Working capital refers to the funds used to meet daily business expenses. It includes current assets like cash and inventory needed to operate on a day-to-day basis. Proper management of working capital, accounts receivable, accounts payable and inventory is important for business liquidity and efficiency. Techniques to manage inventory include determining optimal stock levels, ABC analysis of inventory items and just-in-time systems. Sources of working capital include both long-term sources like equity and loans as well as short-term sources like trade credit, commercial paper and bank finance.

1. WORKING CAPITAL
FINANCIAL MANAGEMENT

2. WORKING CAPITAL
Working capital is the amount of funds required for meeting day-to-day expenses of the business. The firm starts with
cash. It buys raw materials, employees, workers, and spends on expenditures like advertising etc.
DEFINITION OF WORKINF CAPITAL
“ Working capital means the funds available for day-to-day operations of an enterprise.”
- ICAI
“ The sum of the current assets is the working capital of the business.”
- J.M.MILL
CONCEPT OF WORKING CAPITAL
Gross concept
Net concept
PRINCIPLES OF WORKING CAPITAL
Principle of Optimization
Principle of Risk Variation
Principle of Cost of Capital
Principle of Maturity of Payment
Principle of Equity Position

3. NEEDS OF WORKING CAPITAL MANAGEMENT
An adequate supply of raw materials to process
Cash to meet the wage bill
The capacity to wait for the market for its finished product and
The ability to grant credit to its customers.
NATURE AND SCOPE OF WORKING CAPITAL
It is used for purchase of raw materials, payment of wages and expenses.
It changes from constantly to keep the wheels of business moving.
Working capital enhances liquidity, solvency, creditworthiness and reputation of the enterprise.
It generates the elements of cost namely: materials, wages and expenses.
It enables the enterprise to avail the cash discount facilities offered by its suppliers.
It helps improve the morale of business executives and their efficiency reaches at the highest climax.
It facilitates expansion programmes of the enterprise and helps in maintain operational efficiency of
fixed assets.

4. OBJECTIVES OF WORKING CAPITAL MANAGEMENT
Smooth working capital operating cycle
Lowest working capital requirement
Optimal return on current asset investment
Minimize the rate of interest/Cost of capital
TYPES OF WORKING CAPITAL
Permanent (or fixed)
 Regular
 Reserve margin (or cushion)
Temporary (or variable/fluctuating)
 Seasonal
 Special

5. SOURCES OF WORKING CAPITAL
Long term sources
 Issue of equity shares
 Issue of preference shares
 Issue of debentures or bonds
 Retained earnings
 Loans from financial institutions
Short term sources
 Internal
(a) Depreciation fund
(b) Provision for taxation
(c) Outstanding expenses
 External
(a) Trade credit
(b) Commercial paper
(c) Advances from customers
(d) Bank credit

6. DETERMINANTS OF WORKING CAPITAL MANAGEMENT
• Nature of business
• Length of production cycle
• Rate of stock turnover
• Business cycle
• Earning capacity and dividend policy
• Operating cycle
• Operational efficiency
• Price level changes
• Degree of mechanization
• Growth and expansion of business
• Seasonal variations

7. • Capital structure of the firm
• Credit policy
• Size of the business
• Production policy
• Profit margin
• Liquidity and profitability
• Capacity to repay
• Value of current assets
• Means of transport and communication
ISSUES AND ESTIMATION OF WORKING CAPITAL
 Estimation of current assets
(a) Stock of raw materials
(b) Stock of work-in-progress
(c) Stock of finished goods
 Estimation of current liabilities
(a) Trade creditors
(b) Outstanding expenses

8. ACCOUNTS RECEIVABLE MANAGEMENT
Accounts receivable (AR) refers to payments owed to your business for services or products already
delivered. Proper AR management is the process of ensuring that these payments are made on time,
consistently, and reliably.
ACCOUNTS PAYABLE MANAGEMENT
Accounts payable management is a system that deals with a business's debts to third-party vendors or
suppliers that it made on credit and hasn't paid back yet. These debts might include expenses that have
accumulated, purchases of inventory or supplies and short-term operations costs.
INVENTORY MANAGEMENT
Inventory refers to the stock pile of the product a firm is offering
for a sale and the components that make up the product. In other
words inventory is composed of assets that will sold off in future
in the course of business operation.
DEFINITION OF INVENTORY MANAGEMENT
“ Inventory is a tangible property (a) held for sale in the ordinary course of business; (b) in the process of
production of such sale or (c) to be consumed in the production of goods or services for sale”.
- THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE

