PPT ON DETERMINANTS OF WORKING CAPITAL

1. B.COM IV SEM
PAPER: FUNDAMENTALS OF FINANCIAL
MANANGEMENT
Presented by:
MANJUNATH R ILIGER
Lecturer, Department of commerce,
GFGC Chikkabasur

2. Working Capital
 Meaning:-
Working capital refers to the funds invested
in the current assets i.e. investment in stock, sundry
debtors, cash and other current assets. Current assets
are essential to use fixed assets profitably.
Ex: A machine cannot be used without raw materials.

3. Determinants of working capital
 A firm should plan it's operation in such a way that it should have neither too
much nor too little working capital. There are various factors affecting working
capital.
 Nature of business
 Production cycle
 Business cycle
 Production policy
 Credit policy
 Growth and expansion
 Condition of supply
 Profit level
 Level of taxes
 Dividend policy
 Depreciation policy
 Price level changes
 Operating efficiency

4. Nature of the business:-
 The shorter the manufacturing process, the lower is
the requirements for the working capital.
 Longer the manufacturing process the higher would be
the requirements of the working capital.
Production Cycle:-
The term production are manufacturing cycle refers to
the time span between the procurement of raw
material at the completion of manufacturing process
leading to production of finished goods. To sustain
such activity working capital is obvious.

5. Business Cycle:-
 Business fluctuation lead to cyclical and seasonal changes
in production and sales and affect the working capital
requirement.
 The variation in business condition may be in two direction.
a. Upward phase
b. downswing phase
Production Policy:
In case certain lines of business, the demand for the
product is seasonal, that is, they are purchased in certain
months of the year. Here the kinds of the production policy
should be followed for the two option opened to such
enterprise. either they confined their production only to
periods when goods are purchased or they follow a steady
production policy throughout the year and produce at a level
to meet the peak demand.

6. Credit policy:
The credit policy of the company also determines the
requirements of working capital. A company which
allows liberal credit to its customer may have higher
sales but consequently will have large amount of funds
tide up in sundry debtors.
Growth and expansion:-
The growth in volume and growth in working capital go
hand in hand. However, the change may not be
proportionate and the increased need of working capital
is felt right form the initial stage of growth.

7. Conditions of supply:-
If prompt and adequate supply of raw materials, spares,
stores, etc. is available it is possible to manage in small
investment in inventory or work on just in time inventory
principles.
Price Level Changes :-
Inflationary trends in the economy necessitate more
working capital to maintain the same level of activity.

8. Profit Level
 The level of profit earned differ from enterprise to
enterprise.
 The availability of internal funds for working capital
requirement is determine not merely by the profit
margin but also by the manner of appropriating
profits.
 Appropriating profits depend upon the funds such as,
Taxation, dividend, reserves and depreciation.

9. Level of Taxes :
The amount of taxes paid depend on taxation laws, these amount
usually have to be paid in advance.
Dividend Policy:
Payment of dividend utilizes cash while retaining profit acts as a
source of working capital. Thus working capital gets affected by
dividend policy
Depreciation policy:-
Depreciation policy also exerts in influence on the quantum of
working capital.
Depreciation charges do not involves any cash outflows.
The effect of depreciation policy on working capital is, therefore,
indirect.

10.  Operating Efficiency:-
It is an important determinant of the level of the
working capital.
It ensures effective utilization resources by eliminating
waste improving co-ordination, and fuller utilization
of existing resource.

11. Thank You..