Characteristics of Current Assets

• Short Life Span

I.e. cash balances may be held idle for a week or
two , thus a/c may have a life span of 30-60 days etc.
• Swift Transformation into other Asset forms
I.e.each CA is swiftly transformed into other asset
forms like cash is used for acquiring raw materials ,
raw materials are transformed into finished goods
and these sold on credit are convertible into A/R &
finlly into cash.
 CONSTITUENTS OF WORKING CAPITAL
• CURRENT ASSETS
 Inventory – Raw materials, Work-in-progress,
Finished goods, stores and spares
 Sundry Debtors(less provision for bad debts)
 Cash and Bank Balances
 Bills Receivables
 Short term loans and advances
 Temporary investment in surplus funds
 Prepaid Expenses
 Accrued Incomes
• CURRENT LIABILITIES
 Sundry creditors/ Accounts Payable
 Short term loans
 Provisions
 Bills Payable
 Accrued/ Outstanding Expenses
 Dividends Payable
 Bank Overdraft
 Provision for Taxation (if it does not amt to
Appropriation of profits)
 Objectives of WC
• Investing in Current Assets reducing the level
of Current Liabilities

• The company should always be in a position to

meet its current obligations

• Business Firm should manage its current

assets to the marginal return on investment
not less than the cost of capital
 Operating cycle
• It is the time duration starting from the
procurement of goods or raw material and
ending with the realisation of sales

• It is the time duration required to convert into

sales, after the conversion of resources into
inventories, into cash.
 Phases of Operating cycle
• Acquisition of resources such as raw
materials, labour, power, fuel,etc.
• Manufacturing the product – raw materials
into work-in-progress
• Work-in-progress into finished goods
• Finished products into accounts receivables
• Accounts receivable into cash
 Operating cycle of manufacturing
Organisation

Raw material Conversion Period (R)

Working Capital Conversion Period (W)
Finished goods conversion period (F)
Debt collection period (D)
Credit collection period (C)
Duration of operating cycle (O)
 OPERATING CYCLE

Duration of Operating Cycle (O) =

(R) + (W) + (F) + (D) + (T) + (C)
 Formulas
• (R) = Avg. Raw material stock x365
Total raw material consumption

• (W) = Average work-in-progress x365

Total cost of Production

• (F) = Average finished goods x365

Total cost of goods sold
• (D) = Average receivables x365
Total credit sales

• (C) = Average creditors x365

Total credit purchases

• Receivable conversion period =

Annual credit sales x 365
Accounts receivable
• Payables deferral period =
Accounts payable + Salaries, etc
___________________________ x365
Cost of sales + selling, general and admn.
Expenses

• Inventory conversion period =

Avg. inventory x365
Cost of sales

• Cash conversion cycle = operating cycle –

payables deferral period.
 TYPES OF WORKING CAPITAL

• GROSS WORKING CAPITAL

• NET WORKING CAPITAL
• PERMANENT WORKING CAPITAL
• VARIABLE WORKING CAPITAL
 PERMANENT/ FIXED WORKING CAPITAL

• There is always a minimum level of CA which

is continously required by a firm to carry on its
business operations.
• Thus , the minimum level of investment in
current assets that is required to continue the
business without interruption is referred as
permanent working capital.
 TEMPORARY/ VARIABLE WORKING
CAPITAL

• This is the amount of investment required to take care of

fluctuations in business activity or needed to meet
fluctuations in demand consequent upon changes in
production & sales as a result of seasonal changes.