WORKING CAPITAL.pptx Working Capital Introduction

Working Capital Introduction

1. Working capital refers to the circulating capital required to meet the day to day operations of a business firm. According to Weston & Brigham - “working capital refers to a firm’s investment in short term assets, such as cash amounts receivables, inventories etc. W.C = CA - CL

2. Working capital management refers to those procedures that ensure the effective operation of the company with the best utilization of business current assets and liabilities. Working capital management is a business strategy designed to ensure that a company operates efficiently by monitoring and using its current assets and liabilities to the best effect.

3. Gross working capital:- it refers to the firm’s investment in total current or circulating assets. Net working capital:- the term “net working capital” has been defined in two different ways: It is the excess of current assets over current liabilities. It is that portion of a firm’s current assets which is financed by long-term funds

4. CLASSIFICATION OF WORKING CAPITAL PERMANENT WORKING CAPITAL This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. Permanent working capital is that portion of working capital that is expected to generate on a consistent and uninterrupted.

5. Permanent working capital It’s the minimum capital to maintain in order to meet operational levels. Fixed working capital. Independent of variable factors. Stable in nature. Financed through long term funds. Categorised into regular working capital and reserve working capital.

6. Temporary working capital The amount of such working capital keeps on fluctuating from time to time on the basis of business activities In other words, it represents additional current assets required at different times during the operating year. For example, extra inventory has to be maintained to support sales during peak sales period

7. Temporary working capital It’s the additional working capital to permanent working capital. Variable working capital. Dependent on variable factors. Sometimes increase/decreases (fluctuates from time to time) in nature. Financed through short term funds. Categorised into seasonal working capital and special working capital.

8. Sources of Working Capital Short term bank loan :--it is a big source of WC. Usually firms finance through STBL to meet the need of variable WC and need in excess of FWC. Commercial banks give bank O/D, cash credit etc. Non bank short term loan: relatives, bankers, govt. Institute are the non bank S.T. Loan Internal source: one of the main sources w. Cap for a firm in internal sources. This is also called self-financing. Long term sources (LTS): sometimes W. Cap is financed through LTS. Usually fixed working capital are share, debenture LT loan etc.

9. Money lenders: when firms can’t finance short-term need of WC from anywhere, they take loan form moneylenders. Trade credit: when firms purchase on credit & pay the money according to credit term, it is called trade credit. Normally trade credit is used as a source of variable WC Selling out excess of fixed asset: if any fixed asset is considered as extra than need, then that idle fixed asset is sold for working capital. Other than the above sources, firms finances their working capital though paying debts in late & accrual etc. Collect money/receivable in the earliest time, pay as late as possible.

10. Factors affecting working capital FACTORS AFFECTING WORKING CAPITAL

11. INTERNAL FACTORS 1. Nature and size of the business 2. Firm’s production policy 3. Firm’s credit policy: 4. Availability of credit: 5. Growth and expansion of business: 6. Profit margin and dividend policy: 7. Operating efficiency of the firm: 8. Co-ordinating activities in firm:

12. EXTERNAL FACTORS 1. Business fluctuations 2. Changes in the technology 3. Import policy 4. Infrastructural facilities 5. Taxation policy

13. advantages of maintaining adequate amount of working capital 1. Solvency of the business 2. Goodwill 3. Easy loans 4. Cash discounts 5. Regular supply of raw materials 6. Regular payment of salaries, wages and other day-to-day commitments

14. 7. Exploitation of favourable market conditions. 8. Ability to face crisis 9. Quick and regular return on investments. 10. High morale

15. estimation of working capital The following points highlight the top five methods for estimating working capital requirements, 1. Percentage of sales method 2. Regression analysis method 3. Cash forecasting method 4. Operating cycle method 5. Projected balance sheet method.

16. Operating Cycle Operating cycle is an important concept in management of cash and management of working capital. The operating cycle of a company consists of time period between the procurement of inventory and the collection of cash from receivables. The operating cycle is the length of time between the company’s outlay on raw materials, wages and other expenses and inflow of cash from sale of goods.

17. The operating cycle reveals the time that elapses between outlay of cash and inflow of cash. Quicker the operating cycle less amount of investment in working capital is needed and it improves the profitability. The duration of the operating cycle depends on the nature of industry and the efficiency in working capital management

18. According to I. M. Pandey , “operating cycle is the time duration involved in the acquisition of resources, conversion of raw materials into work- in-process into finished goods, conversion of finished goods into sales and collection of sales.”

19. Thus, operating cycle of a manufacturing enterprise involves three phases: 1. Acquisition of resources such as raw material, labour, power and fuel etc. 2. Manufacture of the product which includes conversion of raw material into work-in-progress into finished goods. 3. Sale of the product either for cash or on credit. Credit sales create account receivable for collection.