this is lecture on Working Capital Management

1. Lecture on the topic
Dr. Mohsin Khan
Assistant Professor, Department of Commerce
B.S. Abdur Rahman Crescent Institute of Science and Technology,
Chennai
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2. Objectives of this PPT
After completing this Chapter, the students will be able to
Understand Working capital and its management
Understand the policy of Working capital
Solve the problems of Operating Cycle
Handle the problems of Working Capital in the organizations
Control the excess of Working Capital
Manage the adequate working capital
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3. Content….. Introduction of Working Capital
Meaning of Working Capital
Definitions of Working Capital
Concept of Working Capital
Components of Current Assets and Liabilities
Calculations of Gross Working Capital and Net Working Capital
Operating Cycle
Calculation of Operating Cycle
Problems of Operating Cycle
Classifications of Working Capital
Importance of Working Capital
Working Capital Management
Working Capital Policy
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4. Introduction
Capital required for a business can be classified under two main
categories:
1-Fixed Capital
2-Working Capital
Working Capital is the life blood and nerve
center of business. It is very essential to
maintain the smooth running of a business.
Why does this matter?
You can find lot of definitions online through
google at various platform but they are missing one
point i.e. WHY?
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5. What is Working Capital?
Example 1
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6. Meaning
• Working capital is a part of capital which is
used to meet the day to day expenses of the
business enterprises.
• It is the excess of current assets over current
liabilities
How ?
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7. Working capital is the amount of funds necessary
to cover the cost of operating the enterprises.
According to Shubin
Definitions of…..
Circulating capital means current assets of a company
that are changed in the ordinary course of business
from one form to another i.e. from Cash to Inventories,
Inventories to receivables, Receivables into Cash.
According to Genestenberg
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8. Concept of Working Capital
Balance Sheet Concept Operating Cycle or Circular Flow Concept
Gross Working Capital Net Working Capital
Capital invested in
total current Assets of
the enterprise.
(Current Assets – Current Liabilities)
GOC = RMCP+WIPCP+FGCP+RCP
GOC = RMCP+WIPCP+FGCP+RCP
GOC = Gross Operating Cycle
RMCP= Raw Material Conversion Period
WIPCP= Work-in-progress Conversion Period
FGCP= Finished Goods Conversion Period
RCP = Receivables Conversion Period
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9. Components of Current
Assets and Current
Liabilities
• Cash in Hand
• Cash at Bank
• Bills Receivable
• Sundry debtors
• Short term loans
and advances
• Stock
• Prepaid Expenses
• Accrued Income
etc.
Current Assets
• Bills Payable
• Sundry Creditors
• Outstanding
Expenses
• Short term loans
• Advance and
deposits
• Dividend Payable
• Bank overdraft
• Provision for
taxations
Current Liabilities
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10. How to Calculate Gross
Working Capital and Net
Working Capital
Suppose Maksons Limited
has Current Assets Rs.
5,00,000 and Current
Liabilities of Rs. 300,000.
Fixed Assets are Rs.
1,00,000. Long Term Debt
is Rs.1,00,000 and Short
Term Debt included in the
Current Liability above is
Rs. 25,000. Calculate the
Working Capital of the
Company and analyze the
same.
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11. Calculations of Gross Working Capital and Net Working Capital
Gross Working Capital = Total Current Assets
Total Current Assets given in the question is Rs. 5 lac. Hence Gross working capital = Rs. 5 Lac
Note= if total Current Assets are not given then you have to add all the given components of current
assets i.e. cash in hand, Debtors, stock etc.
Net Working Capital = Current Assets – Current Liabilities
Current Assets given in the question is Rs. 5 lac. Current Liabilities given Rs. 3 lac
Therefore, Net working capital = Current Assets – Current Liabilities = 5,00,000- 3,00,000 = 2,00,000
Hense, Net working capital = 2,00,000
Note= if total Current Liabilities are not given then you have to add all the given components of current
Liabilities i.e. Bills Payable, Creditors, Bank overdrafts etc.
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12. Operating Cycle or Circular Flow Concept
Working capital refers to that part of firm’s
capital which is required for financing short-
term or current assets such as cash, marketable
securities, debtors and inventories.
Hence, invested funds in current assets keep
revolving fast and are being constantly
converted into cash and this cash flows out
again for exchange other current Assets.
It is also called Revolving capital or Circulating
Capital.
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13. Cash received from debtors and paid to
suppliers of raw material
Finished Goods Produced
RawMaterialintroducedintoprocess
SalesofFinishedGoods
Operating Cycle
RawMaterial
Conversion
Period
Work–in-Process
Conversionperiod
FinishedGoods
Conversion
Period
Receivables
Conversion
Period
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14. GOC = RMCP + WIPCP + FGCP + RCP
Calculation of Operating Cycle
GOC = Gross Operating Cycle
RMCP = Raw Material Conversion Period
WIPCP = Work-in-progress Conversion Period
FGCP = Finished Goods Conversion Period
RCP = Receivables Conversion Period
PDP = Payables Deferral Period
Step -1
Formula
Net Operating Cycle Period = Gross Operating Cycle – Payable Deferral Period
Step -2
Now
RMCP =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙
𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝐷𝑎𝑦
WIPCP =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑊𝑜𝑟𝑘− 𝑖𝑛−𝑃𝑟𝑜𝑔𝑟𝑒𝑠𝑠
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝐷𝑎𝑦
FGCP =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝐺𝑜𝑜𝑑𝑠
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 𝑃𝑒𝑟 𝐷𝑎𝑦
RCP =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑃𝑒𝑟 𝐷𝑎𝑦
PDP =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 𝑃𝑒𝑟 𝐷𝑎𝑦
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15. Problem 1
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16. Problem -2
How to
Solve
Problem
no.2
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17. Classification or Kinds of Working Capital
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18. Importance of…..
Solvency of the Business
Goodwill
Easy Loans
Regular Payment of salaries, wages &
other expenses
Cash Discounts
Exploitation of Favorable market
Conditions
Ability to Face Crisis
Quick and Regular Return on Investment
Regular Supply of Raw Material
High Morale
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19. Working Capital Management
Working Capital generally, refers to the excess of current assets over current liabilities.
Working Capital Management, is concerned with the problems that arises in attempting to manage the current
Assets, the current Liabilities and the inter relationship between them.
The basic goal of Working Capital Management is to manage the current and current liabilities of a firm in such a
way that a satisfactory level of working capital is maintained.
It should neither inadequate nor excessive. The consequences of being inadequate or excess of working capital
may put your business in danger.
Inadequate working capital may lead the firm to insolvency
Where as excess working capital implies idle funds which earn no profits for the business.
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21. Working Capital Management Policies of a firm have a great effect on its Profitability, liquidity and
structural health of the organization. Hence, Working Capital Management is in three dimensional in nature.
Dimension II
Dimension I
DimensionIII
First
Dimension
• is Concerned with the formulation of policies
with regards to profitability, risk and liquidity
Second
Dimension
• is concerned with the decisions about the
composition and level of current Assets
Third
Dimension
• is concerned with the decisions about the
composition and level of current Liabilities
Working Capital Management Policies
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22. Working Capital Policy
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