2. THESIS OBJECTIVE:
• To investigate the relationship among working
capital and organisation profitability.
• To verify the connection among working capital
management and profit of real estate firms over 10
years, 2004-14.
4. MEANING OF WORKING CAPITAL(WC):
• Funds required for short term purposes or day to
day expenses are working capital.
• Working capital typically means the firm’s
holding of current or short-term assets such as
cash, receivables, inventory and marketable
securities.
• It is also known as revolving or short term
capital or circulating capital.
5. WORKING CAPITAL MANAGEMENT:
• Its goal is to ensure that the firm is able to continue its
operations and that it has sufficient cash flow to
satisfy both short-term debt and upcoming
operational expenses.
• It is the ability to control effectively and efficiently the
current assets and current liabilities in a manner that
provides the firm with maximum return on its assets
and minimizes payments for its liabilities.
6. COMPONENT OF WORKING CAPITAL:
The working capital cycle is made up of four core
components:
• Cash & Cash equivalent.
• Creditors/accounts payable.
• Inventory/stock in hand.
• Debtors/accounts receivables.
7. IMPORTANCE OF WORKING CAPITAL:
• If the working capital is too:
• High - Business has surplus funds which are not earning a return.
• Low - May indicate that your business is facing financial difficulties.
• To Forecast the optimum working capital requirement the
following formula may be used:
• (Estimated cost of good sold x Operating cycle) + Desired cash balance.
• Operating Cycle, O = R + W + F + D – C
• Where, O = Duration of operating cycle.
R = Raw Material storage period.
W= Work-in-process period.
F = Finished Good Storage period.
D = Debtors collection period.
C = Creditors payment period.
8. TYPES OF WORKING CAPITAL:
WORKING CAPITAL
BASIS OF
CONCEPT
BASIS OF
TIME
Gross
Working
Capital
Net
Working
Capital
Permanent
/ Fixed
WC
Temporary
/ Variable
WC
Regular
WC
Reserve
WC
Special
WC
Seasonal
WC
9. CONCEPT OF WORKING CAPITAL:
Two possible interpretations :
- Balance sheet concept
- Operating cycle concept
Balance sheet concept
• There are two interpretations of working capital under the balance
sheet concept.
- Excess of current assets over current liabilities (Net working capital).
- Gross or total current assets.
• The definition is meaningful only as an indication of the firm’s current
solvency in repaying its creditors.
• When firms speak of shortage of working capital they in fact possibly
imply scarcity of cash resources
10. CONCEPT OF WORKING CAPITAL: (CNTD)
Operating cycle concept:
• A company’s operating cycle typically consists of three primary
activities:
i. Purchasing resources.
• The firm has to maintain cash balance to pay the bills as they
come due
ii. Producing the product.
• In addition, the company must invest in inventories to fill
customer orders promptly
iii. Distributing (selling) the product.
• And finally, the company invests in accounts receivable to
extend credit to customers
• Operating cycle is equal to the length of inventory and receivable
conversion periods.
11. OPERATING CYCLE OF A TYPICAL COMPANY:
Payable
Deferral period
Inventory
conversion
period
Cash conversion
cycle
Operating
cycle
Pay for
Resources
purchases
Receive
CashPurchase
resources
Sell
Product
On credit
Receivable
Conversion period
12. FORMULAE:
• Inventory conversion period
Avg. inventory
= ------------------
Cost of sales/365
• Receivable conversion period
Accounts receivable
= -----------------------
Annual credit sales/365
• Payables deferral period
Accounts payable + Salaries, etc
= ----------------------------------------------------
(Cost of sales + selling, general and admn. Expenses)/365
• Cash conversion cycle = operating cycle – payables deferral period.
13. ANALYSIS OF WORKING CAPITAL:
Analysis
Ratio Analysis Fund flow analysis
Working capital
budget
14. RATIO ANALYSIS:
• It is a simple arithmetical expression of one number to another. The
technique of ratio analysis can be employed for measuring working
capital position of the firm.
• The following ratio may be calculated for this process:
• Current ratio
• Acid test ratio.
• Absolute liquid ratio.
• Inventory turnover ratio.
• Receivables turnover ratio.
• Payables turnover ratio.
• Working capital turnover ratio.
• Working capital leverage.
• Ratio of current liabilities to tangible net worth.
15. FUND FLOW ANALYSIS:
• It is a technical device designated to study the sources from
which additional funds were derived and the use to which
these sources were put.
• It is an effective management tool to study changes in the
financial position(WC) of a business enterprise between
beginning and ending financial statements.
• It consist of:
I. Preparing schedules of change in working capital.
II. Statement of sources and application of funds.
16. WORKING CAPITAL BUDGET:
• Budget is a financial or quantitative expression of business
plans and policies to be pursued in the future period of time.
• Working capital budget as a part of total budgeting process
of a business is prepared estimating future long term and
short term WC needs and sources to finance them and then
comparing the budgeted figures with the actual performance
for calculating variances.
• The successful implementation of WC budget involves the
preparing of separate budgets for various elements of WC
such as cash inventories and receivables etc.
• The objective of a WC budget is to ensure availability of
funds as and when needed and to ensure effective utilization
of those resources.
17. REFERENCES:
S.NO TITLE SOURCE
1. Working capital management Chapter 18. Working capital management
Kaiser Wilhelm II.
2. Relationship Between Working Capital
Management and Firm Profitability
Manufacturing Sector of Pakistan
Muhammad Safdar Sial
Lecturer ,Department of Management Sciences, COMSATS Institute of
Information
Technology
3. Determining working capital solvency level and
its effect on profitability in selected indian
manufacturing firms.
ICBI 2010 - University of Kelaniya, Sri Lanka
4. Working Capital Management And Profitability
– Case Of Pakistani Firms
International Review of Business Research Papers
Vol.3 No.1. March 2007, Pp.279 - 300
5. The Relationship between Working Capital
Management Efficiency and ebit
Azhagaiah Ramachandran
Muralidharan Janakiraman
6. Management of working capital. Agarwal, N. K. 1977. Management of working capital. phd diss., Delhi
School of Economics.
7. Liquidity-profitability trade off: An empirical
investigation in a emerging market.
Eljelly, A. M. A. 2004. International Journal of Commerce and
Management 14 (2)
8.
Financing of working capital in the food
processing industry in India
Gupta, S., and P. Sharma. 2003.
Business Analyst 24 (2)
