WORKING CAPITAL

MANAGEMENT
 MEANING
• Working capital refers to short
term funds to meet operating
expenses. It refers to the funds
which a company must possess to
finance its day to day operations.
It is concerned with the
management of the firms current
assets and current liabilities.
Constituents of Current
Assets and Current
Liabilities
• Current Assets- Inventories (Raw
materials , Work - in process,
Finished goods), Trade debtors,
Loans and advances, Investments,
Cash and bank balances
• Current Liabilities- Sundry
creditors, Trade advances, short
term Borrowings, etc
Needs and Objectives of
working Capital
• For the purchase of raw materials
• To pay wages and salaries
• To ensure day to day overhead costs such
as fuel, power and office expenses etc.
• To meet selling costs such as packaging
and advertising expenses
• To provide credit facilities to the
customers
• To maintain the inventories of raw
materials, working in process and finished
goods.
Concept of Working
Capital

There are two concepts of

working capital:
•Gross working capital
•Net working capital
Gross working capital
The total of all current assets are
termed as gross working capital or
circulating capital

Significance of Gross Working Capital

• Optimum investment in Current
Assets
• Financing of Current Assets
 Net working capital
The difference between current assets
and current liabilities is known as net
working capital.

Significance of Net Working Capital

• Maintaining liquidity
• To decide upon the extent of long term
capital in financing current assets
Kinds of Working Capital

1.Concepts based
• Gross Working Capital
• Net Working Capital
2.Time based
• Permanent or regular Working
Capital
• Temporary or Variable Working
capital
Permanent or regular
Working Capital

• The minimum level of current

assets maintained In a firm is
known as permanent or regular
working capital.
Temporary or Variable
Working capital
• Any additional working capital apart
from permanent working capital
required to support the change in
production and sales activities is
referred to as temporary or Variable
Working capital. In other words an
amount over and above the
permanent working capital is
variable working capital.
Management of working
capital
• There are three Dimensions in
Managing Working Capital
• It is concerned with the formulation
of policies with regard to
profitability, risk and liquidity.
• It is concerned with the decision
about the composition and level of
current assets.
• It is concerned with the decision
about the composition and level of
current liabilities
Operating and cash
conversion cycle
• The time that elapses between
the purchase of raw material
and the collection of cash for
sale is referred as the operating
cycle.
Need to maintain
balanced Working
Capital
For maximization of profit or
minimization of working capital cost
or to maintain balance between
liquidity and profitability there is a
need to maintain a balance in
working capital. It should not be
• Excessive or
• Inadequate
The dangers of
excessive working
capital
• It results in unnecessary
accumulation of inventories which
leads to mishandling of
inventories, waste, theft and
losses.
• It is an indication of defective
credit policy and increase in
collection period.
• It leads to managerial inefficiency.
The dangers of
inadequate working
capital
• It stagnates growth.
• Difficult to implement
production
• It leads to inefficient
utilization of fixed assets.
• It hampers the firm’s goodwill
in the market.
Factors influencing
Working Capital
The working capital needs of a
firm are influenced by numerous
factors. The important ones are:
• Nature of business
• Size of the business
• Seasonality of operations.
• Production policy
• Production Cycle Process
Factors influencing
Working Capital

• Credit policy or terms of

purchase and sales
• Business Cycle
• Growth and expansion
• Scarce availability of raw
material
Factors influencing
Working Capital
• Profit level
• Dividend policy
• Price level changes
• Operating Efficiency
• Availability of credit
Determination of required working capital

Particulars

A. Estimation of CA
1. Raw materials
2. Working-in-process
Raw materials full costs)
Direct Labour (to the extent of completed
stage)
Overheads (to the extent of completed
stage)
3 Finished goods
4 Debtors
5 Cash balance required

Total Current Assets

B. Estimation of CL
1. Creditors
2. Outstanding expenses

B. Total Current liabilities

C. Net Working Capital (A-B)

Add contingencies(% on NWC)

D. Working Capital Required

 Problem
From the following information of XYZ ltd estimate the
working capital needed to finance a level of
production of 110000 units after adding 10% safety
contingencies. The cost per unit
Particulars Amount (Rs.)
Raw Materials 78
Direct Labour 29
Overheads 58
Total Costs 165
Profit 24
Selling Price 189
Additional Information
Average Raw material in stock (one month), Average
materials in process (50% completion- ½ month),
Average Finished goods in stock (one month), Credit
allowed by supplier (one month), Credit allowed to
customers (two month(, Time lag in payment of wages
( one&½ weeks ), Time lag in payment of Overheads
expenses (one month). ¼ of the sales is on cash basis.
Cash balance is expected to be Rs.215000/-.
Working capital policies

By taking into consideration of

what should be the ratio of
current assets to sales the
policies of working capital are
Aggressive current asset policy
Moderate current asset policy
Conservative current asset
policy
Aggressive current
asset policy
• if the firm follows a highly aggressive
current asset policy, it will carry a low
level of current assets in relation to
sales. An aggressive current asset policy,
seeking to minimize the investment in
current assets, exposes the firm to
greater risk. The firm may not be able to
cope with unanticipated changes in the
market place and operating conditions.
The compensation for higher risk, of
course, is higher expected profitability.
Moderate current asset
policy
• If the firm adopts a moderate current
asset policy, a moderate level of
current assets in relation to sales will
exist. The moderate level of investment
in current assets helps keeping a
sufficient amount of resources
available for investment in business
and maintain adequate liquidity. It
results moderate level of risk for the
business.
Conservative current asset
policy
• If the firm pursues a very conservative
current asset policy, it will carry a
high level of current assets in relation
to sales. Such a policy tends to reduce
risk. The surplus current assets under
it enable the firm to cope easily with
variations in sales, production plans
etc. The reduction of risk, however, is
also accompanied by the lower
expected profitability
Thank Q