Working Capital Management in Financial Management (II M.Com.)

1. WORKING CAPITAL MANAGEMENT
Prof. V.Mohan
Associate Professor & Head

2. INTRODUCTION
 Capital requirements of any firm can be
divided into Two there are: Fixed capital and
working capital.

3. FIXED CAPITAL
 It is the capital required to acquire fixed
assets essential for establishment or
expansion of business.
Eg: Capital required for obtaining license,
plant & Machinery, Land & Building,
Technical Know-how etc.

4. WORKING CAPITAL
 It is the capital required to carry on day to
day operations of a business uninterruptedly.
It is also the capital required to finance
current assets like inventories, Accounts
receivable, Marketable securities, cash etc.,
Funds invested in current assets are
revolving and are being constantly converted
into cash. Hence, it is also called as
revolving capital, circulating capital.

5. WORKING CAPITAL MANAGEMENT
 Working Capital Management is managing
current Assets, current liabilities and the
inter-relationship between them.
 Definition: Working Capital Management
refers to all aspects of administering both
current assets and current liabilities.

6. OBJECTIVES OF WORKING CAPITAL
MANAGEMENT
 Then main objective of Working Capital Management is to
maintain a proper balance between current assets and
current liabilities. Maintenance of proper balance helps
the management to struck a trade- off between
profitability and liquidity.
 The other objective of Working Capital Management is to
optimize the investments in current assets (i.e.)
Investment in current Assets should not be inadequate or
excessive. It must be just sufficient to meet its current
obligations [current liabilities] as and when they arise.
 The third are of Working Capital Management is to
manage the current assets in such a way that the
marginal return on investment in current assets not less
than the cost of capital employed to finance the current
assets

7. COMPONENTS OF WORKING CAPITAL
 Current Assets
 Those assets which can be converted into cash
within a period of one year. More over they are
required to meet the day-to-day operation of the
business.
Eg: Cash, Marketable securities, Short term
advances, Prepaid Expenses, Inventories, Bills
receivable etc.,
 Current Liability

8. COMPONENTS OF WORKING CAPITAL
 Current Liability
 Those liabilities which are repayable within a
year out of the amount realized/earned are
called current liabilities. They include creditors
for materials purchased, outstanding expenses,
short-term borrowings, advances received, tax
and dividend payable

9. TYPES OF WORKING CAPITAL

10. FIXED [PERMANENT] VS. VARIABLE
[TEMPORARY]
Fixed [Permanent] Working
capital
Variable [Temporary] Working
capital
1. It is required to carry out normal
business operations.
It is required to meet changes in
demand/ special needs etc.,
1. The amount of [working] capital
is permanently locked up in the
business.
It is temporarily locked up and can
be recovered after the season is
over
1. It is relatively stable. It will be
increasing on growth or
expansion of business.
It is always fluctuating. It is changed
as per seasonal requirement.
1. It is generally financed by long
term financial sources like
equity, preference, bonds&
retained earning etc.,
It is generally financed by short
term financial sources like O/D, CC,
short term loan, CP etc.,

11. DETERMINANTS OF WORKING CAPITAL
 Nature of business
 Production cycle
 Business cycle
 Working capital cycle
 Production policy
 Credit policy
 Dividend policy
 Depreciation policy
 Inflation (or) Price Level Changes
 Tax Level
 Availability of raw materials
 Rapidity of turnover

12. WORKING CAPITAL CYCLE (OR) OPERATING
CYCLE
 It is the span between purchase of raw
materials (Finished goods) and realization of
cash from the sale of finished goods

13. OC/WC FOR A MANUFACTURING
COMPANY
Cash
RMS
WIP
FG
A/C's
receivables
 conversion of cash into
RMS
 Conversion of RMS into
WIP
 Conversion of WIP into
FG
 Conversion of FG into
Ales receivables
 Conversion of A/C’s
receivables into
 Cash

14. OC/WC FOR A TRADING FIRM
Cash
FG
A/C's
receivable
 Conversion of Cash into
FGS
 Conversion of FGs into
A/C’s receivable
 Conversion of A/C’s
receivable into Cash

15. OC/WC FOR A FINANCE FIRM
CashDebtors
 Conversion of Cash into
Debtors
 Conversion of Debtors
into Cash

16. IMPORTANCE OF OC/WC
 The first and foremost of significance of OC/WC is
that it is useful to ascertain the working capital
requirements of any business concerns. (i.e.) The
speed in which OC completes one cycle determines
WCRs. The longer the period, the larger is the WCRs
and vice-versa.
 If can be used as a controlling device (i.e.) Compare
the actual period of OC with the forecasted OC and
take corrective actions, it necessary.
 If facilitates intent-firm comparison and there by
ascertain the overall efficiency of the firm.

17. PRODUCTION CYCLE (OR) MANUFACTURING
CYCLE
RM(purchase)
WIP(RM
introduced into
the process)
FG(completion
of FGs)
 RM holding period- time
gap bet purchase and
usage of RMs
 WIP holding period-
conversion of RMs into
F-Goods.

18. OPERATING CYCLE AND PRODUCTION CYCLE
OPERATING CYCLE PRODUCTION CYCLE
 It is the time gap (span) between
purchase of RMs and realization
of cash from the sale of finished
goods.
 It has widen scope. It includes
production cycle in its told.
 OC can be calculated not only for
manufacturing firms but also for
trading and finance firms.
 The period involved is influenced
by various factors.
 E.g.: Improvement of technology,
credit policy etc…,
 It is the time span between
the purchase of RMs and
conversion of RMs into
finished goods.
 It is a part of operating cycle
 It is related to manufacturing
firms only.
 The period involves is
influenced by
automation/technological
charges

19. SOURCES OF WORKING CAPITAL FINANCE
 Financing of permanent working capital
requirements
 Financing of seasonal/Variable/Temporary
WCRs

20. FINANCING OF PERMANENT WORKING CAPITAL
REQUIREMENTS
 Equity shares
 Preference shares
 Debentures/Bonds
 Retained earnings (or)Ploughing back of
profits
 Term Loans from financial institution and
banks
 Public deposits

21. FINANCING OF
SEASONAL/VARIABLE/TEMPORARY WCRS
 Trade credit
 Cost of Trade credit
 Increase in price of goods
 Loss of good will/Credit worthiness
 Restriction in supply
 Cost of administration and accounting
 Bank Credit
 Cash Credit
 Bank over draft
 Loans
 Purchasing and Discounting of bills
 Commercial Paper