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WORKING CAPITAL Prepared By  : -  PARAG VORA     MANISH  AGHASIYA    MILAN DAVE
CONTENTS <ul><li>Introduction. </li></ul><ul><li>Concept of Working Capital </li></ul><ul><li>Types of Working Capital </l...
<ul><li>Analysis of Liquidity position </li></ul><ul><li>Methods for estimating Working Capital requirement </li></ul><ul>...
INTRODUCTION
WHAT IS WORKING CAPITAL? <ul><li>Working capital is the difference between  current assets  and  current liabilities . </l...
CONCEPT OF  WORKING CAPITAL   <ul><li>The core of the Working capital concept has been subjected to considerable change ov...
TYPES OF WORKING CAPITAL WORKING CAPITAL BASIS OF CONCEPT BASIS OF TIME Gross Working Capital Net Working Capital Permanen...
WORKING CAPITAL CYCLE <ul><li>The Working Capital Cycle can be defined as: </li></ul><ul><li>The period of time which Elap...
WORKING CAPITAL CYCLE Work in progress Raw-material stock Finished goods stock Wages and overheads Trade creditors Taxatio...
Thank You
REQUIREMENTS OF WORKING CAPITAL IN BUSINESS
<ul><li>Business with a lot of cash sales & few  </li></ul><ul><li>credit sales should have minimal trade </li></ul><ul><l...
<ul><li>Some finished goods, notably foodstuffs,  </li></ul><ul><li>have to be sold within a limited period.  </li></ul><u...
<ul><li>Some businesses will receive their money  </li></ul><ul><li>at certain times of year, although they may  </li></ul...
OPERATING CYCLE Accounting  receivable finished Goods WIP RAW material cash
Nature & Importance of  WC Short term financial requirement Reduce the financing cost Helpful in expansion Success of a firm
Working capital management  (WCM)
Management of the WC
MEASUREMENT OF WORKINGCAPITAL REQUIREMENT
<ul><li>The form & amount of working capital  componenets vary overthe operating cycle. </li></ul><ul><li>Working capital ...
<ul><li>The DWC represents the time period between purchase of material on account from the supplier untill the sell of fi...
<ul><li>Another profitability measure is (IS) approach. </li></ul><ul><li>To measure the liquidity of the firm the cash co...
OBJECTIVES OF WORKING CAPITAL MANAGEMENT
THE WORKING CAPITAL OBJECTIVES ARE CONSIDERED AT MAIN FOUR LEVELS. <ul><li>(1) INVENTORY:-   </li></ul><ul><li>High Level ...
<ul><li>(B) CASH:-  </li></ul><ul><li>High level   Low  Level  </li></ul><ul><li>(a) benefit:-  (a) benefit  </li></ul><ul...
<ul><li>(C) Account Receivables :-  </li></ul><ul><li>High level  Low Level  </li></ul><ul><li>(Favorable  (Unfavorable cr...
<ul><li>(b) cost:-  (b) benefit:-  </li></ul><ul><li>Expensive  Less expensive  </li></ul><ul><li>High Collection </li></u...
<ul><li>(D) PAYABLE & ACCRUALS:-   </li></ul><ul><li>High Level  Low Level  </li></ul><ul><li>(a) benefit:-  (a) benefit:-...
<ul><li>(1)- LIQUIDITY:- </li></ul><ul><li>It reflects the firm’s ability to meet it’s short term obligations using those ...
<ul><li>Current assets are often referred to as  working capital, since they represents resources needed for day to day op...
<ul><li>(2)- The Operating Cycle:-   </li></ul><ul><li>The operating cycle is the duration from the time cash is invested ...
<ul><li>(A)- Purchase of raw-material & produces goods, investing in inventory.  </li></ul><ul><li>(B)- Sell goods,  gener...
<ul><li>(3)- Liquidity Ratio:- </li></ul><ul><li>Liquidity ratio or Solvency ratio include the, </li></ul><ul><li>(A) Curr...
<ul><li>The current ratio compares current assets to current liability. </li></ul><ul><li>It also gives an idea of a compa...
