This document discusses key concepts related to working capital management, including: - The need to properly manage current assets and current liabilities. It explains concepts like gross working capital, net working capital, and operating cycle. - Determinants of working capital like the nature of business, market conditions, and credit policy are covered. Different approaches to financing working capital like matching, conservative, and aggressive are outlined. - The operating cycle and its components like inventory conversion period and debtors conversion period are defined. The importance of managing working capital and maintaining adequate liquidity is emphasized.

1. NATURE OF
WORKING CAPITAL

2. LEARNING OBJECTIVES
Underline the need for investing in current assets
Elaborate the concept of operating cycle
Highlight the necessity of managing current assets
and current liabilities
Explain current asset investment and financing
Focus on the proper mix of short-term and long-
term financing for current assets
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3. Management of
Fixed Assets and Current
Assets
 First, in managing fixed assets, time is a very important
factor; consequently, discounting and compounding
techniques play a significant role in capital budgeting and a
minor one in the management of current assets.
 Second, the large holding of current assets, reduces the
overall profitability. Thus, a risk-return trade-off is involved
in holding current assets.
 Third, levels of fixed as well as current assets depend upon
expected sales, but only current assets can be adjusted with
sales fluctuations in the short run. Thus, the firm has a
greater degree of flexibility in managing current assets.
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4. Concepts of Working Capital
1. Gross Working Capital (GWC)
GWC refers to the firm’s total investment in current
assets.
Current assets are those which can be converted into
cash within an accounting year (or operating cycle)
and include cash, short-term securities, debtors,
(accounts receivable or book debts) bills receivable
and stock (inventory).
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5. Total Current Assets = ?

6. https://youtu.be/y_GzZYoc-Vw

7. How to Increase Your Current
Assets
Collect Receivables Quickly (And research indicates that
the longer you wait to collect on invoices, the more likely the invoice is to
go uncollected. The best practice is to send the invoice right after you sell
the item or provide the service.)
Borrow Cautiously
Liquidate Unused Assets
Invest Wisely
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8. Current Liabilities
Current Liabilities is the sum of :
Trade/ Notes Payables
Short Term Loans
Prepaid Revenues
Current/Short term portion of long term debt
Accrued Expenses
Other Short Term Debts
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9. Current Liabilities= ?

10. Concepts of Working Capital
2. Net Working Capital (NWC)
NWC refers to the difference between current
assets and current liabilities.
NWC = CA- CL
NWC can be positive or negative.
 Positive NWC = CA > CL
 Negative NWC = CA < CL
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11. Let’s look at Paula’s Retail store as an example.
Paula owns and operates a women’s clothing and
apparel store that has the following current assets
and liabilities:
 Cash: $10,000
 Accounts Receivable: $5,000
 Inventory: $15,000
 Accounts Payable: $7,500
 Accrued Expenses: $2,500
 Other Trade Debt: $5,000
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Net Working Capital ?

12. Consider a company called XYZ ltd that operates
in a Retail segment has the following current assets
and current liabilities:
 Cash: 10000
 Accounts receivable: 6000
 Inventory: 20000
 Accounts payable: 3000
 Outstanding salaries: 5000
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Net Working Capital ?

13. Concepts of Working Capital
GWC focuses on
 Optimization of investment in current
 Financing of current assets
NWC focuses on
 Liquidity position of the firm
 https://www.youtube.com/watch?v=XtjS7CfUSsA
 Judicious mix of short-term and long-tern
financing
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14. Retail companies require more working capital than
tech companies
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15. Determinants of Working
Capital
1. Nature of business
2. Market and demand conditions
3. Technology and manufacturing policy
4. Credit policy
5. Availability of suppliers’ credit
6. Operating efficiency
7. Price level changes (Inflation)
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16. PERMANENT AND VARIABLE
WORKING CAPITAL
Permanent or fixed working capital
A minimum level of current assets, which is
continuously required by a firm to carry on its
business operations, is referred to as permanent
or fixed working capital.
Fluctuating or variable working capital
The extra working capital needed to support the
changing production and sales activities of the
firm is referred to as fluctuating or variable
working capital.
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17. 17
Permanent and temporary working capital