9. “ The basic function of inventory is to act as a buffer to decouple or uncouple the various activities of a firm, so
that all do not have to be pursued at exactly the same time”.
- R.W.JOHNSON
OBJECTIVES OF INVENTORY MANAGEMENT
• To ensure an adequate supply of materials, stores, spares, finished stock, so that the production may not be
held up for want of materials.
• To avoid over stocking and under stocking of inventory .
• To keep down investment in inventory, inventory carrying cost and obsolescence losses to the minimum.
• To decide which items to stock and which items to procure on demand.
• To promote manufacturing efficiency and prompt execution of orders to ensure better service to customers.
• To permit a better utilisation of visible stocks by facilitating inter departmental transfers within the firm.
• To eliminate duplication in ordering or replenishing stock. This is possible with the help of centralizing the
purchases.
• To enable the management to make costs and consumption comparisons between operations and periods.
• To purchase raw materials in bulk to avail quantity discount and to take advantage of favourable market
conditions.
• To avoid wastage like theft, pilferage etc.
• To contribute to profitability.

10. TECHNIQUES OF INVENTORY MANAGEMENT
Economic order quantity(EOQ)
Determination of stock levels
• Reorder level
• Minimum level
• Maximum level
• Average level
• Danger level

11. ABC analysis
• Category A: A few items accounting for substantial usage in term of total monetary value (10%
items covering 75% value)
• Category B: In between items A and C (20% items representing 15% value )
• Category C: Large number of items of small value (70% items covering 10% value)
Inventory turnover ratio
• Slow moving materials
• Dormant items
• Obsolete items
Just in time (JIT) inventory system
Just-in-time, or JIT, is an inventory management method in which goods are received from suppliers
only as they are needed. The main objective of this method is to reduce inventory holding costs and
increase inventory turnover.
VED analysis
VED analysis is based on critical values and shortage cost of the item. Based on their criticality, the
items could be classified into three categories: vital, essential and desirable.

12. FSN analysis
FSN analysis is an inventory management technique. It is an important aspect in logistics. The items are
classified according to their rate of consumption. The items are classified broadly into three groups: F –
means Fast moving, S – means Slow moving, N – means Non-moving.
Min-Max Method
The min/max method attempts to keep current on-hand inventory within a specific range. Users set a
minimum stocking level, which when reached triggers a reorder to reach the maximum stocking level of
a particular item. The calculation to reorder is simple: it's the difference between the maximum and
quantity on hand.
Perpetual inventory system
A perpetual inventory system is a program that continuously estimates your inventory based on your
electronic records, not a physical inventory. This system starts with the baseline from a physical count
and updates based on purchases made in and shipments made out.
Automatic order system
Automated order processing is technology and systems put in place to process orders faster by
eliminating manual work. With automation, order processing can help reduce human error, improve
operational efficiencies, and ultimately speed up the fulfillment and shipping process.

13. Input-output ratio analysis
Input-output analysis (I-O) is a form of macroeconomic analysis based on the interdependencies
between different economic sectors or industries. This method is commonly used for estimating the
impacts of positive or negative economic shocks and analyzing the ripple effects throughout an
economy.
FIXATION OF STOCK LEVEL
It is a level at which special efforts should be made to obtain supplies of materials, i.e. (vi) Average
Stock level = (Maximum stock level + Minimum stock level) x 14 or Minimum Stock level + 14 Reorder
Quantity.
CASH MANAGEMENT
Cash management is the process of collecting and managing cash flows. Cash management can be
important for both individuals and companies. In business, it is a key component of a company's
financial stability. For individuals, cash is also essential for financial stability while also usually
considered as part of a total wealth portfolio.
WORKING CAPITAL FINANCE
Working capital management is a business strategy designed to ensure that a company operates
efficiently by monitoring and using its current assets and liabilities to their most effective use.

14. TRADE CREDIT
Trade credit means many things but the simplest definition is an arrangement to buy goods and/or
services on account without making immediate cash or cheque payments. Trade credit is a helpful
tool for growing businesses, when favourable terms are agreed with a business's supplier.
BANK FINANCE AND COMMERCIAL PAPER
Finance is a broad term that describes activities associated with banking,
leverage or debt, credit, capital markets, money, and investments.
Essentially, finance represents money management and the process of
acquiring needed funds..
Commercial paper is an unsecured, short-term debt instrument issued
by corporations. It's typically used to the finance short-term liabilities
such as payroll, accounts payable, and inventories.