Working Capital

Presented by:- Ravi Thakur

1632342
B.COM-2016-19
 Introduction

 Working Capital is a financial metric which

represents operating liquidity available to a business.
 The goal of working capital management is to ensure
that the firm is able to continue its operations and
that it has sufficient cash flow to satisfy both
maturing short-term debt and upcoming operational
expenses.
 Components of Working Capital
The working capital cycle is made up of four core
components:
 Cash & Cash equivalent.
 Creditors/accounts payable.
 Inventory/stock in hand.
 Debtors/accounts receivables.
 Importance of Working Capital
 It is important we work out the right level of working capital
you will need. If the working capital is too:
 High - Business has surplus funds which are not earning a return; and
 Low - May indicate that your business is facing financial difficulties.
 To Forecast the optimum working capital requirement the
following formula may be used:
 (Estimated cost of good sold x Operating cycle) + Desired cash
balance.
 Operating Cycle, O = R + W + F + D – C
 Where, O = Duration of operating cycle.
R = Raw Material storage period.
W= Work-in-process period.
F = Finished Good Storage period.
D = Debtors collection period.
C = Creditors payment period.
 Working Capital Financing
 Fund Based:
 Cash Credit

 Overdraft

 Bills Discounting

 Working Capital Demand Loan

 Non Fund Based:

 Letter of Credit

 Bank Guarantee

 Structured Product:
 Factoring

 Commercial Paper

 Securitization of receivables

 Buyers/Supplier credit.
 Short term Borrowings v/s Credit Period

 The Company has obtained short term obligations at

around 13.6 % .
 It is very important to understand that as per the credit
policy of the company it offers around 2%( 0 days) cash
discount to its debtors for payment upfront.
 The company needs to make an effective credit policy to
ensure that the credit period offered is not at the cost of
its earnings.
 The company also needs to ensure that the implicit cost
imbedded in the credit period does not exceed market
rate of competitive goods.
 Negative Working Capital

Pros Cons
 Signifies efficient  Risk of failure to meet
working capital short-term obligation.
management.  May result in lower
credit rating because of
 Saving in interest
failure/delay in
expenses. payments.
 Less risk of Bad-debt  Bank may charge
 For eg. Automobile higher interest rate.
Industry  For eg. Steel Industry
THANK YOU