Working Working CapitalCapital ManagementManagement

Meaning of working capital Meaning of working capital (WC)(WC)

Funds required for short term Funds required for short term purposes or day to day expenses purposes or day to day expenses

are working capital. are working capital. WC refers to part of firm’s capital WC refers to part of firm’s capital reqd. for financing short term or reqd. for financing short term or

current assets current assets also known as revolving or short also known as revolving or short

term capital or circulating capital. term capital or circulating capital.

Concepts of Working CapitalConcepts of Working Capital

Balance sheet concept.Balance sheet concept. Two interpretations of W.C. under this concept are:-Two interpretations of W.C. under this concept are:- gross working capital:- gross working capital:- capital invested in total current assets of an enterprise.capital invested in total current assets of an enterprise. gross concept sometimes preferred over networking gross concept sometimes preferred over networking

concept due to:- concept due to:- a). enables enterprise to provide correct amount of WC a). enables enterprise to provide correct amount of WC

at the right time.at the right time. b). every management is interested in total current b). every management is interested in total current

assets with which it has to operate than the sources.assets with which it has to operate than the sources. c). gross concepts takes into considerations that every c). gross concepts takes into considerations that every

increase in the funds would increase the working increase in the funds would increase the working capital.capital.

d). gross concepts of WC is more useful in determining d). gross concepts of WC is more useful in determining rate of return on investments in WC.rate of return on investments in WC.

Importance of Net Working Importance of Net Working CapitalCapital

It is a qualitative concept which It is a qualitative concept which indicates firm’s ability to meet its indicates firm’s ability to meet its operating expenses and short term operating expenses and short term liabilities. liabilities.

It indicates the margin of protection It indicates the margin of protection available to the short term creditors. available to the short term creditors.

Indicator of financial soundness of an Indicator of financial soundness of an enterprise. enterprise.

Net WC is refered to as working capital. Net WC is refered to as working capital.

Operating cycle or circular flow Operating cycle or circular flow concept concept

Start with raw material.Start with raw material.Raw material -> work in progress -> Raw material -> work in progress ->

finished goods ->finished goods ->Sales -> debtors -> Cash -> raw Sales -> debtors -> Cash -> raw

material.material.This is a cycle.This is a cycle.

CLASSIFICATION OF WC:-CLASSIFICATION OF WC:-

WC may be classified in two ways:-WC may be classified in two ways:- On the basis of conceptOn the basis of concept - gross working capital- gross working capital - net working capital- net working capital On the basis of timeOn the basis of time - permanent or fixed WC- permanent or fixed WC a). regular WCa). regular WC b). reserve WCb). reserve WC - temporary or variable WC- temporary or variable WC a). seasonal WCa). seasonal WC b). special WCb). special WC

IMPORTANCE OR ADVANTAGES IMPORTANCE OR ADVANTAGES OF ADEQUATE WC:-OF ADEQUATE WC:-

Maintains solvency of business.Maintains solvency of business. Helps in creating & maintaining goodwill.Helps in creating & maintaining goodwill. Helps in arranging loans from banks & others on easy Helps in arranging loans from banks & others on easy

andand favourable terms.favourable terms. Enables a concern to avail cash discount and hence Enables a concern to avail cash discount and hence

reduce reduce cost.cost. Ensures regular supply of raw materials.Ensures regular supply of raw materials. Regular payment of salaries, wages & other day to dayRegular payment of salaries, wages & other day to day commitment.commitment. Exploitation of favourable market condition.Exploitation of favourable market condition. Enables a concern to face business crisis.Enables a concern to face business crisis.

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

Disadvantages of redundant or excessive WC:-Disadvantages of redundant or excessive WC:- Excessive WC means idle funds which earn no profit for Excessive WC means idle funds which earn no profit for

the business & hence, business cannot earn a proper the business & hence, business cannot earn a proper rate of return on its investments. rate of return on its investments.

When there is redundant WC, it may lead to unnecessary When there is redundant WC, it may lead to unnecessary purchasing & accumulation of inventories causing more purchasing & accumulation of inventories causing more chance of theft, waste & losses. chance of theft, waste & losses.

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

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

&other financial institutions may not be maintained due &other financial institutions may not be maintained due to low rate of returns on investments, the value of share to low rate of returns on investments, the value of share may also fall. may also fall.

