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2. Working Capital
Management
Persented By:
Vijay

3. Meaning
• Working capital is the amount of funds needed by an enterprise to finance its day to day operations. It is the part of capital in
short-term operations such as raw material , semi finished product , sundry debtors
• Because of its variable nature, the working capital is also referred to as circulating capital . It may be pointed out that the total
working capital is composed of two parts

4. Operating cycle
Purchase Payment Credit sale Collection
Net operating cyclePayable
Gross operating cycle
RMCP+WIPCP+FGCP
Inventory conversion period Receivable conversion price
Operating cycle of a manufacturing firm

5. Gross operating cycle(GOC)
GOC can be determined as inventory conversion period plus debtors conversion period . Thus
GOC is given as follows:
Gross operating cycle = inventory conversion period + Debtors conversion period

6. Inventory conversion period
Inventory conversion period =
Raw Material Conversion period +Work in Progress Conversion Period + Finished Goods
Conversion Period
The inventory conversion period is the sum of raw material period, work in progress conversion period , and finished goods conversion period:

7. • Debtors conversion period (DCP) is the average time taken to convert debtors into cash. DCP
represents the average collection period. It is calculated as follows:
Debtors Conversion Period:
Debtors
Credit Sales/360
DCP =

8. Creditors Deferral Period
Creditor Deferral Period is the average time taken by the firm in paying its suppliers.
Creditors Deferral Period
= Creditors *360
Creditors Purchase

9. Cash Conversion or Net Operating Cycle :
Net operating cycle (NOC) is the difference between gross operating cycle and Creditors deferral period.
Net Operating cycle = Gross Operating Cycle – Creditors
Deferral Period
Net operating cycle is also referred to as cash conversion cycle.

10. Numerical Problem :
From the Following information of X Ltd., Calculate Operating Cycle Period :-
₹
Raw Material Consumed 10,00,000
Average Stock of Raw Material 1,25,000
Total Manufacturing Costs 15,00,000
Average Stock of Work in Progress 75,000
Cost of Finished Goods Sold During the year 18,00,000
Average Stock of Finished Goods 1,00,000
Net Credit Sale during the year 25,00,000
Average accounts receivables 2,50,000
Average credit period availed 40 Days
Number of days in a year 360 Days

11. Working Capital Finance Policies
• Long-term Financing
• Short-term Financing
• Spontaneous Financing

12. Working Capital Finance Approach
• Matching Approach
• Conservative Approach
• Aggressive Approach

13. Matching Approach
The firm follows a matching approach (also known as hedging approach), long-term financing will be used to
finance fixed assets and permanent current assets and short-term financing to finance temporary or variable
current assets.

14. Conservative Approach
Conservative approach in financing its currents and fixed assets. The financing policy of the firm is said to be
conservative when it depends more on long- term funds for financing needs. Under to conservative plan, the
firm finance its permanent assets and also part of temporary currents assets with long-term financing.

15. Aggressive Approach
A firm may be aggressive in financing it assets. An aggressive policy is said to be followed by the firm
when it uses more short-term financing than warranted by matching plan.