1

PROJECT WORK ON
“MANAGEMENT OF WORKING CAPITAL- CASH MANAGEMENT ”
FINANCIAL MANAGEMENT
This final draft is submitted in partial fulfilment of the B.B.A. LL.B HONS.
Course in financial management.

SUBMITTED TO:
Mr. Ashok Kumar Sharma
Assistant Professor of Financial Management

SUBMITTED BY:
Sweta Bharti
ROLL NO - 2643
COURSE– B.B.A. LL.B
SEMESTER – 2nd

March, 2022
Chanakya National law university, Patna
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DECLARATION

I declare that the Project entitled “MANAGEMENT OF WORKING

CAPITAL- CASH MANAGEMENT WITH EXAMPLES” is the outcome of
my own work conducted under the supervision of Mr. Ashok Kumar Sharma
at “Chanakya National Law University, Patna”.
I further declare that to the best of my knowledge the Project does not contain
any part of submitted work, which has been submitted for the award of any
degree or diploma either in this university or in any other university without
proper Citation. I am fully responsible for the contents of my Project Report.

THANK YOU,
SWETA BHARTI
ROLL NO. – 2643
COURSE – B.B.A. LL.B
SEMESTER -2nd
SESSION – 2021-2026
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ACKNOWLDGEMENT

To list who all have helped me is difficult because they are so numerous and
the depth is so enormous.
I would like to acknowledge the following as being idealistic channels and
fresh dimensions in the completion of this project. First of all, I am very
grateful to my subject teacher Mr. Ashok Kumar Sharma without the kind
support of whom and help the completion of the project would have been a
herculean task for me. I acknowledge my family and friends who gave their
valuable and meticulous advice which was very useful and could not be
ignored in writing the project. I want to convey the sincerest thanks to my
faculties for helping me throughout the project.
Thereafter, I would also like to express my gratitude towards our seniors who
played a vital role in the compilation of this research work. I would also like to
express my gratitude towards the library staff of my college which assisted me
in acquiring the sources necessary for the compilation of my project.
Last, but not the least, I would like to thank the Almighty for obvious reasons.

SWETA BHARTI
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Contents

DECLARATION........................................................................................................................................2
ACKNOWLDGEMENT.............................................................................................................................3
INTRODUCTION.....................................................................................................................................5
Objective of Working capital:............................................................................................................6
TYPES OF WORKING CAPITAL................................................................................................................8
FACTORS AFFECTING WORKING CAPITAL MANAGEMENT..................................................................11
FACTORS..........................................................................................................................................11
Approaches of working capital investment.....................................................................................13
NEED FOR WORKING CAPITAL MANAGEMENT....................................................................................14
NEGATIVE WORKING CAPITAL.........................................................................................................15
SIGNIFICANCE OF WORKING CAPITAL..............................................................................................16
CONCLUSION AND SUGGESTIONS.......................................................................................................19
SUGGESTIONS..................................................................................................................................19
BIBILIOGRAPHY:...................................................................................................................................20
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INTRODUCTION
Working capital management is a business strategy designed to ensure that a company
operates efficiently by monitoring and using its current assets and liabilities to their most
effective use. Working capital management requires monitoring a company's assets and
liabilities to maintain sufficient cash flow to meet its short-term operating costs and short-
term debt obligations.

Definition:-
1. According to Guttmann & Dougall-
Excess of current assets over current liabilities .

2. According to Park & Gladson-

The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over
current items owned to employees and others (such as salaries & wages payable, accounts
payable, taxes owned to government).
The term current assets refers to those assets which in ordinary course of business can be,
or, will be, turned in to cash within one year without undergoing a diminution in value and
without disrupting the operation of the firm. The major current assets are cash, marketable
securities, account receivable and inventory.
Current liabilities ware those liabilities which intended at there inception to be paid in
ordinary course of business, within a year, out of the current assets or earnings of the
concern. The basic current liabilities are account payable, bill payable, bank over-draft, and
outstanding expenses. The goal of working capital management is to manage the firm s
current assets and current liabilities in such way that the satisfactory level of working capital
is mentioned. The current should be large enough to cover its current liabilities in order to
ensure a reasonable margin of the safety.

