Here are the calculations of the three working capital ratios based on the information provided: Current Ratio = Total Current Assets / Total Current Liabilities Current Assets = Rs. 0 Current Liabilities = Rs. 0 Current Ratio = #DIV/0! (Not defined as there are no current assets or liabilities provided) Quick Ratio = (Current Assets - Inventory) / Current Liabilities Inventory = Rs. 0 Quick Ratio = #DIV/0! (Not defined as there are no current assets or liabilities provided) Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities Cash & Cash Equivalents = Rs. 0 Cash Ratio = #DIV

1. WORKING CAPITAL
MANAGEMENT
SUBMITTED TO : DR. DHARA JETHAV &
DR. MAYUR PARMAR
BY GROUP NO. 3
ROLL NO. 15 – 20

2. TYPES OF CAPITAL
Two types of Capital are needed in the business enterprise—
 Fixed Capital
 Working Capital

3. FIXED CAPITAL

4. WORKING CAPITAL
 Capital is also needed for short-term purposes, i.e.
meeting day to day operations.
 Capital invested for this purpose is known as
- Current Capital OR Working Capital

5. TWO CONCEPTS OF WORKING
CAPITAL
 Gross Working Capital Concept- Quantitative
Aspect,
 Net Working Capital Concept- Qualitative
Aspect.

6. GROSS WORKING CAPITAL CONCEPT
Gross Working Capital is also known as‘Current
Capital.

7. VALID REASONS FOR GROSS WORKING CAPITAL
 Current Assets, Whatever may be the sources of acquisition,
are used in activities relating to day-to-day operations and
their forms keep on changing. Therefore, they should be
considered as Working Capital.

8. NET WORKING CAPITAL CONCEPT
According to this concept Current Assets minus
Current Liabilities is known as Working Capital.
W.C. = C.A.- C.L.
Positive W.C.= C.A.> C.L. (company position is
sound)
AND
Negative W.C. = C.A.< C.L. (it indicates financial
crisis)
Thus, the concept lays emphasis on qualitative
aspect which indicates the liquidity position of the
concern.

9. VALID REASONS FOR NET WORKING CAPITAL
 The material thing in the long run is the surplus of
current assets over current liabilities.

10. COMPONENTS OF WORKING CAPITAL
Working Capital as per Net Concept has two
components-
1. Current Assets and,
2. Current Liabilities.

11. CURRENT ASSETS
Assets which can easily be converted into cash in the normal
course of the business are known as current assets. These
assets may include:-
1. Cash in hand or at Bank,
2. Debtors and Bills Receivable,
3. Stock or inventory of– raw materials, stores, and spares,
-- Works in Progress,
-- Finished Goods.
4. Advance payments towards expenses, purchases and other
short term advances.
5. Temporary investment of surplus funds.
6. Accrued incomes.
One common characteristics of all the above items of
current assets is that each component is swiftly
transformed into other assets forms.

12. CURRENT LIABILITIES
A part of the need for the funds to finance the current
assets may be met from supply of goods on credit
and deferment, on account of custom, usage of
arrangement of payment of expenses.

13. CURRENT LIABILITIES INCLUDES -
Typical items of Current Liabilities are—
1. Trade creditors i.e. goods purchased on credit and
Bills Payable.
2. Outstanding and Accrued expenses.
3. Short term borrowings.
4. Taxes and Dividend payable.
5. Advances received from parties against goods to be
sold to them or as short term deposits.
6. Bank overdraft.
7. Outstanding liabilities currently payable.

14. KINDS OF WORKING CAPITAL
1. CORE, PERMANENT OR FIXED WORKING
CAPITAL.
2. FLUCTUATING OR VARIABLE WORKING
CAPITAL.

15. FIXED OR PERMANENT WORKING CAPITAL
 This is irreducible minimum amount necessary for
maintaining the circulation of the current assets.
 This is permanently locked up in the business and
therefore, it is referred to fixed or Permanent Working
Capital.

