WORKING CAPITAL

WORKING CAPITALWorking capital means current assets

such as cash, accounts receivables and inventory etc.

Working capital or circulating capital indicates circular flow of funds is the day-to-day or routine activities of business

The management of working capital is more important than the management of fixed assets

The fate of most of the businesses very largely depends upon the manner in which their working capital is managed.

DEFINITIONGerstenberg – “Circulating capital means current assets of a company

that are changed in the ordinary course of business from one form to another ,as for example , from

cash to inventories , inventories to receivable, receivables into cash.”

NEED OF WORKING CAPITALThe need of working capital to run the day

to day business of a firm can not be ignoredThe firm has to maintain an adequate level

of current assets to generate salesThe current assets are required, as the

sales generated by the firm do not convert into cash immediately

There is always an operating cycle involved in conversion of sales into cash

OPERATING CYCLEOperating Cycle is the time duration required to

convert sales, after the conversion of resources into inventories, into cash

It is the time interval between the cash collections from sale of the product and cash payments for resources acquired by the firm

Involves three phases:1)Acquisition of resources such as raw materials,

labour, power and fuel etc.2)Manufacture of the product which includes

conversion of raw material into work-in-progress into finishes goods

3)Sale of the product either for cash or on credit. Credit sales create account receivable for collection

CONCEPT OF WORKING CAPITAL

According to one school of thought, working capital represents all current assets of the Company. They believe that working capital represents those assets, which change their form during the process of production.

  Working Capital = Total Current Assets According to the other school of thought,

working capital is the excess of current assets over current liabilities.

  Working Capital = Current Assets – Current Liabilities

Cash

Raw Material

s

Finished Goods

Accounts Receivabl

e

Sales

Collection of Receivables

Purchase of Raw Materials

Work in

Progress

Thus, there are two concepts of Working Capital:

1. Gross Working Capital- i.e. Total Current Assets.

2. Net Working Capital- i.e. Current Assets –

Current Liabilities.

Gross Working CapitalGross working capital concept focuses

attention on two aspects of current assets management: 

(a) What is the optimum level of investment in current assets?

(b) How should current assets be financed?

Net Working CapitalNet working capital is a qualitative concept.Measures both a company's efficiency and

its short-term financial healthIt indicates how much current assets are

covered by current liabilities.It indicates the liquidity position of the firm

and suggests the extent to which the working capital needs may be financed by permanent sources of funds.

TYPES OF WORKING CAPITAL

i. Permanent working capital

ii.Temporary working capital

Working Capital

Permanent

Variable

Initial Workin

g Capital

Regular Working Capital

Seasonal Working Capital

Special Working Capital

PERMANENT WORKING CAPITAL

It is the minimum level of current assets and cash needed for a day-to-day business operation.

This is permanent in the same way of the firm’s fixed asset but the need for the working capital fluctuates with that of the change in the amount of production and sales.

Initial Working Capital:

It is the amount invested in the firm by the owner during the initial period of operation .

These funds are used for making payment to the creditors, purchasing raw materials, etc,.. In the initial period.

Regular Working Capital:

A firm is always required to keep certain funds for its regular business operations, known as Regular Working Capital.

Regular working capital is the excess of current assets over current liabilities.

This is required to maintain regular stock of raw materials ,work-in-progress and also to maintain the definite level of finished goods.

VARIABLE WORKING CAPITAL

Also called as Fluctuating Working Capital.

It is a working capital which keeps on changing with the change in production and sales activities.

It is an extra working capital that is needed for funding the change in the level of production and sales.

Seasonal Working Capital:

Some business may need additional capital only during specific season or a specific period of time.

For e.g., (a)The company involved in the production

of umbrella need additional capital to meet the demand of umbrellas in the rainy season.

(b)The groundnut oil producers may have to purchase groundnut in a particular season and have to employ additional labour for that purpose. These may require additional funds for a temporary period.

Special Working Capital:

The extra funds/capital invested for overcoming the unexpected events like sudden increase in demand, downward movement of prices of raw materials, strike or natural calamities, etc is known as Special Working Capital.

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Temporary or Fluctuating

Permanent

Difference between permanent and fluctuating W C

Temporary or Fluctuating

Permanent

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ARJUNMEHULSHARIQJASPALNEHA.S