Working capital management can improve a company's cash flow management and earnings
quality by using its resources efficiently.

Working capital is very important aspect for an organisation. It is called the blood of the
organisation. As without proper blood circulation in the body, it will face various diseases,
similarly proper circulation of working capital is vital for the proper and smooth functioning
of an organisation. Seeing the importance of working capital management, it is very
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necessary for a corporate professional to know about management of different constituents

of working capital.

The primary purpose of working capital management is to enable the company to maintain
sufficient cash flow to meet its short-term operating costs and short-term debt obligations.
A company's working capital is made up of its current assets minus its current liabilities.
The requirement of working capital varies from firm to firm depending upon the nature of
business, production policy, market conditions, seasonality of operations, conditions of
supply etc. Working capital to a company is like the blood to human body. It is the most
vital ingredient of a business.

Working capital management if carried out effectively, efficiently and consistently, will
ensure the health of an organization. A company invests its funds for long-term purposes
and for short-term operations. That portion of a company’s capital, invested in short-term or
current assets to carry on its day to day operations smoothly, is called the ‘working capital’.

Working capital refers to a firm’s investment in short-term assets viz., cash, short-term
securities, amounts receivables and inventories of raw materials, work-in-process and
finished goods.

It refers to all aspects of current assets and current liabilities. The management of working
capital is no less important than the management of long-term financial investment.
Sufficient liquidity is necessary and must be achieved and maintained to provide that funds
to payoff obligation as they arise or mature. The adequacy of cash and other current assets
together with their efficient handling virtually determine the survival of the company.

Working capital management is concerned with short-term financial decisions. Shortage of

funds for working capital has caused many businesses to fail and in many cases, has
retarded their growth. Lack of efficient and effective utilization of working capital leads to
earn low rate of return on capital employed or even compels to sustain losses.

The need for skilled working capital management has thus become greater in recent years. A
firm invests a part of its permanent capital in fixed assets and keeps a part of it for working
capital i.e., for meeting the day to day requirements. We will hardly find a firm which does
not require any amount of working capital for its normal operations.
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Objective of Working capital:

Even profitability companies fail if they have inadequate cash flow. Liabilities dare
settled with cash and net profits. The primary objective of working capital management is
to ensure that sufficient cash is available to:
 Meet day to day cash flow needs;
 Pay wages and salaries when they fall due;
 Pay creditors to ensure continued suppliers of goods and services;
 Pay government taxation and providers of cash dividends; and
 Ensure the long term survival of the business entity.

 
AIMS AND OBJECTIVES:
1. To critically analyse the concept of “Working Capital Management”.
2. To present a detail study on the types of working capital.
3. To study the factors affecting working capital requirement.

HYPOTHESIS
1. Profitability of a firm depends upon how the capital is managed.
2. Working capital management aims at more efficient use of a company's resources by
monitoring and optimizing the use of current assets and liabilities.

RESEARCH QUESTIONS
1. Why do we need Working Capital management?
2. What are the types of working capital policy?
3. What are the factors affecting the working capital management of an entity?

RESEARCH METHODOLOGY:
The researcher has adopted the doctrinal method of research to explore the concept of
‘Working capital management’. During the commission of this project, she consulted
various primary & secondary sources such as websites of numerous organisations, books,
article and research paper. This method helped the researcher gain a panoric view of concept
of ‘Working Capital Management’.

SOURCES OF DATA
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The researcher will be relying on both primary as well as secondary sources to complete the
project.

LIMITATION
The Researcher has territorial limit, time limit and monetary limits. Nonetheless, the
researcher has tried her best to consult the authentic source of information available to her
on the internet for research.

CITATION
The researcher has followed the 20th edition of bluebook for the purpose of citation.
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TYPES OF WORKING CAPITAL

The working capital in certain enterprise may be classified into the following kinds.

1. Initial working capital: The capital, which is required at the time of the commencement
of business, is called initial working capital. These are the promotion expenses incurred at
the earliest stage of formation of the enterprise which include the incorporation fees,
attorney’s fees, office expenses and other preliminary expenses.

