Working

Capital

Management
 Meaning of working capital
(WC)
Funds required for short term
purposes or day to day expenses
are working capital.
WC refers to part of firm’s capital
reqd. for financing short term or
current assets
also known as revolving or short
term capital or circulating capital.
 Concepts of Working Capital
 Balance sheet concept.
 Two interpretations of W.C. under this concept
are:-
 gross working capital:-
 capital invested in total current assets of an
enterprise.
 gross concept sometimes preferred over
networking concept due to:-
a). enables enterprise to provide correct amount
of WC at the right time.
b). every management is interested in total
current assets with which it has to operate
than the sources.
c). gross concepts takes into considerations that
every increase in the funds would increase the
working capital.
 Importance of Net Working
Capital
 It is a qualitative concept which
indicates firm’s ability to meet its
operating expenses and short term
liabilities.
 It indicates the margin of protection
available to the short term creditors.
 Indicator of financial soundness of an
enterprise.
 Net WC is refered to as working
capital.
Operating cycle or circular flow
concept

 Start with raw material.

 Raw material -> work in progress ->
finished goods ->
 Sales -> debtors -> Cash -> raw
material.
 This is a cycle.
 CLASSIFICATION OF WC:-

WC may be classified in two ways:-

 On the basis of concept
- gross working capital
- net working capital
 On the basis of time
- permanent or fixed WC
a). regular WC
b). reserve WC
- temporary or variable WC
a). seasonal WC
b). special WC
 IMPORTANCE OR ADVANTAGES
OF ADEQUATE WC:-

 Maintains solvency of business.

 Helps in creating & maintaining goodwill.
 Helps in arranging loans from banks & others on
easy and
favourable terms.
 Enables a concern to avail cash discount and
hence reduce
cost.
 Ensures regular supply of raw materials.
 Regular payment of salaries, wages & other day
to day
commitment.
 Exploitation of favourable market condition.
 Enables a concern to face business crisis.
 EXCESS OR INADEQUATE WC:-

Disadvantages of redundant or excessive WC:-

 Excessive WC means idle funds which earn no
profit for the business & hence, business cannot
earn a proper rate of return on its investments.
 When there is redundant WC, it may lead to
unnecessary purchasing & accumulation of
inventories causing more chance of theft, waste
& losses.
 Excessive WC implies excessive debtors &
defective credit policy which may cause higher
incidences of bad-debts.
 It may result in overall inefficiency in org.
 When there is excessive WC, relationships with
banks &other financial institutions may not be
maintained due to low rate of returns on
 DISADVANTAGES OR DANGERS
OF INADEQUATE WC:-
A concern which has inadequate WC
cannot pay its short term liabilities in time.
Thus, loose its reputation & shall not be
able to get good credit facilities.
 Cannot buy its requirements in bulk &
cannot avail of discounts etc.
 Becomes difficult for the firm to exploit
favourable market conditions & undertake
profitable projects.
 Firm cannot pay its day to day expenses
and it create inefficiency.
 Becomes impossible to use efficiently fixed
assets due to non availability of liquid
funds.
 THE NEED OR OBJECTS OF
WC:-

WC is needed for the following purposes:-

 For the purchase of raw material.
 To pay wages & salaries.
 To incur day to day expenses and
overhead costs.
 To meet selling costs.
 To provide credit facilities to the customer.
 To maintain the inventories of raw
material, work in progress, stores and
spares and finished stock.
 ANALYSIS OF WC

Funds Working
Ratio Flow Capital
Analysis Analysis Budget
 Ratio Analysis

It is a simple arithmetical expression of one

number to another. The technique of ratio
analysis can be employed for measuring short
term liquidity or working capital position of the
firm. The following ratios may be calculated for
this purpose:-
 Current ratio.
 Acid test ratio.
 Absolute liquid ratio.
 Inventory turnover ratio.
 Receivables turnover ratio.
 Payables turnover ratio.
 Working capital turnover ratio.
 Working capital leverage.
 Ratio of current liabilities to tangible net worth.
 FUNDS FLOW ANALYSIS

 Fund flow analysis is a technical device

designated to study the sources from
which additional funds were derived and
the use to which these sources were put. It
is an effective management tool to study
changes in the financial position (WC) of a
business enterprise between beginning
and ending financial statements. Funds
flow analysis consists of:-
 Preparingschedules of changes in WC.
 Statement of sources and application of funds.
 WORKING CAPITAL BUDGET

Budget is a financial or quantitative expression

of business plans & policies to be pursued in the
future period of time. WC budget as a part of total
budgeting process of a business is prepared
estimating future long term & short term WC
capital needs & sources to finance them & then
comparing the budgeted figures with the actual
performance for calculating variances. The
successful implementation of WC budget involves
the preparing of separate budgets for various
elements of WC such as cash inventories and
receivables etc. The objectives of a WC budget is
to ensure availability of funds as and when
needed and to ensure effective utilization of
 References

 www.wikipedia.com
 www.google.co.in
 www.investopedia.com
Thank You…….