The document defines working capital as the capital required to finance short-term operating needs like current assets. It discusses the different types of working capital including gross and net working capital. It also covers key concepts related to working capital management such as operating cycle, determinants of working capital needs, and approaches to financing current assets using long-term vs short-term sources of funds.

1. BY-

2. DEFINING WORKING CAPITAL
 Holding of the firm in current assets.
 Part of firm’s capital that is required for financing
short term current assets.
 It is never exhausted.
 Revolves in the operating cycle.

3. CURRENT ASSETS
 That can be converted into cash within one
accounting year.
 Includes :
 cash
 receivables
 Inventory
 Marketable securities

4. TYPES OF WORKING CAPITAL
CONCEPT TIME
Gross
working temporary
capital
Net
working permanent
capital

5. NET WORKING CAPITAL
GROSS WORKING CAPITAL
 FOCUSSES ON :-  FOCUSSES ON :
 Liquidity position of the  Financing of current
firm assets
 Judicious mix of short
term and long term  Optimization of
financing. investments in current
assets.

6. TYPES OF WORKING CAPITAL
ON THE BASIS OF CONCEPT
 NET WORKING  GROSS WORKING
CAPITAL CAPITAL
 CA-CL
 Investment in CA
 +ive CA>CL
 -ive CA < CL

7. OPERATING CYCLE

8. OPERATING CYCLE
 Time required to convert sales into cash
 Three major phases are :
PURCHASING
THE RESOURCES
PRODUCING THE
PRODUCT
SELLING THE
PRODUCT

9. OPERATING CYCLE TYPES
 NET OPERATING  GROSS OPERATING
CYCLE CYCLE
 RM IHP+WIP PIH + FG  DCP+ICP
IHP + DCP - CDP
 RM IHP+ WIP IHP+ FG
IHP+DCP

10. GROSS OPERATING CYCLE
 Can be determined by –
GOC = ICP+DCP
ICP = RMCP+WIPCP+FGCP
 DCP= debtors collection period
 ICP = inventory conversion period

11. INVENTORY CONVERSION PERIOD
 RMCP
 WIPCP
 FGCP

12. RAW MATERIAL CONVERSION PERIOD
(RMCP)
 Average time taken to convert material into work in
process.
 It depends upon – ( i ) raw material
consumption per day
( ii ) raw material inventory
RMCP = RM inventory*360
RM consumed

13. WORK IN PROCESS CONVERSION
PERIOD (WIPCP )
 Average time taken to complete the semi finished
work
WIPCP=(WIPinventory*360)
COP

14. FINISHED GOODS CONVERSION
PERIOD (FGCP )
 Average time taken to sell the finished goods.
FGCP= FGI*360
COGS

15. DEBTORS CONVERSION PERIOD (DCP
)
 Average time taken to convert debtors into cash.
DCP = debtors*360
credit sales

16. GROSS OPERATING CYCLE
RMCP
DCP GOC WIPCP
FGCP

17. NET OPERATING CYCLE
 NOC = GOC – CDP
NOC = RMIHP + WIPIHP +
FGIHP + ACP – APP

18. CREDITORS DEFERRAL PERIOD (CDP)
 Average time taken by the firm in paying its debts.
CDP= creditors*360
credit purchases

19. PERMANENT AND TEMPORARY
WORKING CAPITAL
 PERMANENT WC – minimum level of required
current assets.
 TEMPORARY WC – extra WC needed to support
the changing production and sales activities of the
firm.

20. GRAPHICAL INTERPRETATION OF
WORKING CAPITAL
Permanent and temporary working capital

21. DETERMINANTS OF WORKING CAPITAL
 Nature of business
 Market and demand conditions
 Technology and manufacturing policy
 Credit policy
 Availability of credit from suppliers
 Operating efficiency
 Price level changes

22. ISSUES IN WORKING CAPITAL
MANAGEMENT
 Current assets to fixed assets ratio
 Liquidity Vs profitability – RISK RETURN
TRADE OFF
 THE COST TRADE--OFF

23. (1.) CURRENT ASSETS TO FIXED
ASSETS RATIO
Alternative current asset policies

24. CURRENT ASSETS TO FIXED ASSETS
RATIO
 Optimum level of current assets so that the wealth
of the shareholders is maximized.
 APPROACHES TO DETERMINE OPTIMUM
LEVEL OF CA/FA RATIO
- conservative
- aggressive
- moderate

25. CA/FA RATIO APPROACHES
( CONSTANT LEVEL OF FIXED ASSETS )
 CONSERVATIVE  AGGRESSIVE
 Higher CA/FA ratio
 Lower CA/FA
ratio
 Higher liquidity
 Lower risk
 Lower return  Higher risk
 Poor liquidity
 Higher return

26. (2.)THE COST TRADE--OFF
Cost Trade-off

27. THE COST TRADE OFF
 cost of liquidity :
 If a firm’s level of CA is very high it has excessive
liquidity.
 Its return on assets is very low because funds are
tied up in idle stocks which earns nothing.
 Cost of illiquidity:
 Cost of holding insufficient current assets.

28. OPTIMUM LEVEL OF CURRENT ASSETS
 With the level of CA the cost of liquidity increases
while the cost of illiquidity decreases.
 The firm should maintain current assets at that level
where the sum of these two cost is minimized.

29. ESTIMATING WORKING CAPITAL
NEEDS
 BEST METHOD – OPERATING CYCLE
 THREE APPROACHES ARE :-
i. Current assets holding period
ii. Ratio of sales
iii. Ratio of fixed investments.
ROR = PBIT / NET FIXED INVEST. + WC

30. POLICIES FOR FINANCING CURRENT
ASSETS ( TYPES )
 LONG TERM FINANCING – sources are ordinary
share capital , preference share capital ,
debentures , long term borrowings.
 SHORT TERM FINANCING : banks, public deposit,
factoring of receivables etc.
 SPONTANEOUS FINANCING – automatic sources
of short term funds arising from normal course of a
business.

31. THREE APPROACHES FOR MIX OF
SHORT TERM AND LONG FINANCNG
 Matching approach
 Conservative approach
 Aggressive approach

32. MATCHING PLAN ( HEDGING
APPROACH )
Financing under matching plan

33. MATCHING APPROACH
 Firm can adopt a financial plan that matches the
expected life of assets.
 Long term financing – fixed assets
 Short term financing – variable current assets.

34. CONSERVATIVE APPROACH
Conservative financing

35. CONSERVATIVE APPROACH
 Financing policy depends more on long term funds.
 The firm finances its permanent current assets and
also a part of temporary current assets with long
term financing.

36. AGGRESSIVE FINANCING

37. AGGRESSIVE APPROACH
 When a firm relies more on short term financing.
 Permanent fixed assets are also financed with short
term funds.

38. (3.) RISK RETURN TRADE OFF
 If firm wants to use short term financing it must
determine it its portion in total financing.
 Short term financing is preferred because:
 cost advantage
 flexibility

39. RISK RETURN TRADE OFF
 Short term financing  Long term financing
 Less expensive  Less expensive
 Greater risk  Lower risk
 High returns  Lower return