1. Presentation on topic : Explain what
is meant by āWorking Capitalā. As a
management consultant , you are
required to state the considerations
involved in estimating the amount of
the required working capital.
Presented by : Sangeeta Saini
M.Com (p)
641
2. Contents
ā¢ Working capital .
ā¢ Definition of working capital.
ā¢ Concept of working capital.
ļ¼Balance sheet concept.
ļ¼Operating cycle concept.
ā¢ Excessive and inadequacy of working
capital.
ā¢ Factors determining the working capital
requirements.
ā¢ Conclusion .
3. Working Capital
Capital required for a business can be
classified under two main categories :
ā¢ Fixed capital.
ā¢ Working capital.
Every business need funds for two
purposes :
ā¢ For its establishment
ā¢ To carry out its day to day
operations.
4. Long term funds are required to create
production facilities through purchase of
fixed assets such as plant & machinery ,
land, building, furniture etc. Investment in
these assets represent that part of firms
capital which is blocked on permanent or
fixed basis is called fixed capital.
Funds are also needed for short term
purposes for the purchase of raw
materials, payment of wages and other
day to day expenses etc. These funds are
known as Working capital.
5. Concept of working capital
Balance sheet concept
Gross
working
capital
Net
working
capital
Operating
cycle
concept
8. Operating cycle concept
Operating cycle means that time
period which is required to
convert the raw material into
cash .
Gross operating cycle = RMCP+WIPCP+FGCP+RCP
9. Operating cycle
Cash received
from debtors and
paid to suppliers
of raw material
Raw material
introduced into
process
Finished goods
produced
Sales of finished
goods
10. Formulaās can be used to
determine the conversion periods
Average stock of raw material
Raw material consumption per day
1. Raw material conversion period =
2. Work in process conversion period =
Average stock of work in process
Total cost of production per day
3. Finished goods conversion period =
Average stock of finished goods
Total cost of goods sold per day
4. Receivable conversion period =
Average accounts receivables
Credit sales per day
13. Disadvantages of inadequate
working capital
Difficulty in availability of raw material.
Full utilization of fixed assets not possible.
Non utilization of favourable opportunities..
Decrease in sales.
Difficult in distribution of dividend.
14. Factor determining the working capital
requirements
1. Nature of business.
2. Growth and expansion.
3. Size of business/ scale of operations.
4. Turnover of inventories.
5. Dividend policy.
6. Price level changes.
7. Level of taxes .
8. Manufacturing process.
9. Business cycle.
15. ā¢ At last , as a management consultant , we
can say that both excess as well as
shortage of working capital positions are
bad for any business . However , out of
two , it is the inadequacy of working capital
which is more dangerous from the point of
view of the firm.