2. Regular working capital: This type of working capital remains always in the enterprise
for the successful operation. It supplies the funds necessary to meet the current working
expenses i.e. for purchasing raw material and supplies, payment of wages, salaries and other
sundry expenses.

3. Fluctuating working capital: This capital is needed to meet the seasonal requirements
of the business. It is used to raise the volume of production by improvement or extension of
machinery. It may be secured from any financial institution which can, of course, be met
with short term capital. It is also called variable working capital.

4. Reserve margin working capital: It represents the amount utilized at the time of
contingencies. These unpleasant events may occur at any time in the running life of the
business such as inflation, depression, slump, flood, fire, earthquakes, strike, lay off and
unavoidable competition etc. In this case, greater amount of capital is required for
maintenance of the business.

5. Permanent and Temporary Working Capital: The Operating Cycle creates the need
for Current Assets (Working Capital). However, the need does not come to an end once the
cycle is completed. It continues to exist. To explain the continuing need of current assets, a
distinction should be drawn between temporary and permanent working capital.

Business Activity does not come to an end after the realization of cash from customers. For
a company, the process is continuing, and hence, the need for regular supply of working
capital. However, the, magnitude of Working Capital required is not constant but
fluctuating. To carry on a business, a certain minimum level of working capital is necessary
on a continuous and uninterrupted basis. For all practical purposes, this requirement has to
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be met permanently as with other fixed assets. This requirement is referred to as permanent
or fixed working capital.

Any amount over and above the permanent level of working capital is temporary,
fluctuating or variable working capital. The position of the required working capital is
needed to meet fluctuations in demand consequent upon changes in production and sales as
a result of seasonal changes. Both kinds of working capital are necessary to facilitate the
sales proceeds through the Operating Cycle.

6.Long Term working capital: The long-term working capital represents the amount of
funds needed to keep a company running in order to satisfy demand at lowest point. There
may be many situations where demand may fluctuate considerably. It is not possible to
retrench the work force or instantly sell all the inventories whenever demand declines due to
temporary reasons. Therefore the value, which represents the long-term working capital,
stays with the business process all the time. It is for all practical purpose known as
permanent fixed assets. In other words, it consists of the minimum current assets to be
maintained at all times. The size of the permanent working capital varies directly with the
size of Operation of a firm.

7.Short term working capital: Short-term capital varies directly with the level of activity
achieved by a company. The Volume of Operation decides the quantum of Short-term
working capital. It also changes from one form to another; from cash to inventory, from
inventory to debtors and from debtors back to cash. It may not always be gainfully
employed. Temporary Working capital should be obtained from such sources, which will
allow its return when it is not in use.

8. Gross Working Capital: Gross working capital refers to the firm’s investment in current
assets. Current assets are those assets which can be converted in to cash with in an
accounting year and includes cash, short term securities, debtors bills receivable and stock.

9. Net Working Capital: Net working capital refers to the difference between current asset
and Current liabilities. Current liabilities are those claims of outsiders, which are expected
to mature for payment within accounting year and include creditors, bills payable and
outstanding expenses. Net Working capital can be positive or negative. A positive net
working capital will arise when current assets exceed current liabilities.
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The Gross working capital concept focuses attention on two aspect of current assets
management.

(a) How to optimize investment in current assets?

(b) How should current assets be financed?

Both the question is the most decision making action of the management. It should be given
due consideration before taking decision. Both Net and Gross working capital is important
and they have equal significance from management point of view.
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FACTORS AFFECTING WORKING CAPITAL MANAGEMENT

Determinants of working capital

How much to be invested in current assets as working capital is a matter of policy decision
by an entity. It has to be decided in the light of organisational objectives, trade policies and
financial (cost-benefit) considerations. There is not set rules for deciding the level of
investment in working capital. Some organisations due to its peculiarity require more
investment than others. For example, an infrastructure development company requires more
investment in its working capital as there may be huge inventory in the form of work in
process on the other hand a company which is engaged in fast food business, comparatively
requires less investment. Hence, level of investment depends on the various factors listed
below:

FACTORS

(a)Nature of Industry: Some businesses are such, due to their very nature, that their
requirement of fixed capital is more rather than working capital. These businesses sell
services and not the commodities and that too on cash basis. As such, no founds are blocked
in piling inventories and also no funds are blocked in receivables. E.g. public utility services
like railways, infrastructure oriented project etc. there requirement of working capital is less.
On the other hand, there are some businesses like trading activity, where requirement of
fixed capital is less but more money is blocked in inventories and debtors.companies,
breweries etc. requires large investment in working capital due long gestation period.