16. VARIABLE WORKING CAPITAL
 Variable working capital refers to that portion of total
working capital which is needed over and above fixed
working capital.
 Such need for Variable Working Capital arise on account
of:-
- Seasonal changes,
- Abnormal and Unanticipated conditions,
- To face tough conditions in the market,
- To meet contingencies like strikes and lockouts,
- Special Advertising Campaigns or other Promotional
activities,
Are financed by variable working capital

17. Dr.SudhenduGiri
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
Jan
Feb
Mar
0
10
20
30
40
50
60
70
80
90
100
Variable W.C.
Permanent W.C.
0
20
40
60
80
100
120
140
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Variable W.C.
Permanent W.C.
Firm “A” Steady Annual Sales Firm “B” Growth Situation

18. CURRENT ASSETS TO FIXED ASSETS RATIO
The financial manager should determine
the optimum level of current assets so that
the wealth of shareholders is maximized.
A firm needs fixed and current assets to
support a particular level of output.

19. CURRENT ASSETS TO FIXED ASSETS RATIO
 A higher CA/FA ratio indicates a conservative current
assets policy. It implies greater liquidity and lower
risk;
 A lower CA/FA ratio means an aggressive current
assets policy, it indicates higher risk and poor
liquidity.

20. IMPORTANCE OF ADEQUATE
WORKING CAPITAL
Working capital is the life blood and nerve
centre of a business . Just as circulation of
blood is essential in the human body for
maintain life, working capital to maintain
the smooth running of a business. The main
advantages of maintaining adequate
amount of working capital are as follows:

21.  Solvency of the business:
Adequate amount of working capital helps in
maintaining solvency of the business by
providing uninterrupted flow of production.
 Good will:
Sufficient working capital enables a business
concern to make prompt payments and hence
helps in creating and maintaining goodwill.

22.  Regular supply of Raw material:
Sufficient working capital ensures regular
supply of raw materials and continuous
production.
 Regular payment of salaries, wages & other day
commitments:
A company which has ample working capital
can make regular payment of salaries, wages and
other day-to-day commitments which rates the
morale of its employees., increase their
efficiency, reduces wastage and cost and
enhances production and profits.

23.  Quick & regular return on Investment:
Every investor wants a quick and regular return
on his investments. Sufficiency of working
capital enables a concern to pay quick and
regular dividends to investors as there may not
much pressure to plough back profits. This gain
confidence of its investors and creates a
favorable market to raise additional funds.
 Cash discount:
Adequate amount of working capital also
enables a concern to avail cash discount on the
purchases and hence it reduces costs.

24.  Easy loans:
A concern having adequate amount of
working capital, having solvency and good
credit standing can arrange loans from banks
and others on easy and favorable term.
 Ability to face crisis:
Sufficient working capital enables a concern
to face business crisis in emergencies such as
depression because during such periods,
generally, there is much pressure on working
capital.

25.  Exploitation of favorable market
conditions:
Only concern with adequate working
capital can exploit favorable conditions such
as purchasing its requirements in bulk when
the prices are lower and by holding its
inventories for higher prices.

26. EXCESS OR INADEQUATE
WORKING CAPITAL
Disadvantage of redundant or excessive
working capital
 When there is a redundant working capital, it
may lead to unnecessary purchasing and
accumulation of inventories causing more
chances of theft, waste and losses.
 Excessive working capital means idle funds
which earn no profits for the business and
hence the business cannot earn a proper rate
on its investments.
 Excessive working capital implies excessive
debtors and defective credit policies which
may cause higher incidence of bad debts.

27.  When there is excessive working capital,
relations with banks and other financial
institution may not be maintained.
 Due to low rate of return on investments, the
value of share may also fall.
 Due to low rate of return on investments, the
value of shares may also fall.
 The redundant working capital gives rise to
speculative transactions.
 It may results into overall inefficiency in the
organization.

28. Disadvantage or danger of inadequate working
capital
 A concern which has inadequate working capital
cannot pay its short term liabilities in time. Thus,
it will lose its reputation and shall not be able to
get good credit facilities.
 It cannot buy its requirements in bulk and cannot
avail of discounts, etc.
 It become difficult for the firm to exploit
favorable market conditions and undertake
profitable projects due to lack of working capital.

