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FM - Basic Concepts
FM - Basic Concepts
Research (PIMSR),
New Panvel
MMS Semester-2
Subject : Financial Management
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Working Capital :
(a) Gross Working Capital : This is the total of all items of
Current Assets
(b) Net Working Capital : This is the excess of current assets
over current liabilities (example : CA CL). This is also known
as Working Capital (WC). Net Working Capital (NWC) is
defined as excess of current assets over current liabilities. If
CA are more, then it is called NWC is positive(+) and if CL are
more, it is known as NWC is negative (-).
Example : CA = 100, CL=60, see the changes in WC below :
NWC or Working Capital (WC) = 100 60 = 40
Important points :
(a) If CA increases, WC increases = 140 60 = 80 (increased),
(b) If CA decreases, WC decreases = 80 60 = 20 (decreased),
(c) If CL increases, WC decreases = 100 50 = 50 (decreased),
(d) If CL decreases, WC increases = 100 30 = 70 (increased).
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Turnover Ratios :
(xvi) Stock Turnover Ratio (or) Inventory Turnover Ratio :
This ratio is computed by dividing the cost of goods
sold by the average stocks (inventory). (Average stock
refers to simple average of opening and closing stocks).
The ratio indicates how fast stocks are sold. A high ratio
is good form the view-point of liquidity. A low ratio
would signify that stocks do not sell fast and stay on in
the shelf or in the warehouse of the company for a long
time.
(xvii)Debtors Turnover Ratio : It is determined by dividing
the net credit sales by average debtors (including bills
receivable) outstanding during the year. A high ratio
indicative of shorter time-lag between credit sales and
cash collection. A low ratio shows that debts are not
being
collected rapidly.
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THANK YOU
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