WORKING CAPITAL

MANAGEMENT
BY

R.S.NARENDRA
ASSISTANT PROFESSOR OF COMMERCE
GOVERNMENT FIRST GRADE COLLEGE VEMAGAL,
KOLAR DIST

CONTENTS
1.
2.
3.
4.
5.
6.
7.

Introduction to Working Capital

Meaning of Working Capital
Concepts of Working Capital
Need for Working Capital
Dangers of Excessive Working Capital
Dangers of inadequate Working Capital
Permanent and Temporary Working
Capital
8. Determinants of Working Capital

Working Capital Management refers

to management of Short term
assets / Current assets

Working Capital Management is

concerned with the problems that
arise in attempting to manage
current assets, current liabilities
and the interrelationships that

What are Current Assets ?

The assets which are expected to be
converted into cash with in one
financial year
Following are the Current Assets
Cash,
Debtors,
Bills Receivable,
Stock,
Short term marketable securities

What are Current Liabilities ?

The Liabilities which are expected to
be paid with in one financial year
out of the current assets or
earnings of the firm
Following are the Current Liabilities
Creditors,
Bills Payable,
Bank Overdraft
Outstanding Expenses

Characteristics of Current Assets

1. Short life span
Cash
7-15 days
Debtors 30-120 days
Stock 30-100 days
2. Shift transformation into other
asset forms
Cash
Raw materials
WIP
Finished goods

Goal
of
Working
Capital
Management
The goal of Working Capital
Management is to manage firms
current assets and current
liabilities in such a way that
satisfactory level of Working
Capital is maintained
A

sound
working
capital
management policy is one which

Concepts of Working Capital

There are two concepts or definitions
of Working Capital they are
1. Gross Working Capital
2. Net Working Capital
Gross Working Capital means firms
investment in current assets
Net Working Capital means
difference between current assets
and current liabilities(NWC=CA-CL)

Need for Working Capital

1. The need for Working Capital
arises due to the time gap
between
production
and
realisation of cash from sales
2. There is an operating cycle
involved in it
3. Cash outflows are predictable
whereas cash inflows are difficult
to predict

Excess and Inadequate working

capital
Both excess and inadequate working
capital are not good for the firm
because
1. Excessive working capital means
idle funds which do not earn
any profits for the firm
2. Inadequate working capital may

Dangers of Excessive working

capital
1.The firm will earn lesser return on
investment
2.Excess investment in stock causes
wastage,
theft,
loss
and
mishandling of stock
3.Excess Debtors leads to increase
in bad debts and adversely affects
the profits

Dangers of Inadequate working

capital
1.The firm cannot pay its short term
obligations resulting in loss of
reputation
2.The firm will loose attractive
opportunities
3.The firm becomes incapable to
exploit favorable market conditions
and profitable projects

Permanent
and
Temporary
working capital
The need for working capital arises
due to the operating cycle which is
a continuous process
Therefore there is a continuous need
for current assets
But the need for current assets will
not be same at all times as such
two types of working capital are

Permanent working capital

The minimum level of current assets
required by the firm at all times is
called Permanent working capital
Permanent
working
capital
is
financed by long term source of
funds

Temporary working capital

The firm may have to invest more
amount in working capital due to
changes in production, sales,
increased demand etc.
The extra working capital required to
run the business operations is
called fluctuating, variable or
temporary working capital

Variable working capital

Amount of
working capital
required

Permanent working
capital

Time
Graph showing the nature of permanent and temporary working capital

Determinants of working capital

Working capital requirements are different for each
kind of firm and is determined by a no of factors
they are:

1.
2.
3.
4.
5.
6.
7.

Nature of the Business

Size of the Business
Length of the Production cycle
Business cycle
Production policy of the firm
Credit policy of the firm
Availability of credit

Determinants of working capital

8. Growth and expansion activities
of the firm
9. Profit margin of the firm
10.Profit appropriation method
11.Price level changes
12.Operating efficiency of the firm

Proportion of current assets and fixed assets

required for different types of business
Type of industry

Current assets(%)

Fixed assets(%)

Hotels and restaurants

80-90
Electricity generation & distribution
70-80
Aluminum, Shipping
Iron and steel, industrial chemicals
50-60
Tea plantation
40-50
Cotton textiles, Sugar

10-20
20-30
30-40

60-70
40-50
50-60

60-70