WORKING CAPITAL WORKING CAPITAL MANAGEMENTMANAGEMENT

PRESENTED BY:PRESENTED BY:

NAZIA NAJNAZIA NAJ

DEFINITIONDEFINITIONWorking capital refers to that part of the Working capital refers to that part of the

firm’s capital, which is required for firm’s capital, which is required for financing short-term or current assets financing short-term or current assets such as cash marketable securities, such as cash marketable securities,

debtors and inventories. debtors and inventories.

It is also known as revolving or It is also known as revolving or circulating capital or short-term capital.circulating capital or short-term capital.

Objectives of working capitalObjectives of working capital

• • For the purchase of raw materials, For the purchase of raw materials, components and spares.components and spares.

• • To pay wages and salaries.To pay wages and salaries.• • To incur day to day expenses and overhead To incur day to day expenses and overhead

costs such as fuel, power, and office costs such as fuel, power, and office expenses etc.expenses etc.

• • To provide credit facilities to customers etc.To provide credit facilities to customers etc.

NEED FOR WORKING CAPITALNEED FOR WORKING CAPITAL

Quick payments to suppliersQuick payments to suppliers Cash discountCash discount Easy availabilities of bank loansEasy availabilities of bank loans Increase in the productivity of fixed assetsIncrease in the productivity of fixed assets Meeting unseen contingenciesMeeting unseen contingencies

WORKING CAPITAL CYCLEWORKING CAPITAL CYCLE

CONCEPTS OF WORKING CONCEPTS OF WORKING CAPITALCAPITAL

Quantitative concept or gross working Quantitative concept or gross working capital conceptcapital concept

Qualitative concept or net working capital Qualitative concept or net working capital conceptconcept

COMPONENTSCOMPONENTS

• Current AssetsCurrent Assets

These are those assets which change These are those assets which change their form within a short period of time, their form within a short period of time, generally within one year.generally within one year.

It includes-:It includes-:

Debtors, B/R, Cash & Bank balance, Debtors, B/R, Cash & Bank balance, Prepaid expenses etc.Prepaid expenses etc.

Cont….Cont….

• Current LiabilitiesCurrent Liabilities

These are those liabilities which are These are those liabilities which are payable within a short period of time, payable within a short period of time, generally within one year.generally within one year.

It includes-It includes-

Creditors, B/P, Bank o/d, Short term loan, Creditors, B/P, Bank o/d, Short term loan, Proposed dividend etc.Proposed dividend etc.

Types of working capital

Basis of concept Basis of nature

Gross working capital Net working capital Fixed working capital Variable working capital

Seasonal

Precautionary

Speculative

DIFFERENCE BETWEEN TEMPORARY DIFFERENCE BETWEEN TEMPORARY AND PERMANENT CURRENT ASSETSAND PERMANENT CURRENT ASSETS

Permanent current assetsPermanent current assets

TIME

AM

OU

NT

(R

s.)

Temporary current assetsTemporary current assets

The amount of current assets that varies with The amount of current assets that varies with seasonal requirements.seasonal requirements.

Sources of working capital

Long term sources Short term sources

Owned sources Borrowed sources Internal sources External sources

Issue of shares

Retained earnings

Reserves

Sale of fixed assets

Debentures

Long term debts

Depreciation funds

Provision for taxation

Trade credit

Advance from customers

Public deposits

Bank credit

FACTORS DETERMINING FACTORS DETERMINING WORKING CAPITALWORKING CAPITAL

1.1. Nature of businessNature of business2.2. Size of businessSize of business3.3. Production processProduction process4.4. Requirement of cashRequirement of cash5.5. Banking relationsBanking relations6.6. Business growth and expansionBusiness growth and expansion7.7. Profit marginProfit margin8.8. Seasonal nature of businessSeasonal nature of business

METHODS OF ESTIMATING METHODS OF ESTIMATING WORKING CAPITALWORKING CAPITAL

1.1. Operating cycle methodOperating cycle method

2.2. Traditional or forecasting methodTraditional or forecasting method

3.3. Projected balance sheet methodProjected balance sheet method

4.4. Profit and loss adjustment methodProfit and loss adjustment method

5.5. Sales forecasting methodSales forecasting method

Advantages of working capital Advantages of working capital

• • It helps the business concern in maintaining the It helps the business concern in maintaining the goodwill.goodwill.

• • It can arrange loans from banks and others on It can arrange loans from banks and others on easy and favorable terms.easy and favorable terms.

• • It enables a concern to face business crisis in It enables a concern to face business crisis in emergencies such as depression.emergencies such as depression.

• • It creates an environment of security, confidence, It creates an environment of security, confidence, and over all efficiency in a business.and over all efficiency in a business.

• • It helps in maintaining solvency of the business.It helps in maintaining solvency of the business.

Disadvantages of working capital Disadvantages of working capital

• • Rate of return on investments also fall with the Rate of return on investments also fall with the shortage of working capital.shortage of working capital.

• • Excess working capital may result into over all Excess working capital may result into over all inefficiency in organization.inefficiency in organization.

• • Excess working capital means idle funds which Excess working capital means idle funds which earn no profits.earn no profits.

• • Inadequate working capital can not pay its short Inadequate working capital can not pay its short term liabilities in time.term liabilities in time.