<ul><li>CURRENT RATIO=  Current Asset  </li></ul><ul><li>Current Liability </li></ul><ul><li>It includes cash, account rec...
<ul><li>The quick ratio is similar to current ratio  </li></ul><ul><li>but it’s a tougher measure of liquidity than </li><...
<ul><li>QUICK RATIO=  Current Assets- Inventory  </li></ul><ul><li>Current liability  </li></ul><ul><li>Generally, the qui...
<ul><li>(A) Advantages of favorable discount:-  </li></ul><ul><li>(B) Profitable Opportunities:-   </li></ul><ul><li>(C) M...
<ul><li>(A) Lower Profitability:-  </li></ul><ul><li>(B) Restricted Opportunities:- </li></ul><ul><li>(C) Loss Of Owner Co...
METHODS FOR ESTIMATING WORKING CAPITAL REQUIREMENT <ul><li>Methods for estimating working capital require  </li></ul><ul><...
<ul><li>(1) Percentage Of  Sales Method:-   </li></ul><ul><li>In this method, level of w.c requirement is decided  </li></...
BALANCE SHEET OF ZELLET STEEL COMPANY AS ON 31-3-2006 Liabilities Rs.(in lakhs) Assets Rs.(in lakhs) Share capital 200 Lan...
<ul><li>The Company’s Turnover For 2005-06 Was  </li></ul><ul><li>Rs.12 Crore. </li></ul><ul><li>It anticipates a sales tu...
ESTIMATE OF W.C. REQUIREMENTS FOR THE YEAR 2006-07 PARTICULARS % OF SALES  BASED ON 2005-06 FIGURES ACTUAL (2005-06) ESTIM...
<ul><li>(2) Regression Analysis Method:-  </li></ul><ul><li>This is a statistical method of determining  working  </li></u...
TABLE 2.6 YEAR  SALES  CURRENT  ASSETS 2001  64 44 2002 88 54 2003 104 63 2004 114  87 2005 138 90
ESTIMATE WORKING CAPITAL  REQUIREMENTS FOR THE YEAR  2006 YEAR SALES(x)  CU.ASSETS(y) xy X2 2001 64 44  2816 4096 2002 88 ...
<ul><li>Y = na + bx. </li></ul><ul><li>338 = 5a + 508b  </li></ul><ul><li>71.7677b =  a + 107.6629  </li></ul><ul><li>6.06...
<ul><li>(3) Duration Of Raw-Material:-  </li></ul><ul><li>It reflects the no. of days for which raw-material  </li></ul><u...
<ul><li>(4) DURATION OF WORK-IN-PROGRESS:-  </li></ul><ul><li>It denotes the no. of days required in the work-in- </li></u...
<ul><li>(5) DURATION OF FINISHED GOODS :-  </li></ul><ul><li>It refers to the no. of days for which financial goods  </li>...
<ul><li>(6) DURATION OF ACCOUNT RECEIVABLE:-  </li></ul><ul><li>It represents the no. of days required to the collect  </l...
<ul><li>(7) DURATION OF ACCOUNT  PAYABLE :-  </li></ul><ul><li>It refers to the no. of days for which the suppliers  </li>...
