Working capital refers to the funds that a company uses to finance its day-to-day business operations involving current assets such as inventory, cash, and receivables. There are two types: permanent/fixed working capital that is continuously invested in current assets, and temporary/variable working capital needed to meet seasonal demands. Working capital management aims to balance adequate liquidity, risk minimization, and profit maximization by making decisions around investment in current assets and sources of financing like equity, debt, trade credit, etc. The key is determining the optimal working capital level for a given business.

1. Prepared By :
Shalu Maria Paul

2.  Working
capital refers to be a part of firm’s
capital which is required for financing short
term or current assets such as cash, marketable
securities, debtors and inventories etc.
 It is also known as resolving or circulating
capital or short-term capital.
 It refers to the funds, which company must
posses to meet its day to day expenses.

3.  From
the accountants’ perspective- It refers to
current assets-current liabilities differentials.
 From the financial managers’ angle it implies
the total investment made in current assets.
 From the production managers’ view it refers
to the total funds that a firm needs to carry out
its day-to-day operations.

4.  In
the words of Shubin, “Working capital is the
amount of funds necessary to cost of operating
the expenses”.
 According to Genestenberg, “Circulating capital
means current assets of a company that are
changed in the ordinary course of business from
one form to another. For example, from cash to
inventories, inventories to
receivables, receivables into cash”.

5. There are two concepts of working capital:
(A) Balance Sheet Concept
(B) Operating cycle or Circular Flow Concept

6. (A)
Balance Sheet Concept
There are two interpretation of working
capital under the balance sheet concept:
(i)
Gross Working Capital

is the amount invested in total current assets of
the enterprise.
is the firm’s investment in short term assets such as
cash, short term securities, account receivables and
inventories.
The concept helps in making optimum investment in
current assets and their financing.



7. (ii)Net working capital




is the excess of current assets over current
liabilities.
Net working capital = current assets – current
liabilities.
Net working capital refers to the portion of firm’s
current assets, which financed with long term funds.
It indicates or measures the liquidity and also suggest
an extent to which working capital need may be
financed by the permantant source of funds.

8. refers to the period that a business
enterprise takes in converting cash back
to cash.
In case of a manufacturing concern the duration of
time required to complete the following sequence
of events is called the operating cycle.

9. 1. Conversion of cash into raw materials
2. Conversion of raw materials into work-in-progress
3. Conversion of work-in progress into finished goods
4. Conversion of finished goods into debtors and B/R
through sales
5. Conversion of debtors and B/R into cash

10. Accounts Payable
Raw
Materials
Cash
Value Addition
WIP
THE WORKING CAPITAL
CYCLE
(OPERATING CYCLE)
Accounts
Receivable
SALES
Finished
Goods

11. WORKING CAPITAL
BASIS OF
CONCEPT
Gross
Working
Capital
BASIS OF
TIME
Permanent
/ Fixed
WC
Net
Working
Capital
Temporary
/ Variable
WC
Seasonal
WC
Regular
WC
Reserve
WC
Special
WC

12. Permanent or fixed working capital is the
minimum investment kept in the form of
inventory or raw materials, work in progress etc
to facilitate uninterrupted operation in the firm.
It also grow with the size of the firm.
It could be financed out of ling term funds.

13. Temporary or Variable working capital is the
amount of working capital which is required to
meet the seasonal demands and some special
exigencies. Variable working capital can be further
classified into Seasonal and Special working
capital.
The capital required to meet the seasonal needs of
the enterprise is called seasonal working capital.
Special working capital is that part of working
capital which is required to meet special
exigencies such as launching of extensive
marketing, campaign for conducting research etc.

14. Amount
of
Working
Capital
Variable Working Capital
Permanent Working Capital
Time

15. Variable Working Capital
Amount
of
Working
Capital
Permanent Working Capital
Time

16. 1.
2.
3.
4.
5.
6.
7.
8.
Solvency of the firm.
Goodwill.
Easy Loan.
Cash discount.
Regular supply of raw materials.
Regular payment of salaries, wages and other
day-to-day commitments.
Ability to faces crisis
High morale.

17. 




Excess of working capital represents idle funds
which earn no profits for the business and hence
the business cannot earn a proper rate of return
on its investments.
Low rate of return
Unnecessary purchase inventories:
Defective Credit Policy
Speculative transaction: His working capitals in
excess give rise to speculative

18. 




Loss reputation
Lowers credit worthless
Cash Discount
Irregularity payment of day-to- day
Low Rate of Return

19. 1.
2.
3.
4.
5.
6.
7.
Nature of the business.
Sixe of the business.
Production policy.
Production cycle process.
Seasonal variation
Working capital cycle
Rate of stock turnover

20. 8. Credit Policy
9. Business Cycle
10. Rate of growth of business
11. Earning capacity and dividend policy.
12.Price level changes
13. Other factors.

21. Management of working capital is concerned
with the problems that arises in attempting to
manage the current assets, the current liabilities
and the inter-relationship that exists between
them. In other words it refers to all aspects of
administration of both current assets and
current liabilities.
 Working Capital Management Policies of a firm
have a great effect on its profitability, liquidity
and structural health of the organizations.


