Unlocking the key concepts of working

capital: a comprehensive guide

By – Shruti Upadhyay
Roll no. - 1771
INTRODUCTION

Working Capital is a vital aspect of any business. It

represents the difference between a company's current assets
and liabilities. In this presentation, we will explore the key
concepts of working capital and how it affects a company's
financial health.
• Mathematical formula to find out the working
capital is: Current Assets-Current Liabilities
 COMPONENTS OF WORKING CAPITAL:
WORKING CAPITAL IS MADE UP OF CURRENT ASSETS AND CURRENT LIABILITIES. CURRENT ASS
1. CASH
2. INVENTORY
3. ACCOUNTS RECEIVABLES
CURRENT LIABILITIES INCLUDE:
1. ACCOUNTS PAYABLE
2. SHORT-TERM LOANS
3. ACCRUED EXPENSES
 IMPORTANCE OF WORKING CAPITAL

Effective working capital management

is crucial for a company's success. It
ensures that a company has enough
cash to meet its short term obligations
and invest in growth opportunities.
Poor management can lead to cash
flow problems and even bankruptcy.
MANAGING WORKING CAPITAL:

• There are several strategies for managing working

capital, including inventory management, accounts
receivable management, and accounts payable
management. These strategies can help a company
improve cash flow and reduce the risk of financial
distress.
CONCLUSION:
• Working capital is a critical component of a company's
financial health. Effective management can help a
company improve cash flow, reduce risk, and invest in
growth opportunities. By understanding the key concepts
of working capital, companies can make informed
decisions to improve their financial performance.
NEED FOR WORKING CAPITAL:

By Taniya Yadav
Roll No. 1157
 NEED OF WORKING CAPITAL:
• Adequate working capital is vital for maintaining business operations, meeting short-term obligations, and
seizing growth opportunities. It ensures smooth cash flow, enables inventory management, and facilitates
timely payments to suppliers. Insufficient working capital can lead to financial distress, missed
opportunities, and even business failure. Understanding and managing working capital is crucial for
sustainable business success.
• Working capital is used to fund operations and meet short-term obligations. If a company has enough
working capital, it can continue to pay its employees and suppliers and meet other obligations, such as
interest payments and taxes, even if it runs into cash flow challenges
• Working capital can also be used to fund business growth without incurring debt. If the company does
need to borrow money, demonstrating positive working capital can make it easier to qualify for loans or
other forms of credit.
OPERATING CYCLE APPROACH:

• Working capital cycle or cash cycle or operating cycle is the time duration
for conversion of cash into cash equivalents like raw materials , work in
progress , finished goods , sundry debtors , thereafter back into cash.
• It helps in the forecast, control and management of working capital.
• The duration of working capital cycle may vary depending on the nature of
business
 SEGMENTS OF CYCLE:
• Conversion of cash in raw materials
• Conversion of raw materials into work in
progress and then into finishing goods
• Conversion of finished goods into debtors
through sales
• Conversion of receivables into cash
FORMULATION:

• O = R+W+F+D-CO = Operating cycle period

• R = Raw material storage period
• W = Work in progress holding period
• F = Finished goods storage period
• D = Debtors Collection Period
• C = Credit Period availed
TYPES OF WORKING CAPITAL

BY VANSHIKA
ROLL NO. 508
• On the basis of time of its investment, working capital can be divided into two categories:

Working capital

Basis of time

Permanent/ Temporary/
Fixed working variable
capital working capital
Permanent working capital

 Permanent working capital is the minimum level of current assets which is continuously
required by a firm for carrying out its business activities and that cannot be converted
into cash in normal course of business. Permanent working capital is either constant or
increase with the size of the business or its scale of operations.

 Characteristics:
 - Continue to exist for a longer period of time is the business activities.
 - Constantly changes in the business from one asset to another.
 - Grows the size or volume of business operation
TEMPORARY WORKING CAPITAL

 Any amount over and above the permanent level of working capital is temporary working capital.
It keeps on fluctuating from time to time as per the changes in production and sales activities.

 CHARACTERISTICS:
 It is an extra working capital needed to changing production and sales activities.
 It is created to meet liquidity requirements.
 It fluctuates according to the level of operations.
GRAPHICAL REPRESENTATION OF PERMANENT AND
TEMPORARY WORKING CAPITAL:
 DETERMINANT
S OF WORKING
CAPITAL

BY- ESHIKA

ROLL NO. 169

A firm should plan its working capital in such a way, that there should neither be an
excess investment in working capital nor it should have inadequate working capital.
Inadequacy of working capital may hamper various business activities of a firm. The
following factors generally influence the requirement working capital in a firm:

Production cycle: Production cycle of

Nature of business: Working capital
requirement of a firm is basically
determined by the nature is business.
Whether a firm is a trading,
manufacturing concern or a public
utility will help finance managers to
calculate its working capital needs.
a firm can be referred as the time lag
between the purchase of raw materials
and the completion of manufacturing
process, resulting in the production of
finished goods. Longer is the
production cycle of a firm, larger is the
requirement of working capital and
vice versa.
Market Conditions: More demand of the product
will force higher level of production, and this will
require more investment in raw materials, work-in-
progress etc. Growing economy, exports or
seasonal and cyclical fluctuations in demand may
result in increase in sales.

Level of Taxes: When in an economy tax rates are

high, a significant amount of profits must be set
aside for payment as taxes to the government.
Taxes have to be paid in advance in anticipation of
profit. This will increase the working capital needs
of a firm.
  Credit policy: Credit
Credit policy
policy both relating to debtors and creditors
also has an influence on the investment in working capital of a firm.
Hence, need for working capital is influenced in following two ways:

CREDIT TERMS OFFERED BY

CREDIT POLICY FOR DEBTOR
• The credit terms and conditions on which a sale is
made, affects the level of debts in the books. A
liberal credit policy will result in huge
accumulation of book-debts and significant
amount of funds will be tied up in the form of
debtors and that too for a longer period of time. A
tight credit policy may reduce working capital
needs for book debts.
SUPPLIERS
• If credit terms offered by suppliers are liberal,
then the need for working capital will be less.
This also depends upon the goodwill or reputation
of the firm in the market. Less favorable credit
terms by supplier will force the firm to purchase
on cash basis or speedy payment schedule is
adopted. This will increase working capital needs
of the firm.
Uncertainty in the Availability of Raw Material: Whenever there is uncertainty regarding the Supply
of some raw material in future due to any reason, then purchase department of the firm will try to
purchase huge amount of material in the current period. The management will try to stock as much
material as it can stock and afford. This will result in higher investment in working capital.

Growth and Expansion Activities: If the firm is growing at a reasonable expansion strategies, then the
firm will require more investment in current assets to cope up with the increased level of sales and
business activities.

Dividend policy.: This is another appropriation of profit item which involves immediate cash outflow or
a provision thereof. Whenever a firm decides to pay dividend to the shareholder, this will lead to
payment of cash. Outflow of cash on this account will affect the availability of working capital.
 Presentation Title

Rising prices
22  Price Level Changes: Increase in price level
necessitates the use of more and more funds to sustain
existing level of sales and other business activities.
Rise in price will result in higher cash outflow for the
existing level of investment in current assets. Hence,
Higher cash outflow price rise will result in more working capital need for
the firm. A firm has to cope up with the problem of
price rise either by increasing the selling price or
making a provision of additional funds for working
capital.

More Working Capital

THANK YOU