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Chapter 4 working capital management
Working capital refers to the capital required to run the day-to-day operations of a business. It includes current assets like inventory, cash, and accounts receivable as well as current liabilities like accounts payable. There are different types of working capital like gross vs net and permanent vs temporary. Over 50% of a company's capital is typically in the form of working capital. It is financed through various sources like trade credit, bank financing, and working capital loans. Factors like the nature of the business, production policy, market conditions, and growth strategies can affect a company's working capital needs.
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Chapter 4 working capital management
- 1. Working Capital • Working Capitalis the Capital required to run the day to day operations of a business enterprise. • It is also known as Current Capital or Running Capital or Short Term Capital. • W.C.M. is Balancing between Holding Cost and Carrying Cost.
- 2. Types of Working Capital •Gross Working Capital and Net Working Capital. • Permanent Working Capital and Temporary Working Capital.
- 3. Scope of Working Capital •Positive Correlation between Sales and W. C. M. • More than 50% Capital is in the form of Working Capital. • Fixed Asset can be acquired on Lease but Working Capital can’t. • Working Capital needs are mostly financed from outside Sources.
- 4. Working Capital Financing Trade Credit Non Cash Financing Bank Financing BankOD Cash Credit Bills Discounting Letter of Credit Working Capital Loans
- 5.
- 6. Factors Affecting Working Capital •Nature of Business, • Production Policy, • Market Conditions, • Seasonal Fluctuations, • Growth and Expansion Strategy, • Operating Efficiency, • Credit Policy, • Growth Rate, • Dividend Policy.
- 7. Current Asset (CA) • CurrentAsset is the asset of an Organization which is already in the form of Cash or will readily get converted in the form of Cash within One Year. Examples of CA: • Stock of R.M. • Stock of WIP • Stock of Finished Goods • Cash in Hand, • Cash at Bank, • Debtors, • Bills Receivables, • Prepaid Expenses
- 8. Current Liability (CL) C.L: Current Liabilityis the Liability of an Organization which is already due for payment or will become due for payment within one Year. Examples of CL: • Outstanding Expenses, • Creditors, • Bills Payables, • Proposed Expenses, • Various Provisions etc.
- 9. Format of WorkingCapital Particular Amount A) CURRENT ASSET: a) Stock of RM b) Stock of WIP c) Stock of Finished Goods d) Debtors e) Bills Receivables f) Prepaid Expenses g) Cash in Hand h) Cash at Bank TOTAL CURRENT ASSET: B) CURRENT LIABILITY: a) Creditors b) Bills Payables c) Outstanding Expenses d) Provisions if any e) Proposed Expenses TOTAL CURRENT LIABILITY: WORKING CAPITAL (A-B):