22. Dimension I
Profitability,
Risk, & Liquidity

23. PRINCIPLES OF WORKING CAPIAL MANAGEMENT
Principle of
Risk
Variation
Principle of
Cost of
Variation
Principle of
Equity
Position
Principle of
Maturity
Payement

24.  The
firm’s policies for managing its working
capital should be designed to achieve three
goals :
1. Adequate liquidity
2. Minimization of risk
3. Contribute to maximizing firm’s value

25. 1.Adequate liquidity- maintain sufficient
cash to pay its bills when due.
2. Minimization of risk - matching of assets
and liabilities among current assets.
3. Contribute to maximizing firm’s value –
The investment of excess cash, minimizing of
inventories, speedy collection of receivables and elimination
of unnecessary and costly short term financing contribute to
maximizing the value of the firm

26. is the risk-return trade off associated with
the appropriate mix between:
1.
Current assets and fixed assets
1.
Short - term and long –term funds.

27. Conservative Approach:
 High level of current assets
 Lower risk
 Higher liquidity
 Lower profitability
 Lower chance of technical insolvency
 Higher current ratio

28. Minimum investment in current assets
 Lower liquidity
 Higher risk
 Higher return
 Greater chance of technical insolvency
 Lower current ratio


29. A compromise between the extreme
approaches
 Satisfactory return
 Sustainable risk
 Average liquidity


30. Policy C
Policy B
Current Assets
Rs.)
Policy A
Sales (Rs.)

31. 
Policy C represents conservative approach
Policy A represents aggressive approach
Policy B represents a moderate approach

Optimal level of working capital investment

Risk of long-term versus short-term debt



32. Working
capital
financing

33. Working capital is the fund invested in
current assets and is needed for meeting
day to day expenses .
It is an operating liquidity available to a
business.
Along with fixed assets such as plant and
equipment, working capital is considered
a part of operating capital.

34. a)
b)
Permanent or long term or fixed working
capital requirement
Temporary or variable or short term
working capital requirement

35. 
Fixed working capital is that portion of the
total capital that is required to be maintained
in the business on the permanent basis or
uninterrupted basis. This working capital is
required to invest in fixed assets. The
requirement of this type of working capital is
unaffected due to the changes in the level of
activity.

36. 
Variable working capital is that portion of the
total capital that is required over and above
the fixed working capital. This working capital
is required to meet the seasonal needs and
some contingencies. The requirement of this
type of working capital changes with the
changes in the level of activity.

37. Permanent or fixed
1.Shares
2. Debentures
3.Public deposits
4.retained profits
5.Loans from financial
institutions
Temporary or variable
1.Indigenous bankers
2.Deferred Incomes
3.Trade credit
4.Instalment credit
5.Advances
6.Accrued expenses
7. commercial paper

38.  Shares
A company can issue various kinds of shares as equity
shares, preference shares and deferred shares.
According to the Companies Act, 1956 a company
cannot issue deferred shares. Preference shares carry
preferential rights in respect of dividend at a fixed rate
and in regards to the repayment of capital at the time
of the winding up the company.

39.  Debentures
A debenture is an instrument issued by the company
acknowledging its debt to its holders. The debentureholder are the creditors of the company. A fixed rate of
interest is paid on debentures. The interest of the
debentures is a charge against profit and loss account.
The debentures are giving floating charge on the assets
of the company.

40.  Public
Deposits
Public deposits are the fixed deposits accepted by a business
enterprise directly from the public. This source of raising
short term and medium term finance was very popular in
the absence of banking facilities.
Ploughing Back of Profits
It means the reinvestments by concern of its surplus earnings
in its business. It is an internal source of finance and is most
suitable for an established firm for its expansion,
modernization and replacement etc. This method of finance
has number of advantages as it is the cheapest rather than
cost free source of finance.


41.  Loans
from Financial Institutions
Financial Institutions such as Commercial Banks, Life
Insurance Corporation, Industrial Finance Corporation
Of India, State Financial Corporations, State Industrial
Development Corporations, Industrial Development
Bank Of India etc also provides short term, medium
term and long term loans. This source of finance is
more suitable to meet the medium term demands of
working capital. Interest is charged on such loans at a
fixed rate and the amount of loan is to be repaid by way
of installments in a number of years.

42.  Indigenous
Banks
Private money lenders and other country bankers used to be
the only source of finance prior to the establishment of
commercial banks. They used to charge very high rates of
interest and exploited customers to the largest extent
possible.
Advances
Some business house get advances from their customers and
agents and this source is a short term source of finance for
them. It is a cheap source of finance in order to minimize
their investment in working capital


43.  Trade
Credit
Trade Credit refers to the credit extended by the
suppliers of goods in the normal course of business. At
present day, commerce is built upon credit, the trade
credit arrangement of a firm with its suppliers is an
important source of short term finance. The credit
worthiness of a firm and the confidence of its suppliers
are the main basis of securing trade credit.

44.  Installment
Credit
This is another method by which the assets are
purchased and the possession of goods is taken
immediately but the payment is made in installment
over a pre-determined period of time.
 Deferred
Incomes
Deferred incomes are incomes received in advances
before supplying goods or services in future. These
funds increase the liquidity of a firm and constitute an
important source of short term finance.

45.  Accrued
Expenses
Accrued Expenses are the expenses which have been
incurred but not yet due and hence not yet paid also.
These simply increases the liquidity that a firm has to
pay for the services already received by it.
 Commercial
Paper
It represents unsecured promissory notes issued by the
firm to raise short term funds. It is an important
money market instrument in advanced countries like
U.S.A.