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  1. 1. WORKING CAPITAL Prepared By : - PARAG VORA MANISH AGHASIYA MILAN DAVE
  2. 2. CONTENTS <ul><li>Introduction. </li></ul><ul><li>Concept of Working Capital </li></ul><ul><li>Types of Working Capital </li></ul><ul><li>Working Capital cycle </li></ul><ul><li>Working Capital needs of a business </li></ul><ul><li>Nature and Importance of Working Capital </li></ul><ul><li>Working Capital management concepts </li></ul><ul><li>Management of Working Capital </li></ul><ul><li>Measures of Working Capital management Efficiency </li></ul><ul><li>Objectives of Working Capital management </li></ul>
  3. 3. <ul><li>Analysis of Liquidity position </li></ul><ul><li>Methods for estimating Working Capital requirement </li></ul><ul><li>Conclusion </li></ul>
  4. 4. INTRODUCTION
  5. 5. WHAT IS WORKING CAPITAL? <ul><li>Working capital is the difference between current assets and current liabilities . </li></ul><ul><li>Working capital is how much in liquid assets that a company has on hand. Working capital is needed to pay for planned and unexpected expenses, meet the short-term obligations of the business, and to build the business. </li></ul>
  6. 6. CONCEPT OF WORKING CAPITAL <ul><li>The core of the Working capital concept has been subjected to considerable change over the years. A few years ago the concept was viewed as a measure of the debtor’s ability to meet his obligation in case of liquidation. The prime concern was with whether or not the current assets were immediately realizable and available to pay debts in case of liquidation. </li></ul><ul><li>The concept of WCM was first evolved by KARL MARX but it was something different , they used the word variable Capital means outlays for payrolls advanced to workers before the goods they worked on were complete. </li></ul>
  7. 7. TYPES OF WORKING CAPITAL WORKING CAPITAL BASIS OF CONCEPT BASIS OF TIME Gross Working Capital Net Working Capital Permanent / Fixed WC Temporary / Variable WC Regular WC Reserve WC Special WC Seasonal WC
  8. 8. WORKING CAPITAL CYCLE <ul><li>The Working Capital Cycle can be defined as: </li></ul><ul><li>The period of time which Elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer. </li></ul><ul><li>The diagram below illustrates the Working Capital Cycle for a manufacturing firm. </li></ul>
  9. 9. WORKING CAPITAL CYCLE Work in progress Raw-material stock Finished goods stock Wages and overheads Trade creditors Taxation sale Trade debtors Shareholders cash Fixed assets Loan creditors Lease payment Selling expenses
  10. 10. Thank You
  11. 11. REQUIREMENTS OF WORKING CAPITAL IN BUSINESS
  12. 12. <ul><li>Business with a lot of cash sales & few </li></ul><ul><li>credit sales should have minimal trade </li></ul><ul><li>debtors. Supermarkets are good examples </li></ul><ul><li>of such business. </li></ul><ul><li>Business that exists to trade in completed </li></ul><ul><li>products will only have finished goods in </li></ul><ul><li>stock. Compare this with manufacturers </li></ul><ul><li>who will also have to maintain stocks of </li></ul><ul><li>raw-material & work-in-progress. </li></ul>
  13. 13. <ul><li>Some finished goods, notably foodstuffs, </li></ul><ul><li>have to be sold within a limited period. </li></ul><ul><li>Larger companies may be able to use their </li></ul><ul><li>bargaining strength as customers to </li></ul><ul><li>obtain more favorable, extended credit </li></ul><ul><li>terms from suppliers. By contrast, smaller </li></ul><ul><li>companies, particularly those that have </li></ul><ul><li>recently started trading may be required </li></ul><ul><li>to pay their suppliers immediately. </li></ul>
