8/7/2019 vasim ppt

1/15

Presented ByPresented By

Vasim ansariVasim ansari

MBA IInd SemMBA IInd Sem

WorkingWorkingCapitalCapitalManagementManagement

8/7/2019 vasim ppt

2/15

Meaning of workingMeaning of working

capitalcapital(WC)(WC)Funds required for short term purposes orday to day expenses are working capital.

WC refers to part of firms capital reqd. forfinancing short term or current assets alsoknown as revolving or short term capital orcirculating capital.

8/7/2019 vasim ppt

3/15

Concepts ofConcepts of

Balance sheet concept. Two interpretations of W.C. under this concept are:- gross working capital:-

capital invested in total current assets of an enterprise. gross concept sometimes preferred over networking concept due to:- a). enables enterprise to provide correct amount of WC at

the right time.

b). every management is interested in total current assetswith which it has to operate than the sources. c). gross concepts takes into considerations that every

increase in the funds would increase the Working capital.

8/7/2019 vasim ppt

4/15

Importance of net workingImportance of net workingcapitalcapital

It is a qualitative concept which

indicates firms ability to meet itsoperating expenses and short termliabilities.

It indicates the margin of protectionavailable to the short term creditors.

Indicator of financial soundness of anenterprise.

Net WC is refered to as working capital.

8/7/2019 vasim ppt

5/15

Operating cycle or circular flowOperating cycle or circular flow

conceptconcept

Start with raw material.

Raw material -> work in progress -> finished goods ->

Sales -> debtors -> Cash -> raw

material. This is a cycle.

8/7/2019 vasim ppt

6/15

CLASSIFICATION OF WC:CLASSIFICATION OF WC:--

WC may be classified in two ways:-

On the basis of concept- gross working capital- net working capital

On the basis of time- permanent or fixed WC

a). regular WCb). reserve WC

- temporary or variable WCa). seasonal WCb). special WC

8/7/2019 vasim ppt

7/15

IMPORTANCE OR ADVANTAGESIMPORTANCE OR ADVANTAGES

OF ADEQUATE WC:OF ADEQUATE WC:--

Maintains solvency of business. Helps in creating & maintaining goodwill.

Helps in arranging loans from banks &others on easy and favorable terms.

Enables a concern to avail cash discountand hence reduce cost.

Ensures regular supply of raw materials.Regular payment of salaries, wages &other day to day commitment.

Exploitation of favorable market condition. Enables a concern to face business crisis

8/7/2019 vasim ppt

8/15

EXCESS OR INADEQUATE WC:EXCESS OR INADEQUATE WC:--

Disadvantages of redundant or excessiveWC:-

Excessive WC means idle funds which earn no profit for thebusiness & hence, business cannot earn a proper rate of return on

its investments. When there is redundant WC, it may lead to unnecessary

purchasing & accumulation of inventories causing more chance oftheft, waste & losses.

Excessive WC implies excessive debtors & defective credit policywhich may cause higher incidences of bad-debts. incidences ofbad-debts.

It may result in overall inefficiency in org. When there is excessive WC, relationships with banks &other

financial institutions may not be maintained due to low rate ofreturns on

8/7/2019 vasim ppt

9/15

DISADVANTAGES OR DANGERSDISADVANTAGES OR DANGERSOFINADEQUATE WC:OFINADEQUATE WC:--

A concern which has inadequate WC cannot payits short term liabilities in time. Thus, loose itsreputation & shall not be able to get good creditfacilities.

Cannot buy its requirements in bulk & cannotavail of discounts etc

Becomes difficult for the firm to exploit favorablemarket conditions & undertake profitableprojects.

Firm cannot pay its day to day expenses and itcreate inefficiency.

Becomes impossible to use efficiently fixed assetsdue to non availability of liquid funds

8/7/2019 vasim ppt

10/15

THE NEED OR OB JECTS OFTHE NEED OR OB JECTS OF

WC is needed for the following purposes:- For the purchase of raw material.

To pay wages & salaries To incur day to day expenses and overhead

costs. To meet selling costs.

To provide credit facilities to the customer. To maintain the inventories of raw material, work

in progress, stores and spares and finishedstocks.

8/7/2019 vasim ppt

11/15

ANALYSIS OFANALYSIS OF

Categories into three parts

Ratio AnalysisFund flow analysis

Working capital Analysis

8/7/2019 vasim ppt

12/15

It is a simple arithmetical expression of onenumber to another. The technique of ratioanalysis can be employed for measuring shortterm liquidity or working capital position of thefirm. The following ratios may be calculatedfor this purpose:-

Current ratio. Acid test ratio. Absolute liquid ratio. Inventory turnover ratio.

Receivables turnover ratio. Payables turnover ratio. Working capital turnover ratio. Working capital leverage. Ratio of current liabilities to tanible net worth.

8/7/2019 vasim ppt

13/15

FUNDS FLOW ANALYSISFUNDS FLOW ANALYSIS

Fund flow analysis is a technical devicedesignated to study the sources from whichadditional funds were derived and the use towhich these sources were put. It is an effective

management tool to study changes in thefinancial position (WC) of a business enterprisebetween beginning and ending financialstatements. Funds flow analysis consists of:-

Preparing schedules of changes in WC.

Statement of sources and application of funds

8/7/2019 vasim ppt

14/15

WORKING CAPITAL BUDGETWORKING CAPITAL BUDGET Budget is a financial or quantitative expression of

business plans & policies to be pursued in thefuture period of time. WC budget as a part oftotal budgeting process of a business is preparedestimating future long term & short term WCcapital needs & sources to finance them & thencomparing the budgeted figures with the actual

performance for calculating variances. Thesuccessful implementation of WC budget involvesthe preparing of separate budgets for variouselements of WC such as cash inventories andreceivables etc. The objectives of a WC budget isto ensure availability of funds as and when

needed and to ensure effective utilization ofthese resources

8/7/2019 vasim ppt

15/15