The document discusses working capital management, which involves managing a firm's current assets and liabilities to ensure adequate liquidity and efficient operations. It defines working capital, explores its interpretations, and explains concepts like operating cycle, cash conversion cycle, and liquidity management. Additionally, it outlines methods to calculate these cycles and highlights the importance of effective cash management for financial stability.

1. WORKING CAPITAL
MANAGEMENT
PRESENTED BY:
AHAD FAROOQI
MARIUM QURESHI
OMER USMAN PEERJI
NOAM KHAN
SABA SALMAN

2. Introduction
 Working capital typically means
the firm’s holding of current or
short-term assets such as cash,
receivables, inventory and
marketable securities.
 These items are also referred to
as circulating capital
 Corporate executives devote a
considerable amount of attention
to the management of working

3. Definition
 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.

4. Nature Of Working Capital
 Working capital management is concerned with the
problems that arise in attempting to manage the
current assets, the current liabilities and the
interrelations that exist between them.
 Current assets refer to those assets which in the
ordinary course of business can be, or will be,
converted into cash within one year without
undergoing a diminution in value and without
disrupting the operations of the firm.
Examples- cash, marketable securities, accounts
receivable and inventory.
 Current liabilities are those liabilities which are
intended, at their inception, to be paid in the ordinary
course of business, within a year, out of the current
assets or the earnings of the concern.
Examples- accounts payable, bills payable, bank
overdraft and outstanding expenses.

5. Concept of working capital
There are two possible interpretations of
working capital concept:
1.Balance sheet concept
2.Operating cycle concept

6. Balance Sheet Concept
Balance sheet concept
There are two interpretations of
working capital under the balance
sheet concept.
a. Excess of current assets over
current liabilities
b. gross or total current assets.

7.  Excess of current assets over current
liabilities are called the net working
capital or net current assets.
 Working capital is really what a part of
long term finance is locked in and used
for supporting current activities.
 The balance sheet definition of working
capital is meaningful only as an
indication of the firm’s current solvency
in repaying its creditors.
 When firms speak of shortage of
working capital they in fact possibly
imply scarcity of cash resources.
 In fund flow analysis an increase in
working capital, as conventionally
defined, represents employment or
application of funds.

8. Operating Cycle Concept
 Operating cycle concept
 A company’s operating cycle typically
consists of three primary activities:
◦ Purchasing resources,
◦ Producing the product and
◦ Distributing (selling) the product.
These activities create funds flows that are both
unsynchronized and uncertain.
Unsynchronized because cash disbursements (for
example, payments for resource purchases)
usually take place before cash receipts (for
example collection of receivables).
They are uncertain because future sales and costs,
which generate the respective receipts and
disbursements, cannot be forecasted with complete
accuracy.

9. Manage and Measuring
Liquidity Liquidity:The degree to which an asset or security can be bought or sold
in the market without affecting the asset's price. Liquidity is characterized
by a high level of trading activity. Assets that can be easily bought or
sold.
OR
The ability to convert an asset to cash quickly. Also known as
"marketability.“
Liquidity Management:Liquidity management is the ability of the firm
to generate enough cash required to meet the firm’s needs.
 Drags are delay and slowing in cash inflows
 While pulls are accelerating cash outflows.

10. Sources of Liquidity
 The primary sources of liquidity include the
sources that a firm uses for its regular daily
operations. This includes:
 Cash
◦ Cash received from sales
◦ Collection of receivables
◦ Short-term investment, and others
 Short-term Funding
◦ Trade credit from suppliers
◦ Working capital loans from banks
 Cash flow management
◦ The firm can also generate working capital by
effectively managing its cash.

11.  Secondary Sources of Liquidity
 These are the sources of liquidity that are
not normally a part of the regular operations.
However, in times of need, the firm may use
these sources. These include:
 Renegotiating existing debt contracts
 Liquidating short-term and/or long-term
assets
 Filing for bankruptcy
 Utilizing the secondary sources of funding
can impact the company’s financial structure
and may even affect its operations. This also
indicates that the firm’s financial condition is

12. Measure Of Liquidity

13. Cash Conversion Cycle
 A metric that expresses the length of time, in
days, that it takes for a company to convert
resource inputs into cash flows. The cash
conversion cycle attempts to measure the
amount of time each net input dollar is tied up in
the production and sales process before it is
converted into cash through sales to customers.
This metric looks at the amount of time needed
to sell inventory, the amount of time needed to
collect receivables and the length of time the
company is afforded to pay its bills without
incurring penalties.
 Also known as "cash cycle."

14. Operating Cycle
 Expressed as an indicator (days) of
management performance efficiency, the
operating cycle is a "twin" of the cash
conversion cycle. While the parts are the
same - receivables, inventory and
payables - in the operating cycle, they are
analyzed from the perspective of how well
the company is managing these critical
operational capital assets, as opposed to
their impact on cash.
Formula:

15. DIFFERENCES
OPERATING CYCLE CASH CONVERSION CYCLE
 An operating cycle is the average
time period between the acquisition
of inventory and the receipt of cash
from the inventory's sale. A short
operating cycle means a more
prompt return on investment for the
firm's inventory. During an
economic downtown, an operating
cycle typically lasts longer than in
periods of economic growth.
 The cash conversion cycle is the number of
days required for a company to convert
resources to cash flows. This measure
calculates the time period during which
each input dollar is committed to production
and sales processes before it is converted to
cash through the accounts receivable
process. The cash conversion process gives
insight into the financial stability of a
company because it reflects the time period
during which assets are committed to
business processes and therefore are not
available to invest to achieve even greater
returns. As a result, the shorter the cash
conversion cycle, the better.

16. CALCULATION
OPERATING CYCLE CASH CONVERSION CYCLE
 To calculate the operating cycle,
determine the duration of each
element of the operating cycle
including raw materials, work-in-
process, finished goods and bills
receivable. Next, calculate the
aggregate duration of the cycle by
adding together each of these
elements. The greater the operating
cycle, the greater the business
requirement for working capital. The
greater the working-capital
requirement, the higher the inventory-
carrying cost, including interest
payments, and the greater the
opportunity cost due to the inability to
invest funds in a higher use. In
addition, the lower the operating cycle,
the greater the number of completed
cycles per year, and the greater the
annual gross and net profits.
 The cash conversion cycle calculation
uses elements of the operating cycle
equation, including raw materials, work-
in-process, finished goods and bills
receivable, in addition to the days'
payables outstanding. The days'
payables outstanding is the average
time required by the company to pay its
vendors. First, calculate the accounts
payable turnover by dividing the cost of
goods sold by accounts payable. Next,
divide 365 days by the accounts payable
turnover to determine the days' payables
outstanding. To determine the cash
conversion cycle, first add the days'
sales outstanding and the days' sales in
inventory, and then subtract the days'
payables outstanding. The resulting
cash conversion cycle measures the
time period between the cash outflow for
materials required for the production of a
product or service and the cash inflow
from sales. A decrease in the cash

17. Managing Cash Position
 The amount of cash that a company,
investment fund or bank has on its books
at a specific point in time. The cash
position is a sign of financial strength
and liquidity. In addition to cash itself, it
will often take into consideration highly
liquid assets such as certificates of
deposit, short-term government debt and
other cash equivalents.

18. Short Term Investment Funds
 A type of fund that invests in short-
term investments of high quality and
low risk. The goal of this type of fund
is to protect capital with low-risk
investments while achieving a return
that beats a relevant benchmark such
as a Treasury bill index.

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