Working capital refers to a company's short-term assets and liabilities involved in day-to-day operations. It is calculated as current assets minus current liabilities and represents the funds available for a company to purchase inventory and pay its short-term debts. Maintaining adequate working capital is important for business solvency, goodwill with creditors and customers, obtaining loans, and taking advantage of cash discounts. The working capital requirements of a business depend on factors like its industry, size, production processes, seasonality, credit and inventory policies, growth rate, and business cycles.

1. Working Capital
Prepared By:
Mohammed Jasir PV
Asst. Professor
MIIMS, Puthanathani
Contact:9605 69 32 66

2. Topics
• Working Capital
– Definition
– Meaning
– Concept
– Importance
– Factors Affecting W/C Requirements

3. • W/C means the amount of current assets that a business firm has to
maintain for its day to day operations
• W/C plays a key role in a business just as the role of heart in human
body
• It act as ‘grease’ to run the wheels of fixed assets
W/C

4. W/C
• Current assets for daily expenses like purchases, wages etc
• Normally excess of current assets over current liability
• W/C = CA - CL
• The efficiency of a business enterprise depends largely on its ability
to manage W/C

5. Definitions of W/C
• “W/C is the excess of C.A. over current liabilities.” - H.G, Guthmann
• “W/C to a firm’s investment in short term assets cash short term
securities, accounts, receivables and inventories.” -Weston the
Brigham

6. Meaning of W/C
• W/C refers to the fund which needs to be invested in the short term
assets or current assets
• Meaning thereby, those assets which are required in running day to
day business such as –
A. Cash
B. Short term Investments (Marketable Securities)
C. Receivables
D. Inventories

7. Purpose / Need of the W/C
• To hold cash for purchasing the raw material
• To hold work in progress for the production process
• To hold the finished goods up to sale
• For the period receivables are being converted into cash
• To meet day to day expenses
• To pay wages

8. Concepts of W/C
– Gross W/C
• Total Current Assets
• WC = CA
– Net W/C
• WC = CA - CL

9. Gross W/C means
• The total of all current assets or all short-term assets
• Current assets here mean cash, marketable securities, inventories and
receivables
• They are meant for a lesser period
• They represent liquid asset
• Gross W/C represents the liquidity position of the organization
• That this much of the asset they are holding for Getting readily available
as the cash in the business

10. Net W/C
• It is a broader concept
• It works on the principle on solvency
• Net W/C means excess of current assets over current
liabilities

12. Types of W/C
• Gross W/C
• Net W/C / Working Capital
• Fixed / Permanent W/C
• Reserve W/C
• Temporary / Fluctuating / Variable W/C
• Positive W/C
• Negative W/C
• Special W/C
• Regular W/C
• Seasonal W/C

13. Importance of W/C
• WC is the life blood and nerve centre of a business
• No business can run successfully without an adequate amount of W/C
• The main advantages of maintaining adequate amount of W/C are as
follows:
– Solvency of the business
– Goodwill
– Easy Loans
– Cash discounts
– Regular supply of raw materials

14. Importance of W/C
• WC is the life blood and nerve centre of a business.
• Just as circulation of blood is essential in the human body for marinating life, W/C
is very essential to maintain the smooth running of a business.
• No business can run successfully without an adequate amount of W/C.
• The main advantages of maintaining adequate amount of W/C are as follows:
– Solvency of the business: Adequate W/C helps in maintaining solvency of the
business by providing uninterrupted flow of production.
– Goodwill: Sufficient W/C enables a business concern to make prompt
payments and hence helps in creating and maintaining goodwill.

15. – Easy Loans: A concern having adequate W/C, high solvency and good credit
standing can arrange loans from banks and other on easy and favourable
terms.
– 4. Cash discounts: Adequate W/C also enables a concern to avail cash
discounts on the purchases and hence it reduces costs.
– Regular supply of raw materials: Sufficient W/C ensures regular supply of raw
materials and continuous production.

16. Factors Affecting W/C Requirements
• Nature or Character of Business
• Size of Business/Scale of Operations
• Production Policy
• Manufacturing Process/Length of Production Cycle
• Seasonal Variation
• Rate of Stock Turnover
• Credit Policy
• Business Cycle
• Rate of Growth of Business

17. Factors Affecting W/C Requirements
1. Nature or Character of Business:
– The W/C requirement of a firm basically depends upon the nature of this
business.
– Public utility undertakings like electricity water supply and railways need very
limited W/C because they offer cash sales only and supply services, not
products and as such no funds are tied up in inventories and receivables.
– Generally speaking it may be said that public utility undertakings require small
amount of W/C, trading and financial firms require relatively very large
amount, whereas manufacturing undertakings require sizable W/C between
these two extremes.

18. Contd..
2. Size of Business/Scale of Operations:
– The W/C requirement of a concern is directly influenced by the size of its
business which may be measured in terms of scale of operations.
3. Production Policy:
– In certain industries the demand is subject to wide fluctuations due to
seasonal variations.
– The requirements of W/C in such cases depend upon the production policy.

19. 4. Manufacturing Process/Length of Production Cycle:
– In manufacturing business the requirement of W/C increases in direct
proportion of length of manufacturing process.
– Longer the process period of manufacture, larger is the amount of W/C
required.
5. Seasonal Variation:
– In certain industries raw material is not available through out the year.
– They have to buy raw materials in bulk during the season to ensure and
uninterrupted flow and process them during the entire year.

20. 6. Rate of Stock Turnover:
– There is a high degree of inverse co-relationship between the quantum of
W/C; and the velocity or speed with which the sales are affected.
– A firm having a high rate of stock turnover will need lower amount of W/C as
compared to affirm, having a low rate of turnover.
7. Credit Policy:
– The credit policy of a concern in its dealing with debtors and creditors
influence considerably the requirement of W/C.
– A concern that purchases its requirement on credit and sell its
products/services on cash require lesser amount of W/C.

21. 8. Business Cycle:
– Business cycle refers to alternate expansion and contraction in general
business activity.
– In a period of boom i.e., when the business is prosperous, there is a need of
larger amount of W/C due to increase in sales, rise in prices, optimistic
expansion of business contracts sales decline, difficulties are faced in collection
from debtors and firms may have a large amount of W/C lying idle.

22. 9. Rate of Growth of Business:
– The W/C requirement of a concern increase with the growth and expansion of
its business activities.
– Although it is difficulties to determine the relationship between the growth in
the volume of business and the growth in the W/C of a business, yet it may be
concluded that of normal rate of expansion in the volume of business, we may
have retained profits to provide for more W/C but in fast growth in concern,
we shall require larger amount of W/C.

23. Thank You