  14. 14. <ul><li>Some businesses will receive their money </li></ul><ul><li>at certain times of year, although they may </li></ul><ul><li>incur expenses throughout the year at a </li></ul><ul><li>fairly consistent level. This is often known </li></ul><ul><li>as “SEASONALITY” of cash flow. </li></ul>
  15. 15. OPERATING CYCLE Accounting receivable finished Goods WIP RAW material cash
  16. 16. Nature & Importance of WC Short term financial requirement Reduce the financing cost Helpful in expansion Success of a firm
  17. 17. Working capital management (WCM)
  18. 18. Management of the WC
  19. 19. MEASUREMENT OF WORKINGCAPITAL REQUIREMENT
  20. 20. <ul><li>The form & amount of working capital componenets vary overthe operating cycle. </li></ul><ul><li>Working capital efficiency can be measured in terms of “DAYS OF WORKING CAPITAL (DWC)” </li></ul><ul><li>DWC value is based on amount of each of equally weighted receivable, inventory & payable accounts. </li></ul>THE MEASUREMENT OF WORKING CAPITAL EFFICIENCY IS AS UNDER
  21. 21. <ul><li>The DWC represents the time period between purchase of material on account from the supplier untill the sell of finished goods. </li></ul><ul><li>Thus it reflects the firm’s profitability to finance it’s core operations with vendor credit. </li></ul><ul><li>The firm’s profitability is measured using(IA) approach. </li></ul>
  22. 22. <ul><li>Another profitability measure is (IS) approach. </li></ul><ul><li>To measure the liquidity of the firm the cash conversion efficiency (CCE) & current ratio are used. </li></ul><ul><li>The CCE is the cash flow generated from operating activities related to sales. </li></ul>
  23. 23. OBJECTIVES OF WORKING CAPITAL MANAGEMENT
  24. 24. THE WORKING CAPITAL OBJECTIVES ARE CONSIDERED AT MAIN FOUR LEVELS. <ul><li>(1) INVENTORY:- </li></ul><ul><li>High Level Low Level </li></ul><ul><li>(a) benefit:- (a) Cost:- </li></ul><ul><li>Happy Customers Shortages </li></ul><ul><li>Few Prod’n Delays Dissatisfied </li></ul><ul><li>Customers </li></ul><ul><li>(b) Cost:- (b) Benefits </li></ul><ul><li>Expensive Low Storage cost </li></ul><ul><li>High Storage Cost Less Risk of Obso </li></ul><ul><li>Risk of obsolence lence lence </li></ul>
  25. 25. <ul><li>(B) CASH:- </li></ul><ul><li>High level Low Level </li></ul><ul><li>(a) benefit:- (a) benefit </li></ul><ul><li>Reduces Risk Reduces Financing </li></ul><ul><li>Cost </li></ul><ul><li>(b) cost:- (b) Cost:- </li></ul><ul><li>Increases Financing Increases Risk </li></ul><ul><li>cost </li></ul>
  26. 26. <ul><li>(C) Account Receivables :- </li></ul><ul><li>High level Low Level </li></ul><ul><li>(Favorable (Unfavorable cre </li></ul><ul><li>Credit Terms) Terms) </li></ul><ul><li>(a) benefit:- (a) cost:- </li></ul><ul><li>Happy Customers Dissatisfied Customers </li></ul><ul><li>High Sales Lower Sales </li></ul>
  27. 27. <ul><li>(b) cost:- (b) benefit:- </li></ul><ul><li>Expensive Less expensive </li></ul><ul><li>High Collection </li></ul><ul><li>Cost </li></ul><ul><li>Increases </li></ul><ul><li>Financing Cost </li></ul>
  28. 28. <ul><li>(D) PAYABLE & ACCRUALS:- </li></ul><ul><li>High Level Low Level </li></ul><ul><li>(a) benefit:- (a) benefit:- </li></ul><ul><li>Reduces need for Happy suppliers </li></ul><ul><li>external finance / employess </li></ul><ul><li>using a spontane </li></ul><ul><li>ous financing re </li></ul><ul><li>sources </li></ul><ul><li>(b) Cost:- (b) Cost:- </li></ul><ul><li>Unhappy suppli Not using a spontaneous </li></ul><ul><li>ers financing source </li></ul>
