This document discusses working capital and its components. It defines working capital as the capital required to finance short-term operating needs such as inventory, accounts receivable, and cash. It also discusses the operating cycle as the continuous flow of cash being converted into inventory, then receivables, and back into cash. Finally, it notes that companies must determine the optimal level of working capital to support operations without having excess funds tied up in current assets.

1. Ptesented by
Subhasish champatisingh
Roll no-03
Ibs,bbsr

2.  Working Capital refers to that part of the firm’s capital, which
is required for financing short-term or current assets such a
cash marketable securities, debtors and inventories.
 Funds thus, invested in current assets keep revolving fast and
are constantly converted into cash and this cash flow out again
in exchange for other current assets.
 Working Capital is also known as revolving or circulating
capital or short-term capital.

3. circulating capital means current assets of a company
that are changed in the ordinary course of business from
one form to another, as for example, from cash to
inventories, inventories to receivables, receivable to
cash”

4. 4

5.  As profits earned depend upon magnitude of
sales and they do not convert into cash
instantly, thus there is a need for working
capital in the form of CA so as to deal with the
problem arising from lack of immediate
realization of cash against goods sold.
 This is referred to as “Operating or Cash
Cycle” .
 It is defined as “The continuing flow from cash
to suppliers, to inventory , to accounts
receivable & back into cash “.

6.  The firm has to maintain cash balance to pay
the bills as they come due.
 In addition, the company must invest in
inventories to fill customer orders promptly.
 And finally, the company invests in accounts
receivable to extend credit to customers.
 Operating cycle is equal to the length of
inventory and receivable conversion periods.

7.  Gross Working Capital
 Net working Capital

8.  Total Current assets
 Where Current assets are the assets that
can be converted into cash within an
accounting year & include cash , debtors
etc.
 Referred as “Economics Concept” since
assets are employed to derive a rate of
return.

9.  CA – CL
 It indicates liquidity position of a firm.
 It suggests the extent to which working capital needs may
be financed.
Current Assets ( less )Current Liabilities
Current Assets Current Liabilities
Inventories Trade Payables
Raw Materials Accruals
Work-in-Progress Taxation/Dividends
Finished Goods Short-Term Borrowings
Trade Receivables
Prepayments
Bank/Cash
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10. Having sufficient funds available to meet all
foreseen and unforeseen obligations
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11.  CURRENT ASSETS
 Inventory
 Sundry Debtors
 Cash and Bank Balances
 Loans and advances
 CURRENT LIABILITIES
 Sundry creditors
 Short term loans
 Provisions

12. 1. Nature of Business-
 Different Industries have different Working
Capital requirements.
 Manufacturing and Trading Companies will have
a high proportion of Current Assets in the form
of inventory of Raw Materials, Work-in-
Progress, accounts Receivable, Cash and
Accounts Payable as Current Liability.
 But in case of public utilities may have limited
need for working capital because they only have
cash sales, & supply services, not products and
no funds will be tied up in debtors & stock.

13. 2. Growth and Expansion
 As the company grows, it is logical to expect that
a larger amount of working capital is required.
3. Degree of Competition in the Market
When the degree of competition in the market
for finished goods in an industry is high, then
companies belonging to the industry may have to
resort to an increased credit period to its
customers to push their products. These practices
are likely to result in a high proportion of
accounts receivable.

14. 4. Technology & manufacturing process
 Longer the manufacturing cycle, larger will be the
firm’s working capital requirements.
 Exa- Manufacturing cycle in case of boiler- More
working capital needed depending on its size,
(may range between Six to Twenty-four months.
 Exa- Manufacturing cycle in case of detergent
powder, soaps, chocolate etc- less working capital.

15. Interdependence Among Components of Working capital
Finished
Goods
Work in
Selling and
Progress
Distribution, General
Administration and
Sundry Financial costs
Debtors or
Accounts Wages, Salaries
Receivables and Manufacturing
costs
Raw
Materials,
Components
Stores etc.
Sundry
Cash Creditors or
Accounts
The Operating Cycle Payable

16. Operating Cycle Concept
Company start with cash, go through the successive
segments of the operating cycle to get cash.
Operating cycle is the time duration required to convert
sales, after the conversion of resources in to inventories, in
to cash.
Raw material storage period
Conversion period
Finished goods storage period
Average collection period

17.  Gross
operating cycle- The duration above is
known as gross operating cycle.
 Thegross operating cycle = Raw material
Storage period + Conversion Period + Finished
goods storage period + Average collection
period
 NOTE- If there is no receivables the cycle is
reduced.

18.  Net operating cycle- When the average
payment period is deducted from the gross
operating cycle is known as net operating
cycle
 The Net operating cycle = Raw material
Storage period + Conversion Period +
Finished goods storage period + Average
collection period – Average Payment Period

19.  Time
• Permanent
• Temporary or Variable

20. The amount of current assets required to
meet a firm’s long-term minimum needs.
DOLLAR AMOUNT
Permanent current assets
TIME

21. The amount of current assets that varies with
seasonal requirements.
Temporary current assets
DOLLAR AMOUNT
Permanent current assets
TIME

22.  We need working capital for the smooth
functioning.
 Magnitude of current assets varies with the
changes in the operating cycle
 There will always be a minimum level of
current assets (i.e. permanent or fixed current
assets)
 Depending upon the production and sales the
need for the working capital over and above
the fixed level will fluctuate.

23. A larger investment in current assets would
mean a low rate of return on investment for
the firm, as excess investment in current
assets will not earn enough return.
 On the other hand a smaller investment in
current assets would mean interrupted
production & sales.

24. Both excessive as well as inadequate working capital
positions are harmful for the company
Excessive working capital
• Unnecessary inventory accumulation.
• Shows a defective credit policy and high collection
period.
• leads to marginal inefficiency of the management.

25.  Stagnates growth
 Difficult to implement operating plans.
 Reduction in operating efficiency.
 Fixed assets cannot be utilised efficiently.
 Banks will hesitate in extending credit.
 Affects the goodwill of the firm.

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 subhasish.champatisingh@gmail.com