Ppt

1. MANAGEMENT OF WORKING
Dr. SANTOSH SOLANKI
MBA - MBA

2. Working Capital Management
Definition:-
• Working capital is that capital which is
required to meet day to day operation of an
organization.
• Working capital means the portion of capital
investment in short-term assets (or current
assets) of a firm.

3. CONTD…
According to definition, WCM is required to
meet the following expenses:
 For having the stock of raw material, semi-
manufactured and fully finished goods;
 For making payments of wages and salaries
 For providing credit facility on purchase, to
the customers
 For paying-off the expenses of advertisement
and promotional activities.

4. Objective of Working Capital
Management
• The goal of working capital management is to
manage the firm’s current assets and liabilities
in such a way that a satisfactory level of
working capital is maintained.
• The interaction between current assets and
current liabilities is, therefore the main theme
of the theory of the working capital
management.

5. Importance of working capital
1. Solvency of the business: Adequate working
capital helps in maintaining solvency of the
business by providing uninterrupted flow of
production.
2. Goodwill: Sufficient working capital enables a
business concern to make prompt payments and
hence helps in creating and maintaining
goodwill.
3. Easy Loans: A concern having adequate working
capital, high solvency and good credit standing
can arrange loans from banks and other on easy
and favourable terms.

6. Contd….
4. Cash discounts: Adequate working capital also
enables a concern to avail cash discounts on the
purchases and hence it reduces costs.
5. Regular supply of raw materials: Sufficient working
capital ensures regular supply of raw materials and
continuous production.
6. Regular payment of salaries, wages and other day-
to-day commitments: A company which has ample
working capital can make regular payment of salaries,
wages and other day-to-day commitments which
raises the morale of its employees, increases their
efficiency, reduces wastages and costs and enhances
production and profits.

7. Contd….
7. Ability to face crisis: Adequate working capital enables a
concern to face business crisis in emergencies such as
depression because during such periods, generally, there is
much pressure on working capital.
8. Quick and regular return on investments: Every investor
wants a quick and regular return on his investments.
Sufficiency of working capital enables a concern to pay quick
and regular dividends to its investors as there may not be
much pressure to plough back profits. This gains the
confidence of its investors and creates a favourable market
to raise additional funds ion the future.
9. High morale: Adequacy of working capital creates an
environment of security, confidence, and high morale and
creates overall efficiency in a business.

8. Factor Affecting working capital
1) Nature or Character of Business: The working capital requirement of
a firm basically depends upon the nature of this business. Public
utility undertakings like electricity water supply and railways need
very limited working capital because they offer cash sales only and
supply services, not products and as such no funds are tied up in
inventories and receivables. Generally speaking it may be said that
public utility undertakings require small amount of working capital,
trading and financial firms require relatively very large amount,
whereas manufacturing undertakings require sizable working capital
between these two extremes.
2) Size of Business/Scale of Operations: The working capital
requirement of a concern is directly influenced by the size of its
business which may be measured in terms of scale of operations.
3) Production Policy: In certain industries the demand is subject to wide
fluctuations due to seasonal variations. The requirements of working
capital in such cases depend upon the production policy.

9. 4) Seasonal Variation: In certain industries raw material is not
available through out the year. They have to buy raw materials
in bulk during the season to ensure and uninterrupted flow
and process them during the entire year.
5) Rate of Stock Turnover: There is a high degree of inverse co-
relationship between the quantum of working capital; and the
velocity or speed with which the sales are affected. A firm
having a high rate of stock turnover will need lower amount of
working capital as compared to affirm, having a low rate of
turnover.
6) Credit Policy: The credit policy of a concern in its dealing with
debtors and creditors influence considerably the requirement
of working capital. A concern that purchases its requirement
on credit and sell its products/services on cash require lesser
amount of working capital.

10. Contd…..
7) Business Cycle: Business cycle refers to alternate expansion and
contraction in general business activity. In a period of boom i.e.,
when the business is prosperous, there is a need of larger amount of
working capital due to increase in sales, rise in prices, optimistic
expansion of business contracts sales decline, difficulties are faced
in collection from debtors and firms may have a large amount of
working capital lying idle.
8) Rate of Growth of Business: The working capital requirement of a
concern increase with the growth and expansion of its business
activities. Although it is difficulties to determine the relationship
between the growth in the volume of business and the growth in
the working capital of a business, yet it may be concluded that of
normal rate of expansion in the volume of business, we may have
retained profits to provide for more working capital but in fast
growth in concern, we shall require larger amount of working