  29. 29. <ul><li>(1)- LIQUIDITY:- </li></ul><ul><li>It reflects the firm’s ability to meet it’s short term obligations using those assets which are most readily converted into cash. </li></ul><ul><li>Assets that may be converted into cash in a shorter period of time are referred as liquid assets. </li></ul>ANALYSIS OF LIQUIDITY POSITION
  30. 30. <ul><li>Current assets are often referred to as working capital, since they represents resources needed for day to day operations of the firm’s long term capital investments. </li></ul><ul><li>Current assets are used to satisfy short term obligation or current liability. </li></ul>
  31. 31. <ul><li>(2)- The Operating Cycle:- </li></ul><ul><li>The operating cycle is the duration from the time cash is invested into goods & services to the time the investment produces cash. </li></ul><ul><li>It includes four phases which are as under. </li></ul>
  32. 32. <ul><li>(A)- Purchase of raw-material & produces goods, investing in inventory. </li></ul><ul><li>(B)- Sell goods, generating sales, which may or may not be in cash. </li></ul><ul><li>(C)- Extent credit, creating a/c receivable. </li></ul><ul><li>(D)- Collects a/c receivable, generating cash. </li></ul>FOUR PHASES OF OPERATING CYCLE
  33. 33. <ul><li>(3)- Liquidity Ratio:- </li></ul><ul><li>Liquidity ratio or Solvency ratio include the, </li></ul><ul><li>(A) Current Ratio:- </li></ul><ul><li>(B) Quick Ratio:- </li></ul><ul><li>(C) Net Working Capital:- </li></ul>
  34. 34. <ul><li>The current ratio compares current assets to current liability. </li></ul><ul><li>It also gives an idea of a company’s ability </li></ul><ul><li>to meet day to day payment obligation. </li></ul><ul><li>Generally higher ratio is better. </li></ul>(A) CURRENT RATIO
  35. 35. <ul><li>CURRENT RATIO= Current Asset </li></ul><ul><li>Current Liability </li></ul><ul><li>It includes cash, account receivables, marketable securities, inventory & prepaid expenses like insurance & taxes. </li></ul><ul><li>The benchmark current ratio is 2:1 </li></ul>
  36. 36. <ul><li>The quick ratio is similar to current ratio </li></ul><ul><li>but it’s a tougher measure of liquidity than </li></ul><ul><li>the current ratio. </li></ul><ul><li>Generally a higher ratio is better. </li></ul>(B) QUICK/ ACID TEST RATIO
  37. 37. <ul><li>QUICK RATIO= Current Assets- Inventory </li></ul><ul><li>Current liability </li></ul><ul><li>Generally, the quick ratio should be lower </li></ul><ul><li>than the current ratio because the inventory </li></ul><ul><li>figure drops from the calculations. </li></ul><ul><li>The desired quick ratio is 1:1 </li></ul>
  38. 38. <ul><li>(A) Advantages of favorable discount:- </li></ul><ul><li>(B) Profitable Opportunities:- </li></ul><ul><li>(C) Management Actions:- </li></ul><ul><li>(D) Coverage of Current obligations:- </li></ul>LIQUIDITY CAN LIMIT:
  39. 39. <ul><li>(A) Lower Profitability:- </li></ul><ul><li>(B) Restricted Opportunities:- </li></ul><ul><li>(C) Loss Of Owner Control:- </li></ul><ul><li>(D) Loss Of Capital Investment:- </li></ul><ul><li>(E) Insolvency & Bankruptcy:- </li></ul>SEVERE LIQUIDITY OFTEN PROCEEDS
  40. 40. METHODS FOR ESTIMATING WORKING CAPITAL REQUIREMENT <ul><li>Methods for estimating working capital require </li></ul><ul><li>ments of a firm are, </li></ul><ul><li>(1) Percentage Of Sales Method:- </li></ul><ul><li>(2) Regression Analysis Method:- </li></ul><ul><li>(3) Operating Cycle Method:- </li></ul>
  41. 41. <ul><li>(1) Percentage Of Sales Method:- </li></ul><ul><li>In this method, level of w.c requirement is decided </li></ul><ul><li>on the basis of past experience. </li></ul><ul><li>The past relationship between sales & w.c. is taken </li></ul><ul><li>as a base for determining the size of w.c. requireme </li></ul><ul><li>nts for future. </li></ul>