29.  The firm cannot pay day-to-day expenses of
its operations and it creates inefficiencies,
increases costs and reduces the profits of the
business.
 It becomes impossible to utilizes the fixed
assets due to non-availabilities of liquid
funds.
 The rate of return on investments also fall
with the shortage of working capital.

30. THE NEED OR OBJECTS OF
WORKING CAPITAL
o For the purchase of raw materials,
components and spares.
o To pay wages and salaries.
o To incur day-to-day expenses and overhead
costs such as fuel, power and office expenses,
etc.
o To meet the selling costs as packing,
advertising, etc.
o To provide credit facilities to the customers.
o To maintain their inventories of raw material,
work-in-progress, stores and spares and
finished socks.

31. FACTORS AFFECTING THE
WORKING CAPITAL
REQUIREMENT

32. The working capital requirements of a concern
depends upon a large number of factors such as
nature & size of business , The character of there
operation, The length of production cycle, The
rate of stock turnover & The state of economic
situation.
Following are important factors generally
influencing the working capital requirements:

33. 1. NATURE OR CHARACTER OF BUSINESS.
2. SIZE OF BUSINESS.
3. PRODUCTION POLICY.
4. MANUFACTURING PROCESS.
5. SEASONAL VARIATION.
6. WORKING CAPITAL CYCLE.
7. RATE OF STOCK TURNOVER.
8. CREDIT POLICY.
9. BUSINESS CYCLE.
10. RATE OF GROWTH OF BUSINESS.
11. EARNING CAPACITY.
12. PRICE LEVEL CHANGE.
13. OTHER FACTORS.

34. MANAGEMENT OF WORKING CAPITAL
 Working capital in general practice refer to the
excess of CA over CL.
 Management of working capital therefore is
concerned with the problems that arise in
attempting to manage the CA, the CL and the
inter-relationship that exists between them.
 The basic goal of WCM is to manage the CA &
CL of a firm in such a way that a satisfactory
level of WC is maintained.
 Working Capital Management Policies of a
firm have a great effect on its profitability,
liquidity and structural health of the
organization

35. WORKING CAPITAL MANAGEMENT IS 3 DIMENSIONAL IN
NATURE
Dimension I
Profitability,
Risk, & Liquidity

36. WORKING CAPITAL ISSUES
Assumptions
 50,000 maximum
units of production
 Continuous
production
 Three different
policies for current
asset levels are
possible
Optimal Amount (Level) of Current Assets
0 25,000 50,000
OUTPUT (units)
ASSETLEVEL
Current Assets
Policy C
Policy A
Policy B

37. IMPACT ON LIQUIDITY
Liquidity Analysis
Policy Liquidity
A High
B Average
C Low
Greater current asset
levels generate more
liquidity
Optimal Amount (Level) of Current Assets
0 25,000 50,000
OUTPUT (units)
ASSETLEVEL
Current Assets
Policy C
Policy A
Policy B

38. IMPACT ON EXPECTED PROFITABILITY
Return on Investment =
Net Profit
Total Assets
Let Current Assets =
(Cash + Rec. + Inv.)
Return on Investment =
Net Profit
Current + Fixed Assets
Optimal Amount (Level) of Current Assets
0 25,000 50,000
OUTPUT (units)
ASSETLEVEL
Current Assets
Policy C
Policy A
Policy B

39. IMPACT ON EXPECTED PROFITABILITY
Profitability Analysis
Policy Profitability
A Low
B Average
C High
As current asset levels
decline, total assets will
decline and the ROI will
rise.
Optimal Amount (Level) of Current Assets
0 25,000 50,000
OUTPUT (units)
ASSETLEVEL
Current Assets
Policy C
Policy A
Policy B