(b) Types of products: Consumer durable has large inventory as compared to perishable
products. In some business like machine tools industry, the time gap between the acquisition
of raw material till the end of final production of finished products itself is quit high. As
such amount may be blocked either in raw material or work in progress or finished goods or
even in debtors. Naturally there need of working capital is high.

(c) Manufacturing Vs Trading Vs Service: A manufacturing entity has to maintain three

levels of inventory i.e. raw material, work-in-process and finished goods whereas a trading
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and a service entity has to maintain inventory only in the form of trading stock and
consumables respectively.

(d) Volume of sales: Where the sales are high, there is a possibility of high receivables as
well. Some time due to competition or custom, it may be necessary for the company to
extend more and more credit to customers, as result which more and more amount is locked
up in debtors or bills receivables which increase the working capital requirement. On the
other hand, in the case of purchase, if the credit is offered by suppliers of goods and
services, a part of working capital requirement may be financed by them, but it is necessary
to purchase on cash basis, the working capital requirement will be higher.

(e) Credit policy: An entity whose credit policy is liberal has not only high level of
receivables but requires more capital to fund raw material purchases.

(f) Size and growth of business: In very small company the working capital requirement is
quit high due to high overhead, higher buying and selling cost etc. as such medium size
business positively has edge over the small companies. But if the business start growing
after certain limit, the working capital requirements may adversely affect by the increasing
size.

(g) Business/ Trade cycle: If the company is the operating in the time of boom, the working
capital requirement may be more as the company may like to buy more raw material, may
increase the production and sales to take the benefit of favorable market, due to increase in
the sales, there may more and more amount of funds blocked in stock and debtors etc.
similarly in the case of depressions also, working capital may be high as the sales terms of
value and quantity may be reducing, there may be unnecessary piling up of stack without
getting sold, the receivable may not be recovered in time etc.

(h) Profitability/Operating Efficiency: The profitability of the business may be vary in

each and every individual case, which is in turn its depend on numerous factors, but high
profitability will positively reduce the strain on working capital requirement of the
company, because the profits to the extend that they earned in cash may be used to meet the
working capital requirement of the company.
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Approaches of working capital investment

Based on the organisational policy and risk-return trade off, working capital investment
decisions are categorised into three approaches i.e. aggressive, conservative and moderate.

(a) Aggressive: Here investment in working capital is kept at minimal investment in current
assets which means the entity does hold lower level of inventory, follow strict credit policy,
keeps less cash balance etc. The advantage of this approach is that lower level of fund is tied
in the working capital which results in lower financial costs but the flip side could be that
the organisation could not grow which leads to lower utilisation of fixed assets and long
term debts. In the long run firm stay behind the competitors.

(b) Conservative: In this approach of organisation use to invest high capital in current
assets. Organisations use to keep inventory level higher, follows liberal credit policies, and
cash balance as high as to meet any current liabilities immediately. The advantage of this
approach are higher sales volume, increased demand due to liberal credit policy and increase
goodwill among the suppliers due to payment in short time. The disadvantages are increase
cost of capital, higher risk of bad debts, shortage of liquidity in long run to longer operating
cycles.

(c) Moderate: This approach is in between the above two approaches. Under this approach
a balance between the risk and return is maintained to gain more by using the funds in very
efficient manner.
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NEED FOR WORKING CAPITAL MANAGEMENT

Working capital is a common measure of a firm’s liquidity, efficiency and overall health. As
it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due
within one year, and other short-term accounts, a firm’s working capital reflects the results
from a host of firm activities, including inventory management, debt management, revenue
collection and payments to suppliers.

