Amount
a)Minimum desired cash and bank balances ***
b)Inventories: ***
Raw materials ***
Work-in-progress ***
Finished goods ***
c)Debtors ***
Total Current Assets ****
II)Estimation of Current Liabilities
a)Creditors ***
b)Wages ***
c)Overheads ***
Total Current Liabilities ****

15. Amount
III)Net working capital (I-II) ***
Add margin for contingencies ***
IV)Net working capital required ***

16. Problem:
X &Y ltd is desirous to purchase a business and has consulted you, and one point on
which you are asked to advice them, is the average amount of working capital which will
be required in the first years working.
You are given the first years estimates and are instructed to add 10% to your computed
figure to allow for contingencies.
Particulars Amount for the year
(i)Average amount backed up for stocks
Stocks of finished products Rs 5000
Stock of stores and materials Rs 8000
(ii)Average credit given:
Inland sales,6weeks credit Rs312000
Export sales,1.5weeks credit Rs78000

17. (iii)Average time lag in payments of wages and other outgoings:
Wages,1.5weeks Rs260000
Stocks and materials,1.5months Rs48000
Rent and royalties,6months Rs10000
Clerical staffs,0.5months Rs62400
Manager,0.5month Rs 4800
Miscellaneous expenses ,1.5months Rs48000
Particulars Amount for the year
(iv)Payment in advance:
Sundry expenses(paid quarterly in advance) Rs8000
Undrawn profits on an average throughout the year. Rs11000
Set up your calculations for the average amount of
working capital required.