40. IMPACT ON RISK
 Decreasing cash reduces
the firm’s ability to meet
its financial obligations.
More risk!
 Stricter credit policies
reduce receivables and
possibly lose sales and
customers. More risk!
 Lower inventory levels
increase stockouts and lost
sales. More risk!
Optimal Amount (Level) of Current Assets
0 25,000 50,000
OUTPUT (units)
ASSETLEVEL
Current Assets
Policy C
Policy A
Policy B

41. IMPACT ON RISK
Risk Analysis
Policy Risk
A Low
B Average
C High
Risk increases as the level
of current assets are
reduced.
Optimal Amount (Level) of Current Assets
0 25,000 50,000
OUTPUT (units)
ASSETLEVEL
Current Assets
Policy C
Policy A
Policy B

42. SUMMARY OF THE OPTIMAL AMOUNT OF CURRENT
ASSETS
SUMMARY OF OPTIMAL CURRENT ASSET ANALYSIS
Policy Liquidity Profitability Risk
A High Low Low
B Average Average Average
C Low High High
1. Profitability varies inversely with liquidity.
2. Profitability moves together with risk.
(risk and return go hand in hand!)

43. OPERATING CYCLE APPROACH TO
WORKING CAPITAL MANAGEMENT
 What has been considered in figure above as
working capital cycle is more popularly known as
the operating cycle.
 This title is more expressive in the sense that the
normal business operations of a manufacturing and
trading company start with cash, go through the
successive segments of the operating cycle, viz, raw
material storage period, conversion period, finished
goods storage period and average collection period
before getting back cash along with profit.
 The total duration of all the segments mentioned
above is known as ‘gross operating cycle period’.
Dr.SudhenduGiri

44. OPERATING CYCLE
 Gross Operating Cycle =
Raw Material Storage Period + Conversion
period + Finished Goods Storage Period +
Average Collection Period
 Net Operating Cycle =
Gross Operating Cycle – Average Payment
period
Dr.SudhenduGiri

45. TECHNIQUES OF ANALYSIS OF WORKING CAPITAL
The analysis of working capital can be conducted through a
number of devices such as
 Ratio analysis
 Fund flow analysis
 Working capital Budgeting
 Ratio analysis : A ratio is a simple arithmetical expression
of the relationship of one number to another , this
technique can be employed for measuring short term
liquidity or working capital position of a firm.

46. THE FOLLOWING RATIOS MAY BE
CALCULATED FOR THIS PURPOSE
 Liquidity Ratio
a) Current Ratio
b) Acid test ratio/quick ratio/liquid ratio
c) Cash Position ratio/absolute liquid ratio
 Inventory turnover ratio
 Receivable turnover ratio
 Payable turnover ratio
 Working capital turnover ratio

47. o Current ratio may be define as the relationship
between CA and CL
o This ratio is also known as WCR. (Working
capital ration).
o It is helpful to measure short – term financial
position or liquidity of a firm
o Current ratio: Current asset
o Current liabilities

48. CURRENT ASSETS CURRENT LIABILITIES
Cash in hand
Bills Payable
Cash at bank Sundry Creditors
Sundry Debtors
Accrued or Outstanding
Expenses
Marketable securities
(Short term)
Short term loan and
advances
Bills Receivable Dividend payable
Inventories of Stock Bank Overdraft
Work in progress
Finished goods
Prepaid Expenses

49. QUICK OR ACID TEST OR LIQUID RATIO
 An asset is said to be liquid if it can be convert into cash
with in a short period with out loss of value
 Inventory cannot be termed to be liquid asset because
they cannot be convert into cash immediately
 The quick ratio can be calculated
Quick ratio: liquid asset
Current liabilities

50. Quick or liquid Current Liabilities
Cash in hand Bills Payable
Cash at bank Sundry Creditors
Sundry Debtors
Accrued or Outstanding
Expenses
Marketable securities
Short term advances
Temporary Investments Dividend payable
Bank Overdraft
Income tax payable
Convection quick ratio of 1:1 is consider
satisfactory

51. CASH POSITION RATIO/ABSOLUTE LIQUID
RATIO
 Absolute Liquid assets include cash in hand and
cash at bank and marketable securities or
temporary investments
 The acceptable norms for this ratio is 50% or .05%
Cash ratio: Cash & bank + Short –term securities
Current liabilities

