Working capital managment

1. WORKING CAPITAL MANAGEMENT
Dr S SHEIK FAREETH
MBA., M.Phil., SET., NET., Ph.D.
Assistant Professor
Business Administration
Arul Anandar College (Autonomous)
Karumathur.
sheikfareeth@aactni.edu.in 1

2. FLOW OF CONTENTS
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 OVERVIEW
 OPERATING CYCLE
 ESTIMATION OF WORKING CAPITAL
 WORKING CAPITAL FINANCING

3. Working Capital :- Meaning
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 Working capital means the firm’s holding of current or short-term assets
such as cash, receivables, inventory and marketable securities.
 These items are also referred to as circulating capital
 Corporate executives devote a considerable amount of attention to the
management of workingcapital.

4. Working capital management
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Working capital management is concerned with the problems that
arise in attempting to manage the current assets, the current liabilities
and the interrelations thatexist between them.

5. Concepts of Working Capital
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There are twopossible interpretations of working capital concept:
1. Balance sheetconcept
2. Operating cycleconcept

6. Balance sheet concept
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There are two interpretationsof working capital underthe balance sheet
concept.
 Excess of currentassetsovercurrent liabilities
 gross or total currentasset

7. Current assets
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Current assets refer to those assets which in the ordinary course of business
can be, or will be, converted into cash within one year without undergoing a
diminution in valueand withoutdisrupting theoperations of the firm.
Examples- cash, marketable securities, accounts receivableand inventory.

8. Current liabilities
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Current liabilities are those liabilities which are intended, at their inception,
to be paid in the ordinary course of business, within a year, out of the
currentassets or theearningsof theconcern.
Examples- accounts payable, bills payable, bank overdraft and outstanding
expenses.

9. Classification of Working Capital
Working
Capital
On the basis
of Concept
Gross
Working
Capital
Net Working
Capital
On the basis
of Time
Permanent /
Fixed WC
Temporary /
Variable WC
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10. Concepts of Working Capital
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1. Gross working capital (GWC)
GWC refers to the firm’s total investment in currentassets.
Current assets are the assets which can be converted into cash
within an accounting year (or operating cycle) and include cash,
short-term securities, debtors, (accounts receivable or book debts)
bills receivable and stock(inventory).

11. Concepts of Working Capital
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Net working capital(NWC)
 NWC refers to the difference between current assets and current
liabilities.
 Current liabilities (CL) are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors
(accounts payable), bills payable, and outstandingexpenses.
 NWC can be positive ornegative.
o Positive NWC = CA > CL
o Negative NWC = CA < CL

12. Concepts of Working Capital
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 GWC focuseson
 Optimisation of investment incurrent
 Financing of current assets
 NWC focuseson
 Liquidity position of thefirm

13. Permanent And Variable Working Capital
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 Permanent or fixed workingcapital
A minimum level of current assets, which is continuously required by a firm
to carry on its business operations, is referred to as permanent or fixed
working capital.
 Fluctuating or variable workingcapital
The extra working capital needed to support the changing production and
sales activities of the firm is referred to as fluctuating or variable working
capital.

14. Permanent and temporary working capital
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16. DETERMINANTS OF WORKING CAPITAL
Size Of Business
Nature Of Business
Storage Period
Credit Period
Seasonal Requirement
Potential Growth Or Expansion Of Business
Changes In Price Level
Dividend Policy
Working Capital Cycle
Operating Efficiency
OTHER FACTORS

17. 1- SIZE OF BUSINESS
Working capital requirement of a firm is directly influenced by
the size of its business operation. Big business organizations
require more working capital than the small business
organization
Employees Businesses Total businesses(%)
1-9 (Micro) 1,022,695 82.3%
10-49 (Small) 177,950 14.3%
50-249 (Medium) 29,750 2.4%
250+ (Large) 6,455 0.5%

18. 2- NATURE OF BUSINESS
Working capital requirement depends also upon the
nature of business carried by the firm.
Normally, manufacturing industries
and trading organizations need more working capital
than in the service business organizations.
A service sector does not require any
amount of stock of goods. But in the manufacturing
or trading firm, credit sales and advance related
transactions are in large amount.

19. 3- STORAGE PERIOD
Time needed for keeping the stock in store is called
storage period.
The amount of working capital is influenced by
the storage period.
If storage period is high
A firm should keep more quantity of goods in store
and hence requires more working capital.
if the storage Period is less ,
then more stock of goods must be held in store as
work-in-progress.

20. 4- CREDIT PERIOD
The credit period is the number of days that a
customer is allowed to wait before paying an invoice.
Thus, a longer credit period equates to a larger
investment in receivables.
1-Longer credit period requires more investment in
debtors and hence more working capital is needed
But, the firm which allows less credit period to
customers needs less working capital.

21. 5-SEASONAL REQUIREMENT
In Seasonal Business , Working Capital Is Most
Important Requirement.
Such business organizations have to buy raw
material in bulk during the Season to ensure an
uninterrupted flow and process them during the
SHORT Period.
Thus, a huge amount is blocked
in the form of raw material inventories which gives
rise to more working capital requirements.

22. 6- POTENTIAL GROWTH
Growth potential is an organization's future ability
to generate larger profits, expand its workforce and
increase production.
If the business is to be extended in future, more
working capital is required.
WHICH IS IN FOR TWO SHAPE
1- BUSINESS WEALTH
2- BUSINESS IMAGE
More amount of working capital is required to meet
the expansion need of business.

23. 7- CHANGES IN PRICE LEVEL
Change In Price Level Also Affects The Working
Capital Requirements.
1- The Rise In Price Will Require The Firm To
Maintain Large Amount Of Working Capital
2- When Decrease In The Price Will Require The
Firm, It Is Needed Decreasing The Working Capital Of
Business

24. 8- DIVIDEND POLICY
Dividend policy is the set of guidelines a company
uses to decide how much of its earnings it will pay out
to shareholders.
A desire to maintain an established dividend policy
may affect working capital.
The need for working capital can be met
with the retained earning.
If a firm retains more profit and distributes
lower amount of dividend, it needs less working
capital.

25. 9- WORKING CAPITAL CYCLE
The working capital cycle (WCC) is the amount of time
it takes to turn the net current assets and current
liabilities into cash.
When the working capital cycle of a firm is long,
it will require larger amount of working capital.
But, if working capital cycle is short, it will need
less working capital.

26. 10- OPERATIONAL EFFICIENCY
Operational efficiency is the capability to deliver
products or services to its customers in the most
effective manner.
The operating efficiency of a firm also affects
the firm's need of working capital.
The operating efficiency of the firm results in
optimum utilization of assets.
The optimum utilization of assets in turn results in
more fund release for working capital

27. 11- OTHER FACTORS
GOVERNMENT POLICIES
DEPRICIATION POLICY
INVENTORY POLICY
CREDIT POLICY OF RBI