18. Working Capital Finance
Policies
 Long-term sources
 Short-term sources
 Spontaneous or Transactionary
Sources
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19. Working Capital Finance
Policies
Matching approach
Conservative approach
Aggressive approach
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20. Matching Approach
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Financing under matching plan

21. Conservative Approach
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Conservative financing

22. Aggressive Approach
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Aggressive financing

23. Short-term vs. Long-term
Financing:
A Risk-Return Trade-off
Cost
Flexibility
Risk
Risk-return trade-off
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24. Issues in Working Capital
Management
 Current Assets to Fixed Assets Ratio
 Liquidity vs. Profitability: Risk–Return Trade-off
 Cost Trade-off.
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Alternative current asset policies Cost Trade-off

25. Operating Cycle
Operating cycle is the time duration required to
convert sales, after the conversion of resources into
inventories, into cash. The operating cycle of a
manufacturing company involves three phases:
 Acquisition of resources such as raw material, labour,
power and fuel etc.
 Manufacture of the product which includes conversion of
raw material into work-in-progress into finished goods.
 Sale of the product either for cash or on credit. Credit
sales create account receivable for collection.
 https://www.youtube.com/watch?v=nzKTIGYCjW4
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26. Operating Cycle (Contd.)
The length of the operating cycle of a manufacturing
firm is the sum of:
 Inventory conversion period (ICP).
 Debtors (receivable) conversion period (DCP).
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Operating cycle of a manufacturing firm

27. Gross Operating Cycle (GOC)
The firm’s gross operating cycle (GOC) can be
determined as inventory conversion period (ICP)
plus debtors conversion period (DCP). Thus, GOC
is given as follows:
Gross operating cycle = Inventory conversion period
+ Debtors conversion period
GOC = ICP + DCP
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28. Inventory Conversion Period
Inventory conversion period is the total time
needed for producing and selling the product.
Typically, it includes:
 raw material conversion period (RMCP)
 work-in-process conversion period (WIPCP)
 finished goods conversion period (FGCP)
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= Average Inventory / Cost of Sales * 365

30.  MV Ltd has the following data:
Stock at start $17,000
Stock at end $11,000
Total purchases $20,000
Purchase returns $2,000
Then,
Net purchases = Total purchases - Purchase returns = 20,000 -
2,000 = $18,000
Cost of goods sold = 17,000 + 18,000 - 11,000 = $24,000
Average inventory = (17,000 + 11,000) / 2 = $14,000
 ICP ?
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31. RMCP= Raw Material Inventory
(Raw material consumption)/360
 WIPCP= Work in process Inventory
(Cost of Production)/360
 FGCP= Finished GoodsInventory
(Cost of good sold)/360
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32. Debtors (Receivables)
Conversion Period (DCP)
Debtors conversion period (DCP) is the average
time taken to convert debtors into cash. DCP
represents the average collection period. It is
calculated as follows:
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33. Let's say a company has an average accounts
receivable balance for the year of $10,000. The
total net sales the company recorded during this
period was $100,000. So to calculate the average
collection period, we use the following formula:
(($10,000 ÷ $100,000) x 360).
DCP ?
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34. For example, if a company has average trade
receivables of $5,000,000 and its annual credit
sales are $30,000,000,
 DCP ?
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35. Creditors (Payables) Deferral
Period (CDP)
Creditors (payables) deferral period (CDP) is the
average time taken by the firm in paying its
suppliers (creditors). CDP is given as follows:
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36.  Metro trading company makes most of its purchases on credit.
The extracted data for the year 2012 is given below:
Total purchases: $570,000
Cash purchases: $150,000
Accounts payable at the start of the year: $65,000
Accounts payable at the end of the year: $40,000
Notes payable at the start of the year: $20,000
Notes payable at the end of the year: $15,000
CDP ?
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37. Cash Conversion or Net
Operating Cycle
Net operating cycle (NOC) is the difference between
gross operating cycle and payables deferral period.
Net operating cycle =
Gross operating cycle – Creditors deferral period
NOC = GOC – CDP
Net operating cycle is also referred to as cash
conversion cycle.
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38. Which of the following activities is not a component
of the operating cycle?
a. Sale of merchandise
b. Payment of employees' salaries
c. Collection of cash from merchandise sales
d. Purchase of merchandise
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45. THANK YOU
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