This document discusses working capital management. It defines working capital as current assets minus current liabilities, which identifies a firm's ability to meet short-term obligations. The document outlines different types of working capital including permanent/fixed working capital required for regular operations and temporary/variable working capital needed for seasonal needs. It also lists various factors that determine a company's working capital needs such as the nature of its business, operating cycle, growth plans and price fluctuations. Maintaining sufficient but not excessive working capital provides benefits like flexibility but can also lead to overcapitalization and low returns if not managed properly.

1. WORKING CAPITAL
MANAGEMENT
By
Dr.K.P.Malathi Shiri

2.  GROSS CONCEPT
Also called as “Current Capital” or “Circulating
Capital”
Earnings of a firm depend on both the fixed and
current assets
Increase in funds leads to increase in working
capital
Used in calculation of ROI in w.capital
CONCEPTS OF W.CAPITAL

3.  Net Concept
 Working Capital = Current Assets – Current
Liabilities
 Used in Fund Flow Analysis
 Used in Ratio Analysis
 Identifies the firm’s capacity to meet operating
expenses and short term liabilities
 Reflects the Financial standing of the business

4.  Permanent Working Capital– Features
 Based on time
 It increases with the size of business operations
 Always better to finance it out of long term
funds
 It changes from one type of current asset to
another
 Is a part of the business process
 Temporary Working Capital- Features
 It is always ideal for a business that is seasonal
in nature
 Is not always completely utilised in business
Types of Working Capital

5.  Permanent or fixed - types
Regular
Reserve for contingencies like;-
Unprecedented price hikes
Depression in business and trade cycles
Unexpected strikes, fire, strategies of
competitors
Special operations like new product launch,
supply to new businesses, war etc
TYPES OF WORKING CAPITAL

6.  It is the working capital that is required by a
business in addition to the permanent working capital
 It is dependant on trade cycles, peak seasons like
Pongal, Diwali, Christmas, New Year etc
 Types of variable working capital
 Seasonal – sugar, cotton, timber
 Special
Temporary/variable/fluctuating

7.  Nature of the business
 Length of production cycle – directly proportional
 Earning capacity and divided policy
 Operating cycle- (cash – raw materials- FG- B/R-
cash)
 Operating efficiency – optimum utilization of
resources
DETERMINANTS OF WORKING
CAPITAL

8.  Price Level Changes- directly proportional
 Degree of Mechanisation – inverse relationship
 Growth and expansion of business – direct impact
 Seasonal Variations
 Capital Structure of the business
 Credit Policy – Cash/ credit sales
 Size of the Business
Determinants-contd….

9.  Capacity to repay
 Value of Current Assets
 Means of Transport and Communication – inverse
 Profit Margin – inverse relationship
 Liquidity and Profitability – direct relationship
 Rate of stock turnover- inverse relationship
 Business cycle – high requirement in both cases
Determinants – contd….

10.  Cash Discount
 Security and Confidence
 Credit Worthiness
 Continuous Supply of Raw Materials
 Exploitation of business opportunities
 Increase in Productivity
 Attractive Dividend for Market Value of shares
 Meeting exigencies
MERITS OF SUFFICIENT
WORKING CAPITAL

11.  Inefficient Management
 Increased capital expenditure
 Over capitalisation
 Capitalization is the sum total of all long term funds
and surplus retained earnings.
 Capitalization = Share capital+ Debentures+ Long
term Borrowings+ Reserve Fund
 Share Capital – Equity and Preference shares
 Debentures – Redeemable/ Non-Redeemable;
Convertible/ Non-Convertible
 Long term borrowings – loans, bonds, term loans
from banks, long term deposits
DEMERITS OF EXCESS
CAPITAL

12.  Low return on capital employed
 Improper use of funds
 Reflection by poor turnover ratios
 Imbalance of liquidity and profitability
Determinants – contd….