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Business Administration-Working Capital Management
The document discusses working capital management. It defines working capital as the funds required for day-to-day operations of a business. Working capital includes current assets like inventory, accounts receivable, and cash. It is necessary for purchasing raw materials and paying daily expenses. Effective working capital management involves cash, receivables, payables, and inventory management. Both deficient and excessive working capital can pose dangers for a business.
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Business Administration-Working Capital Management
- 1. Working Capital Management BlessyVarghese Assistant Professor Department of Management Studies St. Mary’s College Thrissur-680020 Kerala
- 2. Working Capital Management,BlessyVarghese,St.Mary’s College Definition According to Shubin “ Working capital is the amount of funds necessary to cover the cost of operating the enterprise” Meaning of Working Capital Working capital is the capital required for the day to day working of an enterprise. It is required for the purchase of raw materials and for meeting day to day expenditure on salaries, wages,rents,advertising etc.
- 3. Working Capital Management,BlessyVarghese,St.Mary’s College Nature of Working capital Working capital is required for the day to day working of an enterprise Working capital is the amount invested in current assets The level of working capital in a firm determines its liquidity position Working capital requirements are financed through short term sources Working capital management involves cash management, receivables management, payable management and inventory management
- 4. Concept of Working capital GrossWorking capital Net Working capital Concepts of working capital Working Capital Management,Blessy Varghese,St.Mary’s College
- 5. Working Capital Management,BlessyVarghese,St.Mary’s College Nature of Working capital Working capital is required for the day to day working of an enterprise Working capital is the amount invested in current assets The level of working capital in a firm determines its liquidity position Working capital requirements are financed through short term sources Working capital management involves cash management, receivables management, payable management and inventory management
- 6. Working Capital Management,BlessyVarghese,St.Mary’s College Gross working capital Gross working capital is the sum of all of a company's current assets (assets that are convertible to cash within a year or less). Gross working capital includes assets such as cash, accounts receivable, inventory, short-term investments and marketable securities. Gross Working capital = Total current Assets Net Working Capital Net Working Capital (NWC) is the difference between a company’s current assets (net of cash) and current liabilities (net of debt) on its balance sheet. It is a measure of a company’s liquidity and its ability to meet short-term obligations, as well as fund operations of the business. Net working capital = Current asset – Current liabilities
- 7. Working Capital Management,BlessyVarghese,St.Mary’s College Types of Working Capital Types of Working Capital Permanent Working Capital InitialWorki ng capital Regular Working capital Reserve Margin Working capital Cash Working Capital Balance sheet Working Capital Variable Working capital Seasonal Working Capital Special working Capital
- 8. Working Capital Management,BlessyVarghese,St.Mary’s College To carry on day to day business To invest in current assets for smooth running of the business To ensure the maximization of wealth To meet short term obligations To utilize the maximum available resources Need for Working capital
- 9. Working Capital Management,BlessyVarghese,St.Mary’s College It may lead to business failure Trade and cash discounts will be lost Financial reputation is lost It effects dividend policy adversely The company cannot utilize its fixed assets properly Dangers of deficiency of Working Capital
- 10. Working Capital Management,BlessyVarghese,St.Mary’s College Excessive working capital means idle funds which gives no profit The value of shares may fall due to lower rate of return on investment Efficiency of management may deteriorate It may encourage speculation Inefficiency may be encouraged Dangers of Excessive Working Capital
- 11. Operating cycle conceptin Working Capital Cash Raw materials Finished goods Receivables Working Capital Management,Blessy Varghese,St.Mary’s College
- 12. Working Capital Management,BlessyVarghese,St.Mary’s College Factors Determining Working Capital Requirements Internal Factors External Factors Nature of business Seasonal fluctuation Production Cycle Business cycles Size of the business Price level changes Turnover Technological development Terms of trade Environmental factors Nature and value of the product Taxation policy Use of manual labor or machines Growth and expansion of business Earning capacity and dividend policy Depreciation policy
- 13. Working Capital Management,BlessyVarghese,St.Mary’s College Sources of Working Capital There are Two types of working capital Permanent /Fixed - Working Capital Temporary / Variable - Working Capital
- 14. Working Capital Management,BlessyVarghese,St.Mary’s College Sources of Permanent /Fixed Working Capital 1.Equity Shares 2. Preference Shares 3.Debentures 4.Long term borrowings 5.Retained earnings
- 15. Working Capital Management,BlessyVarghese,St.Mary’s College Sources of Temporary of Variable Working Capital Transactionary Sources Trade Credit Accrued expenses Deferred income Depreciation Short term sources Commercial Paper Borrowings from commercial banks Public deposits Factoring Indigenous bankers