WORKING CAPITAL MANAGEMENT.pptx

Finance notes

1. WORKING CAPITAL MANAGEMENT Presented By:- Vikash Barnwal

2. Introduction of working capital Working Capital :-working capital means this is the amount of cash which help to run the business. It is capital refers to firm `investment in short term assets , viz cash short-term securities ,debtors, and inventories of raw material ,work and process and finished goods Its can also regarded as that portion of the firm`s total capital, which is employed in short term operation. Simply we can say that working capital is the investment needed for carrying out day to day operations of the business smoothly.

3. Concept of working capital There are two concept of working capital. Gross working capital.(quantitative concept) Net working capital.(qualitative concept)

4. Gross working capital Total Current assets Where Current assets are the assets that can be converted into cash within an accounting year & include cash , debtors etc. Referred as “Economics Concept” since assets are employed to derive a rate of return.

5. Current assets : Current assets are the assets that can be converted into cash within an accounting year . Current Assets are:- Cash in hand and bank balances. Sundry debtors Short term loans and Advances Bills Receivables Inventories of stocks Raw material Work in progress Stores and spares Finished Goods Temporary investment of surplus goods Prepaid expenses Accrued incomes

6. Current liabilities Current liabilities which is intended to be Paid in the ordinary course of business withinn a short period of normally one accounting year . Current liabilities are :- Bills recievable Sundry creaditors Accrued and o/s expenses Short term loan and advances Dividend payable Bank o/d Provision of taxation

7. Defination of gross working capital “Working capital is the total of current assets” Working capital means current Assets :- Meed , Mallot , Field Any acquisition of funds which increase the current assets are known as Gross working capital. :- Bonneville, Baker

8. Net working capital Net working capital is the deference between the current assets to current liabilities. Working capital = C.A-C.L

9. DEFINATION OF NET WORKING CAPITAL “The excess of the current assets over the liabilities are called” , Net working capital or Qualitative method :- Lincon and sayors

10. Needs of working capital For the purchase of raw material To pay wages and salaries To incur day to day expenses and over head cost(fuel charges, power and office expenses) To provide credit facility to the customer To meet the selling costs and as packaging cost To maintain the inventories.

11. Importance of working capital Solvency of the business Raise the goodwill Easy loan Cash discounts Regular supply of raw material Regular payment of wages , salaries, and day to day expenses. Regular return on Investment

12. Kinds of working capital Fixed working capital(permanent working capital) Flactuating working capital( temporary working capital)

13. Fixed working capital Is the amount that remains more and less permanently invested as working capital in business. FLACTUATING WORKING CAPITAL Is the amount of working capital over and above the fixed minimum amount of working capital. it may fluctuating from time to time.

14. 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

15. Operating cycle CASH PURCHASE OF RAWMATERIAL RECIEPT FROM DEBTORS WORK IN PROGRESS FINISHED GOODS

16. To be continue……… Conversion of cash into raw materials Conversion of raw material into work in process Conversion of work in process into finished goods Conversion of finished goods into sundry debtors Conversion sundry debtors into cash

17. Determinants of working capital needs Nature and size of business Manufacturing cycle Business fluctuation Credit terms Growth and expansion activity Production policy

18. Method of estimating working capital Operating cycle method Balance sheet method Operating cycle method GOC :- GROSS OPERATING CYCLE GOC = R+W.I.P+F+D Where R - Raw material average storage period W- Average period of work in progress F- Finished goods average storage period D- Average Debtor collection period

19. N.o.c (net operating capital) N.O.C = G.O.C -C C –Creditors payment period. R- Average stock of raw material and stores Average Rawmaterial and stores consumption per day W- Average work-in-progress inventory Average cost of production per day F- Average finished stock inventory Average cost of goods sold per day

20. D= Average book debts Average cost goods sold per day C- Average trade creaditors Average credit purchases per day 2. Number of operating cycles in operating period N- P/O 3. Total operating annual expenses 4. R – E/N Requirement of working capital Annual Operating expenses Number of operating cycles in the operating period

21. Balance sheet method statement showing for working capital requirement Current Assets: (2)Stock of Raw material(for ….month consumption) (3)Work in process (for ….month ) (a)Direct labor (b)Raw material ©Overhead (4)Sundry debtors (for month s sales) (a)Raw material (b)Direct labor ©Overhead (5)Payments in advance (6)Balance of cash (7)Others Current Liabilities:- (1) Creaditors (for……months purchase of raw material) (2)Lag in payment of expenses….(o/s….months (3)Others(if any) Net working capital(ca- cl ) Add:-provision for contigencies total working capital required

22. Thank you