Introduction to Working capital Managment

1. Working Capital Management
Dr Raju Indukoori

2. Dr Raju Indukoori
Working Capital
It is the capital needed to meet day to day
operations of a business entity which represents
operating liquidity available to a firm along with
fixed assets such as plant and equipment.
working capital is considered a part of operating
capital.
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3. Dr Raju Indukoori
Types of Working Capital
• Gross Working Capital
• Net Working Capital
– Working capital surplus (+ve)
– Working capital deficit (-ve)
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4. Dr Raju Indukoori
Need for Working Capital
• Needed for smooth running of business
• Gives good liquidity
• Increases productivity
• Enables to grab new and potential
opportunities
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5. Dr Raju Indukoori
Composition of Working Capital
CURRENT ASSETS
1 Cash : Cash in Hand & Bank
2 Receivables
3 S T loans given
4 S T marketable securities
5 Advance payments
6 Tax paid in advance
7 Inventory
CURRENT LIABILITIES
1 Bank OD
2 Payables
3 S T Loans taken
4 Interest payable
6 Provision for tax
7 Proposed dividend
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6. Dr Raju Indukoori
Factors Influencing Composition of WC
• Nature of business
• Size of the company
• Nature of raw material used
• Process technology used
• Nature of finished goods
• Seasonal fluctuations
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7. Dr Raju Indukoori
VIEWS OF WORKING CAPITAL
• Static : Annual assessment
• Dynamic : Continuous assessment
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8. WORKING CAPITAL MANAGEMENT

9. Dr Raju Indukoori
WORKING CAPITAL MANAGEMENT
It is the process of identifying short
term capital requirements through
estimations and funding them with an
objective to increase profits and maintain
sound liquidity position for the company.
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10. Dr Raju Indukoori
Scope of WCM
• Operating Cycle
• Inventory Management
• Receivables Management
• Cash Management
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11. Dr Raju Indukoori
Objectives Of WC Management
• Profitability
• Liquidity
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12. Dr Raju Indukoori
Operating Cycle
It determines how much time it would
take to get the investment in working
capital back.
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13. Dr Raju Indukoori
Operating Cycle
DayPerSales
Inventory
PeriodConversionInventory 
DayPerSales
Rceivables
(DSO)PeriodCollectionAverage 
DayPerPurchases
Payables
PeriodDeferralPayables 
+
-
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14. Dr Raju Indukoori
Evaluation of
Working capital management
• Liquidity
• Availability of Cash
• Inventory turnover
• Credit extended to customers
• Credit obtained from suppliers
• Under trading and over trading
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15. Dr Raju Indukoori
Ratio Analysis
• Current ratio
• Quick / Acid-test ratio
• Cash to current asset ratio
• Sales to cash ratio
• Average collection period
• Inventory turnover
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16. Dr Raju Indukoori
Problem
• Annual Sales :Rs 1,00,00,000
• Credit Sales :Rs 6,57, 534
• Cost of Goods sold :Rs 80,00,000
• Payables :Rs 6,57,534
• Inventories : Rs 20,00,000
Calculate Cash Conversion Cycle
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17. Dr Raju Indukoori
Solution
CCC = ICP + RCP – PDP
67days = 73days + 24 days – 30 days
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18. Questions?
Thank You