11. TypesofWorkingCapital
1. Gross Working Capital
Gross working capital is the amount of funds invested in the various
components
• 1. Financial Managers are profoundly concerned with current
assets:
• 2. Gross working Capital provides the current amount of working
capital at the right time;
• 3. It enables a firm to realize the greatest return on its investment;
• 4. It helps in the fixation of various areas of financial responsibility;
5. It enables a firm to plan and control funds and to maximize the
return on investment.
• For these advantages, gross working capital has become a more
acceptable concept in financial management

12. 2. Net working Capital
Networking Capital is the difference between current
assets and current liabilities. The concept of net
working capital enables a firm to determine how
much amount is left for operational requirements.
Net Working Capital Formula – Example
Consider a company called XYZ ltd that operates in a Retail
segment has the following current assets and current liabilities:
Cash: 10000
Accounts receivable: 6000
Inventory: 20000
Accounts payable: 3000
Outstanding salaries: 5000

13. 3.PermanentWorkingCapital
• Permanent Working Capital is the minimum amount of current
assets which is needed to conduct a business even during the dullest
season of the year.
• This amount varies from year to year, depending upon the growth of
a company and the stage of the business cycle in which it operates.
• It is the amount of funds required to produce the goods and services
which are necessary to satisfy demand at a particular point.
• It represents the current assets which are required on a continuing
basis over the entire year.
• It is maintained as the medium to carry on operations at any time.
Permanent working capital has the following characteristics:
1. It is classified on the basis of the time factors;
2. It constantly charges from one asset to another and continues to
remain in the business process
3. Its size increase with the growth of business operations

14. Types of permanent working capital
• We’ve defined what fixed working capital is in a
general sense, but there are two more specific sub-types
of permanent working capital:
• Regular working capital – the minimum amount of
working capital needed to maintain a cashflow; enough
money to purchase materials, produce inventory, turn
that inventory into profits, use those profits to purchase
more materials, and so on.
• Reserve working capital – the amount of working
capital that exceeds the regular working capital; reserve
working capital is there for unexpected business
expenses (like implementing a business disaster
recovery plan).

15. 4.TemporaryorVariableWorkingCapital
• It represents the additional assets which are required at
different times during the operating year-additional inventory,
extra cash, etc.
• Seasonal working capital is the additional amount of current
assets- particularly cash, receivable and inventory which is
required during the more active business seasons of the year.
It Is Temporarily Invested In Current Assets And Possesses The
Following Characteristics:-
1. It is not always gainfully employed, though it may change
from one asset to another, as permanent working capital does;
2. It is particularly suited to business of a seasonal or cyclical
nature.

16. 5.Balancesheetworkingcapital
• The balance sheet working capital is not which
is calculated from the items appearing in the
balance sheet.
• Gross working capital which is represented by
the excess of current assets, and net working
capital which is represented by the excess of
current assets over current liabilities are
examples of the balance sheet working capital.

17. 6. Negative working Capital
• Negative working Capital emerges when
current liabilities exceed current assets.
• Such a situation is not absolutely theoretical
and occurs when a firm is nearing a crisis of
some magnitude.

18. Adverse Consequences Of Inadequate
Working Capital
 Due to non-availability of funds, it may become
difficult for the company to undertake profitable
projects.
 It may become difficult to execute plans.
 Difficulty in meeting day to day commitments.
This would further create operational inefficiency.
 Due to insufficient working capital fixed asset
may not be efficiently utilized.
 Inadequacy of working capital may also prevent
the company from availing attractive credit
facilities.

19. Dangers Of Excessive Working Capital
i. When there is a redundant working capital, it may
lead to unnecessary
ii. purchasing and accumulation of inventories causing
more chances of theft, waste and losses.
iii. Excessive Working Capital means idle funds which
earn no profits for the business and hence the business
cannot earn a proper rate of return on its investments.
iv. Increased bad debts due to defective credit policy.
v. Leads to managerial inefficiency.
vi. It may result into overall inefficiency in the
organisation.

20. Determining Financing-mix
There are two sources from which funds can be
raised for current assets financing-
Short term sources, like current liabilities and,
 long term sources, such as share capital, long
term borrowings, internally generated
resources like retained earnings, etc.

21. OPERATING CYCLE
• The time period between purchase of
inventory(RW) and conversion into cash is
known as operating cycle.
• The operating cycle may be defined as the time
duration starting from the procurement of
goods or raw materials and ending with the
sales realization.

