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W O R K I N G C A P I T A L R E F E R S T O T H O S E A S S E T S
W H I C H A R E R E Q U I R E D F O R T H E D A Y T O D ...
KINDS OF WORKING CAPITAL
A. On the basis of concept
I. Gross working capital
II. Net working capital
B. On the basis of ti...
I. Gross working capital
 It refers to firms investment in total current
assets
 It requires that a firm should have ade...
Net working capital
 It is the difference between current assets and
current liabilities. When current assets is higher t...
On the basis of time
 Permanent working capital
It will remain permanently in business and will not
be returned until the...
Needs of working capital
 For the purchase of raw material
 To pay wages and salaries.
 To meet selling costs such as p...
Factors affecting working capital
a. Nature of business
b. Business cycle/Operating cycle
c. Seasonal variations
d. Credit...
DANGERS OF INADEQUATE WORKING CAPITAL
 Cannot pay short-term liabilities in time
 Not able to get good credit facilities...
Operating cycle
 Working capital is required because of the true gap
between sales and their actual realization of cash.
...
Operating cycle (Cont…d)
 Operating cycle of a Trading Firm
 Cash Inventories
•Account receivables
Operating cycle (Cont…d)
 Operating cycle of a Financing Firm
 Cash Debtors
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Working capital

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Working capital

  1. 1. W O R K I N G C A P I T A L R E F E R S T O T H O S E A S S E T S W H I C H A R E R E Q U I R E D F O R T H E D A Y T O D A Y W O R K I N G O F T H E C O M P A N Y . E G : P U R C H A S E O F R A W M A T E R I A L S , P A Y M E N T O F S A L A R I E S , W A G E S , R E N T , A D V E R T I S I N G E T C Working capital
  2. 2. KINDS OF WORKING CAPITAL A. On the basis of concept I. Gross working capital II. Net working capital B. On the basis of time I. Permanent working capital II. Temporary or variable working capital
  3. 3. I. Gross working capital  It refers to firms investment in total current assets  It requires that a firm should have adequate investment in current assets and proper management of these assets. Their should be neither excessive nor inadequate assets and it should be responsive to the changing requirements of business which depend on the level of business.
  4. 4. Net working capital  It is the difference between current assets and current liabilities. When current assets is higher than current liabilities net working capital will be positive but if current liabilities exceed current assets then net working capital will result in negative.  Net working capital = current assets – current liabilities
  5. 5. On the basis of time  Permanent working capital It will remain permanently in business and will not be returned until the business is wound up. Eg: Every business has to maintain a minimum level of raw materials, work-in-progress, finished goods and cash balance.  Temporary or Variable working capital It is the amount of working capital required for short periods It is intended to meet seasonal demands and some special emergencies
  6. 6. Needs of working capital  For the purchase of raw material  To pay wages and salaries.  To meet selling costs such as packing, advertising etc.  To provide credit facilities to the customers.  To maintain the inventories of raw material, work- in-progress, and finished stock.
  7. 7. Factors affecting working capital a. Nature of business b. Business cycle/Operating cycle c. Seasonal variations d. Credit policy e. Availability of raw materials f. Dividend policy g. Relation with banks h. Rapidity of turnover i. Growth and expansion of business
  8. 8. DANGERS OF INADEQUATE WORKING CAPITAL  Cannot pay short-term liabilities in time  Not able to get good credit facilities  loose its reputation.  Cannot buy requirements in bulk so it will not get Discounts etc.  Difficult to exploit favorable market conditions.  Create inefficiencies.  Impossible to utilize fixed assets efficiently.  Rate of return on investments fall.
  9. 9. Operating cycle  Working capital is required because of the true gap between sales and their actual realization of cash.  Operating cycle of a Manufacturing concern  Raw material Finished goods Work in progress Cash Accounts Receivables
  10. 10. Operating cycle (Cont…d)  Operating cycle of a Trading Firm  Cash Inventories •Account receivables
  11. 11. Operating cycle (Cont…d)  Operating cycle of a Financing Firm  Cash Debtors

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