The needs for working capital vary from industry to industry, and they can even vary among
similar firms. This is due to several factors, including differences in the collection and
payment policies, the timing of asset purchases, the likelihood of a firm writing off some of
its debt, and in some instances, capital raising efforts made by the firm.

The need of working capital arrived because of time gap between production of goods and
their actual realization after sale. This time gap is called “Operating Cycle” or “Working
Capital Cycle”. The operating cycle of a company consist of time period between
procurement of inventory and the collection of cash from receivables. The operating cycle is
the length of time between the company’s outlay on raw materials, wages and other
expanses and inflow of cash from sales of goods.

Operating cycle is an important concept in management of cash and management of cash

working capital. The operating cycle reveals the time that elapses between outlays of cash
and inflow of cash. Quicker the operating cycle less amount of investment in working
capital is needed and it improves profitability. The duration of the operating cycle depends
on nature of industries and efficiency in working capital management.

Calculation of operating cycle

The operating cycle is the length of time between the company’s outlay on raw materials,
wages and other expenditures and the inflow of cash from the sale of the goods. In a
manufacturing business, operating cycle is the average time that raw material remains in
stock less the period of credit taken from suppliers, plus the time taken for producing the
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goods, plus the time the goods remain in finished inventory, plus the time taken by
customers to pay for the goods. Operating cycle concept is important for management of
cash and management of working capital because the longer the operating cycle the more
financial resources the company needs. Therefore, the management has to remain cautious
that the operating cycle should not become too long. Most businesses cannot finance the
operating cycle (accounts receivable days + inventory days) with accounts payable
financing alone. Consequently, working capital financing is needed. This shortfall is
typically covered by the net profits generated internally or by externally borrowed funds or
by a combination of the two. The duration of working capital cycle may vary depending on
the nature of the business. In the form of an equation, the operating cycle process can be
expressed as follows:

Operating Cycle = R + W + F + D – C
Where,
R = Raw material storage period
W = Work-in-progress holding period
F = Finished goods storage period
D = Receivables (Debtors) collection period
C = Credit period allowed by suppliers (Creditors).

NEGATIVE WORKING CAPITAL

Generally, negative working capital is a sign that the company may be facing bankruptcy or
a serious financial trouble. Under the best circumstances, poor working capital leads to
financial pressure on a company, increased borrowing, and late payments to creditor - all of
which result in a lower credit rating. A lower credit rating means banks charge a higher
interest rate, which can cost a corporation a lot of money over time.
In general, companies that have a lot of working capital will be more successful since they
can expand and improve their operations. Companies with negative working capital may
lack the funds necessary for growth. However, some companies can sell their inventory and
generate cash so quickly that they actually have a negative working capital.
This is generally true of companies in the restaurant business (McDonald’s had a negative
working capital of $698.5 million between 1999 and 2000). Amazon.com is another
example. This happens because customers pay upfront and so rapidly that the business has
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no problems raising cash. In these companies, products are delivered and sold to the
customer before the company even pays for them.

SIGNIFICANCE OF WORKING CAPITAL

The significance of working capital management is tremendous, irrespective of the size of
the business. Every entity requires a working capital management strategy or plan that is
robust and well chalked out, considering various scenarios. Often, we see that profitable
businesses are shut down, and it is because they were unable to manage to pay for their
liabilities when they were due. Furthermore, a sound working capital management policy
even results in higher profitability. Some reasons why management of working capital is
essential are listed below.

Higher Return on Capital Employed

Higher working capital means a higher portion of assets financed by the owner’s equity.
Higher equity implies that higher profits are needed to achieve the required return on capital
employed. When the working capital can be efficiently managed and the owner’s equity
finances only the required portion of assets, it results in a higher return on capital.

Improvement in Solvency and Credit Profile

When a business pays off its dues on time while generating revenue, it ensures that its
operating cycle is efficient. When the business ensures that its operating cycle is efficiently
funded, it enhances its credit score. On the other hand, if the entity has low operational
expenses but fails to repay its dues on time, it negatively pacts the business’s credit score.

