This document discusses working capital management. It defines working capital as the difference between current assets and current liabilities, and can be positive or negative. It outlines key components of working capital like inventories, receivables, payables. The document also discusses factors that influence working capital needs like nature of business, credit policies. It then explains how to calculate the operating cycle and applies it to sample data. Finally, it discusses various sources to finance working capital needs, including bank financing tools like overdrafts and letters of credit, as well as trade credit, public deposits, commercial papers and more.

1. Working Capital Management
By:
Prof. Saptarshi Mukherjee
MBA (Finance), B.Com(Hons.), IA.

2. Financial Management
Long Term Financing
-Capital Budgeting
-Dividend Policy
-Capital Structure
Short Term Financing
-Current Assets
-Current Liabilities

3.  Current Assets:
- Inventories (Raw Material/Work In Process/Finished Goods)
- Cash & Bank Balance
- a/c Receivables (Trade Debtors)
- Loans & Advances
 Current Liabilities:
- Short term borrowings from banks
- a/c Payables (Sundry Creditors)
-Trade Advances
-Outstanding expenses

4. Gross Working Capital = Sum of all current Assets
Net Working Capital =Current Assets – Current Liabilities
Net working capital can be either + or -

5. Importance of management of WC
How much to invest in CA (more or less)
&
How should one finance CA (Sources & Liquidity)

6. Characteristics/Nature of CA
- Short life Span
- Swift transformation in to other assets forms
Raw
Materials
WIP
Finished
Goods
a/c
Receivables
Cash
Wages/Sala
ries/OH

7. PURCHASE COLLECTIONCr.SALE
Inventory Conversion Period (ICP)
(RMCP+WIPCP+FGCP)
Receivable Conversion Period
(RCP)
Gross Operating Cycle
Creditor Deferral Period
(CDP)
Net Operating Cycle
(NOC)
Operating Cycle:

8. Factors/determinants of Working Capital Requirements
-Nature of business
-Market & Demand conditions
-Technology & manufacturing policy
-Credit Policy for Debtors
-Availability of credit from supplier

9. 1. From the following data, compute the duration of the
operating cycle for each year & comment on the
increase/decrease
Particulars Year 1 Year 2
Stocks
Raw Materials 20,000 27,000
WIP 14,000 18,000
FG 21,000 24,000
Purchase of RM 96,000 1,35,000
Cost of goods sold 1,40,000 1,80,000
Sales 1,60,000 2,00,000
Debtors 32,000 50,000
Creditors 16,000 18,000

10. BANK FINANCING FOR WC:
1.Overdrafts (OD)/Cash Credit
2.Letter of credit
3.Loans
1.OVERDRAFTS (OD)
-Borrower is allowed to withdraw funds in excess of the
balance in his current a/c up to certain limit specified by
bank
- Amount is repaid partially or fully as when he desires.
- Interest is charged only on running balance or not on limit
sanctioned.

11. 2. LETTER OF CREDIT
- It is an indirect form of financing compared to previous
ones
- Risk is owed by the bank. It honors the obligation made
by its customer, if he fails do so.
- Bank opens a LOC in favor of its customer for some
specific purchase.

12. 3.LOANS
- They are fixed amounts given against security
- Interest is charged on entire amount irrespective of how
much he borrows
- Loans are payable in periodic installments or on
demand.

13. Sources of WC financing:
- Commercial Banks
- Accruals
- Trade Credit
- Public deposits
- Inter corporate deposits
- Factoring
- Commercial Papers
- Rights debentures for WC
- Short term loans from financial institutions

14. Accruals:
-Wages are paid on a monthly, fortnightly or monthly basis
& tax is payable quarterly, half yearly or annually
-Accruals are those which firm owes to its employees & to govt.
Trade Credit:
-It is important source of WC finance, presenting 25%-50% of
short-term financing
- It is credit extended by the supplier of goods/services.
Accruals & Trade Credit are termed as spontaneous
sources of finance.

15. Public deposits
- They are unsecured deposits from public
-No security is offered against public deposits
Inter corporate Deposits
- Deposits made by one company with another company,
normally for 6 months
Short term loans from financial institutions
-Loans are given for a period of 1 year & can be renewed for 2
consecutive years, provided the original eligibility criteria are
satisfied.
- LIC,GICI & UTI give to manufacturing firms.
-Totally unsecured

16. Commercial Papers
- Generally large firms with considerable financial strength
are able to issue CP.
-CP is either placed with investor or sold through dealers
-Maturity period- 15 to 365 days
-Sold at a discount from its face value & redeemed at its
face value.
Rights debentures for WC
-Public limited companies can issue “rights” debenture to
their shareholders
- It follows certain guidelines

17. Factoring
Client
(Seller)
Client
(Factor)
Client
(Buyer)
PO
Pays
balance
amount
Repays up
to 80%
Sends
invoice
copy
Fixes
customer
limit
Follow up
Pays
Deliver goods &
invoice with notice to
pay the factor