DISADVANTAGES OR DANGERS DISADVANTAGES OR DANGERS OF INADEQUATE WC:- OF INADEQUATE WC:-

A concern which has inadequate WC cannot A concern which has inadequate WC cannot pay its short term liabilities in time. Thus, pay its short term liabilities in time. Thus, loose its reputation & shall not be able to get loose its reputation & shall not be able to get good credit facilities. good credit facilities.

Cannot buy its requirements in bulk & cannot Cannot buy its requirements in bulk & cannot avail of discounts etc. avail of discounts etc.

Becomes difficult for the firm to exploit Becomes difficult for the firm to exploit favourable market conditions & undertake favourable market conditions & undertake profitable projects. profitable projects.

Firm cannot pay its day to day expenses and Firm cannot pay its day to day expenses and it create inefficiency. it create inefficiency.

Becomes impossible to use efficiently fixed Becomes impossible to use efficiently fixed assets due to non availability of liquid funds. assets due to non availability of liquid funds.

THE NEED OR OBJECTS OF THE NEED OR OBJECTS OF WC:-WC:-

WC is needed for the following purposes:-WC is needed for the following purposes:- For the purchase of raw material. For the purchase of raw material. To pay wages & salaries. To pay wages & salaries. To incur day to day expenses and overhead To incur day to day expenses and overhead

costs. costs. To meet selling costs. To meet selling costs. To provide credit facilities to the customer. To provide credit facilities to the customer. To maintain the inventories of raw material, To maintain the inventories of raw material,

work in progress, stores and spares and work in progress, stores and spares and finished stock. finished stock.

ANALYSIS OF WCANALYSIS OF WC

Ratio Analysis

FundsFlow

Analysis

WorkingCapitalBudget

Ratio AnalysisRatio Analysis It is a simple arithmetical expression of one number to It is a simple arithmetical expression of one number to

another. The technique of ratio analysis can be employed another. The technique of ratio analysis can be employed for measuring short term liquidity or working capital for measuring short term liquidity or working capital position of the firm. The following ratios may be position of the firm. The following ratios may be calculated for this purpose:-calculated for this purpose:-

Current ratio.Current ratio. Acid test ratio. Acid test ratio. Absolute liquid ratio. Absolute liquid ratio. Inventory turnover ratio. Inventory turnover ratio. Receivables turnover ratio. Receivables turnover ratio. Payables turnover ratio.Payables turnover ratio. Working capital turnover ratio. Working capital turnover ratio. Working capital leverage. Working capital leverage. Ratio of current liabilities to tangible net worth. Ratio of current liabilities to tangible net worth.

FUNDS FLOW ANALYSISFUNDS FLOW ANALYSIS

Fund flow analysis is a technical device Fund flow analysis is a technical device designated to study the sources from which designated to study the sources from which additional funds were derived and the use to additional funds were derived and the use to which these sources were put. It is an effective which these sources were put. It is an effective management tool to study changes in the management tool to study changes in the financial position (WC) of a business enterprise financial position (WC) of a business enterprise between beginning and ending financial between beginning and ending financial statements. Funds flow analysis consists of:- statements. Funds flow analysis consists of:- Preparing schedules of changes in WC. Preparing schedules of changes in WC. Statement of sources and application of funds. Statement of sources and application of funds.

WORKING CAPITAL BUDGETWORKING CAPITAL BUDGET

Budget is a financial or quantitative expression of Budget is a financial or quantitative expression of business plans & policies to be pursued in the future business plans & policies to be pursued in the future period of time. WC budget as a part of total budgeting period of time. WC budget as a part of total budgeting process of a business is prepared estimating future process of a business is prepared estimating future long term & short term WC capital needs & sources to long term & short term WC capital needs & sources to finance them & then comparing the budgeted figures finance them & then comparing the budgeted figures with the actual performance for calculating variances. with the actual performance for calculating variances. The successful implementation of WC budget involves The successful implementation of WC budget involves the preparing of separate budgets for various the preparing of separate budgets for various elements of WC such as cash inventories and elements of WC such as cash inventories and receivables etc. The objectives of a WC budget is to receivables etc. The objectives of a WC budget is to ensure availability of funds as and when needed and ensure availability of funds as and when needed and to ensure effective utilization of these resources.to ensure effective utilization of these resources.

ReferencesReferences

www.wikipedia.comwww.wikipedia.comwww.google.co.inwww.google.co.inwww.investopedia.comwww.investopedia.com

Thank You…….Thank You…….