52. CALCULATE ALL THE THREE RATIO
Liabilities Rs Assets Rs
9% preference
share 500000 Goodwill 100000
Equity share
capital 1000000
Land and
building 650000
8% debentures 200000 Plant 800000
Long term loan 100000
Furniture and
fixtures 150000
Bills payable 60000 Bills receivable 70000
Sundry creditors 70000 Sundry debtors 90000
Bank over draft 30000 Bank balance 45000
Outstanding
expenses 5000
short term
investments 25000
Prepaid expenses 5000
Stock 30000
1965000 1965000

53. CONCLUSION:
o Current ratio of the company is not satisfactory
because the ratio 1:6 is much below then the
expected Standards .
o Acid test ratio on the other hand is more than the
normal standard of 1:1
o Absolute ratio is slightly low because it is 0.42
where as the accepted standard is 0.5
o In this company need to improve its short term
financial position

54. CONT...
 Inventory conversion period
Inventory conversion period = Days in a year
Inventory Turnover Ratio
Debtor/Receivable turnover ratio
/Debtor velocity
Debtor(Receivable) = Net credit Annual sales
Average Trade debtors

55. AVERAGE COLLECTION PERIOD
The average collection period represent the average
number of days for which a firm has to wait before its
receivable are converted into cash
Average Collection period =
Average Trade Debtors (Drs + B/R)
Sales per day
Sales Per day = Net Sales
No of working days

56. Or
Average collection period
= average trade debtors * no. of
net sales working days
If period is in months :
average collection period= no.of working days
Debtors turnover ratio
The two basis component of the ratio are debtors and sales
per day

57. CREDITOR/PAYABLE TURNOVER RATIO
The analysis for credit turnover is basically the same as of
debtors turnover ratio except that in place of trade debtor,
the trade creditor are taken and in place of sales , average
daily purchase are taken as the other component of the ratio.
Creditors turnover ratio
= Net credit annual purchase
Average Trade creditors

58. Average Payment period Ratio
= Average Trade Creditors( Creditors+ Bills
payable)/Average Daily purchases.
Average daily purchase = Annual Purchase /No of working
days in a year.
Average Payment Period = Trade creditor * No of working
days / Net annual purchase.
Average Payment Period = No of working days / Credit
turnover Ratio.

59. WORKING CAPITAL TURNOVER RATIO
Working capital of a concern is directly related to sales and
current asset like debtors , bills receivable , cash , stock
etc .
Working capital turnover ratio = Cost of Sales / Average
working capital
Average working capital = Opening working capital +
Closing Working capital/2
** If cost of sales is not given , then the figure of sale can be
used . O n the other hand if opening working capital is
not disclosed then working capital at the end of the year
will be used.
Cost of sale /Net working capital

60. Fund flow analysis : Fund flow analysis is a
technical device designated to study the sources from
which additional fund were derived and the use to which
these sources were put . It is an effective management
tool to study change in the financial position of business
The fund flow analysis consists of
 Preparing schedule of change in working capital
 Statement of sources and application of funds

61.  Working capital Budgeting : Working capital
budget as a part of total budgeting process of a
business , is prepared estimating future long
term and short term working capital need and
the sources of finance them .
 The objective of a working capital budget is to
ensure availability of fund as and when needed
and to ensure effective utilization of these
resources .

62. WORKING CAPITAL FINANCING MIX
Approaches to Financing
Mix
The Hedging or
Matching Approach
The Conservative
Approach
The Aggressive
Approach

63. HEDGING APPROACH TO ASSET FINANCING
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
Short-term
Debt
Long-term
Debt +
Equity
Capital

64. CONSERVATIVE APPROACH TO ASSET FINANCING
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
Short-term
Debt
Long-term
Debt +
Equity
capital

65. Trade off between Hedging
and conservative
approaches

66. AGGRESSIVE APPROACH TO ASSET FINANCING
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
Short-term
Debt
Long-term
Debt +
Equity
capital