  42. 42. BALANCE SHEET OF ZELLET STEEL COMPANY AS ON 31-3-2006 Liabilities Rs.(in lakhs) Assets Rs.(in lakhs) Share capital 200 Land & Building 60 Reserve & Surplus 160 Plant & Machinery 200 Term Loans 160 Inventories 200 Surplus creditors 120 Receivables 220 Provisions of tax 60 Cash & Bank 20 700 700
  43. 43. <ul><li>The Company’s Turnover For 2005-06 Was </li></ul><ul><li>Rs.12 Crore. </li></ul><ul><li>It anticipates a sales turnover of Rs.18 crore in </li></ul><ul><li>2006-07. </li></ul><ul><li>Estimate the working capital requirement for 2006-07 </li></ul>
  44. 44. ESTIMATE OF W.C. REQUIREMENTS FOR THE YEAR 2006-07 PARTICULARS % OF SALES BASED ON 2005-06 FIGURES ACTUAL (2005-06) ESTIMATSE (2005-06) Sales 100.00 1200 1800 Current assets Inventories 16.67 200 300 Receivables 18.33 220 330 Cash & bank 1.67 20 30 TOTAL(A) 36.67 440 660 Current Liabilities Sundry creditors 10.00 120 180 Provision of tax 5.00 60 90 TOTAL(B) 15.00 180 270 Working capital (A-B) 21.67 260 390
  45. 45. <ul><li>(2) Regression Analysis Method:- </li></ul><ul><li>This is a statistical method of determining working </li></ul><ul><li>capital requirements by establishing the sales & wor </li></ul><ul><li>king capital & it’s various components in the past </li></ul><ul><li>years. </li></ul><ul><li>The equation of this methods is as under. </li></ul><ul><li>Y= a + bx </li></ul><ul><li>a= fixed variable, b= variable components </li></ul><ul><li>x = sales, y = inventory, n = no. of observation </li></ul>
  46. 46. TABLE 2.6 YEAR SALES CURRENT ASSETS 2001 64 44 2002 88 54 2003 104 63 2004 114 87 2005 138 90
  47. 47. ESTIMATE WORKING CAPITAL REQUIREMENTS FOR THE YEAR 2006 YEAR SALES(x) CU.ASSETS(y) xy X2 2001 64 44 2816 4096 2002 88 54 4752 7744 2003 104 63 6552 10816 2004 114 87 9918 12996 2005 138 90 12420 19044 N = 5 X = 508 Y = 338 XY = 36458 X2 = 54696
  48. 48. <ul><li>Y = na + bx. </li></ul><ul><li>338 = 5a + 508b </li></ul><ul><li>71.7677b = a + 107.6629 </li></ul><ul><li>6.0629 = b + 416.771b </li></ul><ul><li>a = -2.167622 </li></ul><ul><li>b = 0.6866892 </li></ul>
  49. 49. <ul><li>(3) Duration Of Raw-Material:- </li></ul><ul><li>It reflects the no. of days for which raw-material </li></ul><ul><li>remain in inventory before they are issued for </li></ul><ul><li>prod’n. </li></ul><ul><li>R = avg. stock of raw- material </li></ul><ul><li>per day consumption of raw- material </li></ul>
  50. 50. <ul><li>(4) DURATION OF WORK-IN-PROGRESS:- </li></ul><ul><li>It denotes the no. of days required in the work-in- </li></ul><ul><li>progress stage. </li></ul><ul><li>W = avg. work-in-progress inventory </li></ul><ul><li>avg. production per day </li></ul>
  51. 51. <ul><li>(5) DURATION OF FINISHED GOODS :- </li></ul><ul><li>It refers to the no. of days for which financial goods </li></ul><ul><li>remain in inventory before they are sold. </li></ul><ul><li>F = avg. finished goods inventory </li></ul><ul><li>per day sale of goods </li></ul>
  52. 52. <ul><li>(6) DURATION OF ACCOUNT RECEIVABLE:- </li></ul><ul><li>It represents the no. of days required to the collect </li></ul><ul><li>the account receivable. </li></ul><ul><li>A = avg. book debt </li></ul><ul><li>avg. credit sales per day </li></ul>
  53. 53. <ul><li>(7) DURATION OF ACCOUNT PAYABLE :- </li></ul><ul><li>It refers to the no. of days for which the suppliers </li></ul><ul><li>of raw-material offer credit. </li></ul><ul><li>P = avg. trade creditors </li></ul><ul><li>avg. credit purchase per day </li></ul>
  54. 54. Any Questions

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