Working

Capital
Management
Operating & Cash
Conversion Cycle

Name:
Aanchal Mahajan 202022027
Devansh Singh 202032070
Jatin Gupta 202012057
Working capital

• Gross Working Capital: Capital invested in total current assets

GWC = CA
• Net Working Capital: Excess of current assets over the current
liability
NWC = CA - CL
 Working Capital

Current Assets Current Liability

Cash in hand Cash at bank

Bills Payable

Bills receivables Sundry debtors

Sundry
Creditors

Short term loans Advances Inventories

Outstanding
Expenses

Prepaid
Accrued Income Short term loans and
expenses
Advances

Dividend
payable

Bank overdraft

Provision for
Taxation
Needs of Working Capital

• Purchase of raw materials and spares

• Payment of wages and salary
• Day-to-Day expenses
• Provide credit obligations
Factors Determining Working Capital Requirements

• Nature of business • Availability of raw materials

• Earning Capacity
• Production cycle
• Business cycle
• Production policy
• Credit policy
• Growth and expansion
Working Capital – A Crucial Decision

• A signal of a company’s operating liquidity

• A measure of future credit-worthiness
• Enhance goodwill
Operating cycle

• Operating cycle consists of the following important stages:

• 1. Raw Material and Storage Stage
• 2. Work in Process Stage
• 3. Finished Goods Stage
• 4. Debtors Collection Stage
• 5. Creditors Payment Period Stage
Operating cycle

Raw
Cash
material

Accounts Work in
receivables progress

Finished
sales
good
 Formulas:

• Inventory turnover ratio = COGS/ Average inventory

• Average inventory period = days per year/ Inventory turnover
• Receivable turnover ratio = Credit sales/ Average Receivables
• Average receivables period = days per year/ Receivable turnover
• Accounts Payable turnover ratio = COGS/ Average Payables
• Average payable period = days per year/ Account payables turnover
Formulas:

• Operating Cycle
= Average Inventory period + Average receivables

• Cash Cycle
= Operating cycle – Average payable period
Example:

Rs. Millions
2012 2013
Inventory 15,547 12,625
Receivables 20,113 18,729
Payables 14,969 14,417
Sales 65,875 55,656
Cost of goods sold 47,852 41,454
Inventory turnover ratio = COGS/ Average Inventory
= 41,454 = 2.94

(15,547+12,625)/2

Average inventory period = days per year/ Inventory turnover

= 365 = 124.03 days
2.94

Receivable turnover ratio = Credit sales/ Average Receivables

= 55,656 = 2.87
(20,113 + 18,729)/2
Average receivables period = days per year/ Receivable turnover
= 365 = 127.37 days
2.86

Accounts Payable turnover ratio = COGS/ Average Payables

= 41,454 = 2.82
(14,969 + 14,417)/2

Average payable period = days per year/ Account payables turnover

= 365 = 129.37 days
2.82
Operating Cycle
= Average Inventory period + Average receivables
= 124.03 + 127.37
= 251.39 days

Cash Cycle
= Operating cycle – Average payable period
= 251.39 – 129.37
= 122.02 days
Thank You