Working

Capital
Managemen
t
 WORKING CAPITAL
 Current assets – Current liabilities

 It measures how much in liquid assets a company has

available to build its business.

 A short term loan which provides money to buy earning

assets.

 Positive working capital is required to ensure that a firm is

able to continue its operations and that it has sufficient funds
to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital
involves managing inventories, accounts receivable and
payable and cash.
 WORKING CAPITAL

 Allows to avail of unexpected opportunities.

 An increase in working capital indicates that the

business has either increased current assets (that is
received cash, or other current assets) or has
decreased current liabilities, for example has paid off
some short-term creditors.
 WORKING CAPITAL MANAGEMENT
 Decisions relating to working capital and short term
financing are referred to as working capital management.
Short term financial management concerned with
decisions regarding to CA and CL.

 Management of Working capital refers to management of

CA as well as CL.

 Ifcurrent assets are less than current liabilities, an entity

has a working capital deficiency, also called a working
capital deficit.

 These involve managing the relationship between a firm's

short-term assets and its short-term liabilities.
 WORKING CAPITAL MANAGEMENT

 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.

 Businesses face ever increasing pressure on costs and

financing requirements as a result of intensified
competition on globalised markets. When trying to attain
greater efficiency, it is important not to focus exclusively
on income and expense items, but to also take into
account the capital structure, whose improvement can
free up valuable financial resources
 WORKING CAPITAL MANAGEMENT

 The fundamental principles of working capital

management are reducing the capital employed
and improving efficiency in the areas of
receivables, inventories, and payables.
 Need for Working Capital
As profits earned depend upon magnitude of sales
and they do not convert into cash instantly, thus
there is a need for working capital in the form of CA
so as to deal with the problem arising from lack of
immediate realization of cash against goods sold.

This is referred to as “Operating or Cash Cycle” .

Itis defined as “The continuing flow from cash to

suppliers, to inventory, to accounts receivable &
back into cash “.
 Need for Working Capital

Thus needs for working capital arises from cash or

operating cycle of a firm.

Which refers to length of time required to

complete the sequence of events.

Thus operating cycle creates the need for working

capital & its length in terms of time span required
to complete the cycle is the major determinant of
the firm’s working capital needs.
Concepts of Working Capital

Gross Working Capital

Net working Capital

 Constitutes of Working Capital
 CURRENT ASSETS
 Inventory
 Sundry Debtors
 Cash and Bank Balances
 Loans and advances

 CURRENT LIABILITIES
 Sundry creditors
 Short term loans
 Provisions
Characteristics of Current Assets

 Short Life Span

 Swift Transformation into other Asset forms

 Matching Principles
If a firm finances a long term asset(like machinery)
with a S-T Debt then it will have to be periodically
finance the asset which will be risky as well as
inconvenient.

 i.e. maturity of sources of financing should be

properly matched with maturity of assets being
financed.

 Thus Fixed Assets & permanent CA should be

supported with L-T sources of finance & fluctuating
CA by S-T sources.
 Operating or Cash Cycle

1. Conversion of cash into inventory

2. Conversion of inventory into Receivables

3. Conversion of Receivables into Cash

 Types of Working Capital

PERMANENT WORKING CAPITAL

VARIABLE WORKING CAPITAL

 Permanent Working Capital

 There is always a minimum level of Current Asset

which is continuously 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.
 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.