23. Computation of Working Capital by
Operating Cycle method
Under this method working capital is calculated
in three steps :-
1) First, we calculate operating cycle period
2) Second, number of operating cycle in the year
3) Third, calculation of working capital

24. OPERATING CYCLE CONCEPT
1) Operating Cycle Period =
Gross Operating Cycle period
Less:- Payable Deferral Period
Where:- Gross period includes
Material Storage period
+ Production/Conversion Period
+ Finished Goods Holding Period
+ Average Collection Period
- Average Payment Period

25. Operating cycle method of forecasting
working capital
Estimation of total operating expenses in the
year.
All material + labour + overheads
2. Number of operating cycle:-
365
𝑃𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑦𝑐𝑙𝑒

26. Contd….
 Raw material Conversion Period =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙
𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝐷𝑎𝑦
 Work in Process Conversion Period=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑊𝑜𝑟𝑘 𝑖𝑛 𝑃𝑟𝑜𝑐𝑒𝑠𝑠
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑂𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝐷𝑎𝑦
 Finished Goods Conversion Period =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝐺𝑜𝑜𝑑𝑠
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 𝑃𝑒𝑟 𝐷𝑎𝑦

27. Contd…….
Receivable Conversion Period =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑃𝑒𝑟 𝐷𝑎𝑦
Payable Deferral Period =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 𝑃𝑒𝑟 𝐷𝑎𝑦

28. Contd….
3. Working Capital =
Total Operating Expenses
Number of Operating Cycles

29. Examples
Ques:-
Find out working capital by operating cycle method taking
360 days in a year .
Sales is 9000 units @ Rs.100 each
Material cost = Rs.50 per unit
Labor cost =Rs.25 per unit
Overheads =Rs. 15 per unit
Customers are given 45 days credit and 50 days credit is
allowed by suppliers
Raw material is for 30 days and finished goods is for 15
days are kept in stock.
Production cycle period is 25 days

30. Raw Material conversion period 30
Work in progress conversion period 25
Finished good conversion period 15
Receivable conversion period 45
Total 115
Less:-
(-)Payable Deferral Period (-) 50
Operating cycle period 65

31. Particulars Amount
Total Cost of Material (9000x50) 4,50,000
Total Cost of Labor (9000x25) 2,25,000
Total Cost of Overheads (9000x15) 1,35,000
Total Operating Expenses of the year 8,10,000

32. Estimation of total operating expenses in the
year.
All material + labour + overheads
2. Number of operating cycle:-
365
65
= 5.538

33. 3. =
Working Capital
Total Operating Expenses
Number of Operating Cycles
=
810000
5.538
= 146262.18

34. Example-2
From the following information, estimate the amount
of Working Capital by ‘Operating Cycle Method’,
taking 360 days in a year.
Sales 50,000 units @Rs. 20per unit
Material cost Rs. 10 per unit
Labour cost Rs. 4 per unit
Overheads Rs. 3.5 per unit
Customers are given 45 days credit and 60 days
credit is taken from suppliers.
Raw materials for 32 days and finished goods for 15
days are kept in stock.
Production cycle is 18 days.

35. 1) Total Operating Exp:-
Material (50,000 x 10) 5,00,000
Labour (50,000 x 4) 2,00,000
Overheads (50,000 x 3.5) 1,75,000
8,75,000
2. Operating Cycle Period:- Days
Material Storage Period 32
Finished Goods Storage Period 15
Production Cycle Period 18
Credit to Customers 45
110
Less:-
Credit from Suppliers = 60
Operating cycle period = 50

36. 3. No of operating Cycles in the Year =
360
50
= 7.2
4. Working Capital =
𝑇𝑜𝑡𝑎𝑙 𝑂𝑝.exp 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
𝑁𝑜 𝑜𝑓 𝑜𝑝 𝑐𝑦𝑐𝑙𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟
875000
7.2= 1,21,527.78

37. Approaches ForFinancingWorkingCapital
There are three basic approaches to determine an
appropriate financing mix:
1) Hedging approach, also called the matching
approach,
2) Conservative approach,
3) Aggressive approach.

38. Hedging(MaturityMatching)Approach
 This is a meticulous strategy of financing the
working capital with moderate risk and
profitability.
 Hedging strategy works on the cardinal principle
of financing i.e. utilizing long-term sources for
financing long-term assets i.e. fixed assets and a
part of permanent working capital and temporary
working capital are financed by short-term
sources of finance.
Long Term Funds will Finance >> FA + PWC
Short Term Funds will Finance >> TWC

39. ConservativeApproach
• This approach suggests that the estimated
requirement of total funds should be met
from long term sources; the use of short term
funds should be restricted to only emergency
situations or when there is an unexpected
outflow of funds.
Long Term Funds will Finance >> FA + PWC + Part of TWC
Short Term Funds will Finance >> Remaining Part of TWC

40. AggressiveStrategy
• The complete focus of the strategy is in profitability. It
is a high-risk high profitability strategy.
• In this strategy, the dearer funds i.e. long term funds
are utilized only to finance fixed assets and a part of
the permanent working capital.
• Complete temporary working capital and a part of
permanent working capital also are financed by the
short-term funds.
Long Term Funds will Finance >> FA + Part of PWC
Short Term Funds will Finance >> Remaining Part of PWC + TWC