Better Liquidity

A business with a high amount of working capital has higher liquidity and can pay off its
dues even in times of crisis. It prevents businesses from shutting down and facing losses,
called shut down costs, and enables surviving the crisis and restoring regular business
operating levels.

Efficient Utilization of Fixed Assets

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Having adequate working capital and efficient management of the same will help the
business’s fixed assets to be utilised efficiently and effectively. Often, the business’s fixed
assets remain idle due to the unavailability of components of working capital, such as raw
materials, finished goods, and the shortage of funds to buy them. In such cases, even though
there is no activity in the entity, it has to pay interests on borrowed funds and charge
depreciation on the assets.

Expansion of Business

Any entity that wants to expand its business levels will need to have a healthy level of
working capital to finance it. It is required to fund purchase orders and provide credit
periods to more customers. Without an adequate and increasing level of working capital, it
is challenging for any business to expand its business scale.

Increased Profitability

Policies such as credit period allowed to customers, cash discounts, and easy monthly
installments (EMIs) all bear intrinsic or explicit interest costs. A balanced working capital
management policy for all these schemes helps reduce interest costs and thus, results in
higher levels of profits for the business.

Uninterrupted Trading and Production

Paying your vendors or creditors on time is one of the essentials of running your business
smoothly. If they are not paid on time, they might put the delivery of raw materials on hold.
These materials may be required for production or the supply of goods that are traded. It
will result in a lower or even a complete halt in production or sales. Such activities harm the
business reputation of any entity adversely.

Appreciation in Business Value

An entity that has efficient working capital management has a reputation in the market of
being credit-worthy. It enhances the goodwill of the business, and consequently, its market
value or share prices. A higher market value means higher wealth created for the business
owners.

Edge Over Competitors

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A business with an effective working capital management system can sell its products and
services at lower prices, as it has lower overall costs.

Better Financing Terms

A business with a reputation for managing its working capital efficiently and paying off its
dues on time has a higher credit score and worthiness. Due to this, it can obtain similar
facilities from NBFCs, and creditors, such as business line of credit, with more favourable
terms, compared to other players in the market.

Ready for Boons and Banes

A business with an excellent working capital management plan accounts for factors such as
boons and banes, which are a part of every business cycle fluctuation. They are prepared
and well-equipped to handle both deficient and high-demand levels, as they already plan for
such contingencies.
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CONCLUSION AND SUGGESTIONS

Working capital management meaning is nothing but simply how the working capital of a
business is managed. The significance of working capital management in a business can
never be undermined due to the reasons discussed. Working capital management objectives
include keeping the business’s liquidity intact, enhancing operating efficiency, decreasing
implicit and explicit interest costs, and increasing the overall profitability of the business.

 Working capital management involves balancing movements related to five main

items – cash, trade receivables, trade payables, short-term financing, and inventory –
to make sure a business possesses adequate resources to operate efficiently.
 The levels of cash should be enough to deal with ordinary or small unexpected
needs, but not so high to determine an inefficient allocation of capital.
 Commercial credit should be used properly to balance the need to maintain sales and
healthy business relationships with the need to limit exposure to customers with low
creditworthiness.
 Managing short-term debt and accounts payable should allow the company to
achieve enough liquidity for ordinary operations and unexpected needs, without an
excessive increase in financial risk.
 Inventory management should make sure there are enough products to sell and
materials for its production processes while avoiding excessive accumulation and
obsolescence.
 SUGGESTIONS
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BIBILIOGRAPHY:

1. Taxmann’s Principal of Financial Management- Dr. R.P. Rustagi

2. Financial management- I.M. Pandey
3. Financial management- Sheeba Kapil (Pearson)

WEBLIOGRAPHY

 Working Capital Management - Overview, How It Works, Importance

(corporatefinanceinstitute.com)
 https://www.investopedia.com/terms/w/
workingcapitalmanagement.asp#:~:text=Working%20capital%20management%20is
%20a,be%20quantified%20using%20ratio%analysis
 What Are the Importance of Working Capital Management for Business (flexiloans.com)
 Types of Working Capital – Accountlearning | Contents for Management Studies |