Synopsis of

WORKING CAPITAL MANAGEMENT

Introduction:- Working capital is the amount of funds
necessary to cover the cost of operating the enterprise. In simple term,
working capital is an excess of current assets over the current liabilities.
Good working capital management reveals higher returns of current
assets than the current liabilities to maintain a steady liquidity position of
a company. Otherwise, working capital is a requirement of funds to meet
the day to day working expenses. So a proper way of management of
working capital is highly essential to ensure a dynamic stability of the
financial position of an organization. There are two concepts of working
capital: gross and net. Gross working capital refers to the firm’s
investment in current assets. Current assets are the assets which can be
converted in to cash within an accounting year. Net working capital refers
to the difference between current assets and current liabilities. Current
liabilities are those claims of outsider which are expected to mature for
payment within an accounting year. A positive net working capital will
arise when current assets exceeds current liabilities. A negative net
working capital occurs when current liabilities are in excess of current
assets.

Importance of working capital in industry:– Main advantage of

maintaining adequate amount of working capital are follows- solvency of
the business, company goodwill, easy loan from bank, cash discount on
raw material purchase, regular supply of raw material, regular payment of
salaries, wages and other day to day commitments, Exploitation of
favourable market condition, ability to face crisis, quick and regular return
on investment, high morale.

Objectives:-
  Whether, NALCO has the ability to pay it’s short term obligations in
time?
 Whether, the management of NALCO is serious about the result of
working capital management?
 Whether, the changes in working capital is directly attributable to
profitability of the organization?
 Whether, the cash flow analysis indicates operating, investing and
financing activities of the organization?
 Whether, the company’s financial basis is stable on the basis of two
years balance-sheet analysis?

Estimate of working capital requirement:-

For manufacturing organisation the following factors have to be taken

into consideration while making an estimate of working capital
requirement-

 Total costs incurred on material, wages and overheads.

 The length of time for which raw materials are to remain in stores
before they are issued for production.

 The length of sales cycle during which finish goods are to be kept
waiting for sales.

 The average period of credit allowed to customer

 The amount of cash required to pat day to day expenses of the

business

 The average amount of cash required to make advance payment, if

any.

 The average credit period expected to be allowed by suppliers.

 Time lag in payment of wages and other expenses

  The length of the production cycle ,i.e. the time taken for conversion
of raw material to finish goods.

 For analysing working capital can be conducted through a number

of device, such as: Ratio analysis, Funds flow analysis, Budgeting.

Purchases payment

RMCP +WICP +FGCP

Financing of workingInventory
capital :- conversion period
The fixed proportion of working capital should be generally financed from
the fixed capital sources /long term sources while the temporary or
variable working capital requirement of a concern may be met from the
short term sources of capital.

Permanent sources of working capital- shares, debentures, public

Payable
deposits, ploughing back of profit, loan from financial institution.

Temporary sources of working capital- commercial bank, indigeneous

banker, trade creditors, instalment credit, advances, account receivable-
credit, accured expences, commercial paper. (Operating cycle o
Conclusion:-
The basic goal of working capital management is to manage the current
asset and current liabilities of a firm in such a way that a satisfactory level
of working capital is maintained i.e. is neither inadequate nor excessive.
This is so because inadequacy of working capital may lead the firm to
insolvency and excessive working capital implies idle funds which earn no
profit for the business.

BIBLIOGRAPHY
 Financial Management by I. M. Pandey.
 Working Capital Management by Hrisikesh Bhattacharya.
 Financial Management by M. Y. Khan & P. K. Jain.
 Financial Management by Prasanna Chandra.
 Financial Management by Sharma & Gupta.
 Financial Management by S. P. Jain.
 www.themanagementor.com/.../cfa/miller.htm
 http://ssrn.com/abstract=961614
 http://mpra.ub.uni-muenchen.de/4541/

Submitted By
Joseph Bita
C.I.T.E., BBSR