Working Capital

Presentation by
group-8
 JAIPURIA INSTITUTE OF
MANAGEMENT
JAIPUR
 Introduction

Study of working capital is not only an
important part of financial management but also are
overall management of the business concern.



Working capital is described as the capital
which is not fixed but the more common uses of the
working capital is to consider it as the difference
between the book value of current assets and
current liabilities.
 Classification of capital

Capital

Fixed Capital Working Capital

 What is Working Capital…?

Ø Working capital means current assets.

ØWorking capital is short term capital which is

required for doing routine activities of
business.

WORKING CAPITAL MANAGEMENT

Working capital management refers to the

management of current assets and current
liabilities.
 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
 Conceptually:

Net
Working
Capital
 Working Capital Concepts

Gross Working Capital

total current assets of the firm

GWC = CA

Net Working Capital

Current Assets – Current
Liabilities
NWC = CA - CL
 Component of Working Capital

Working Capital

Current Assets Current Liability

Cash Bills payable

Bank Sundry Creditors

Bills Receivable Outstanding Expenses

Debtors Short term loans and advances

Stock Dividend Payable

Prepaid expenses Bank Overdraft

Accrued Income
Provision for Taxation
 Classification of Working Capital

WORKING CAPITAL

PERMANENT TEMPORARY
WORKING CAPITAL SEMI VARIABLE
WORKING CAPITAL WORKING CAPITAL

SEASONAL WORKING CAPITAL SPECIAL WORKING CAPITAL

Permanent Working
Capital
Working Capital

Permanent Working Capital

Amount of

Time
Temporary Working Capital

The amount of current assets that varies with



seasonal requirements.

Temporary current assets

AMOUNT

Permanent current assets

TIME
 Semi Variable Working
Capital
Working Capital
Amount of

Time
 Why Working Capital is required ?

1.Purchase of raw material & spares

2.
3.Payment of wages & salary
4.
5.Day to day expenses
6.
7.Provide credit obligations
ADVANTAGES OF ADEQUATE
WC:-


Maintains solvency of business.

Helps in creating & maintaining goodwill.
Helps in arranging loans from banks & others on easy
and favorable terms.
Ensures regular supply of raw materials.
Regular payment of salaries, wages & other day to day
commitment.
 DISADVANTAGES OF EXCESS OR
INADEQUATE WC:-


no profit for the business & no proper rate of return on its
investments.

lead to unnecessary purchasing & accumulation of
inventories .

Excessive WC implies excessive debtors & defective credit
policy which may cause higher incidences of bad-debts.

It may result in overall inefficiency in org.

 HOW TO ANALYSIS WC OF ANY
COMPANY

Funds Working
Ratio Flow Capital
Analysis Analysis Budget

Current ratio.
Acid test ratio.
Absolute liquid
ratio.
Inventory turnover
ratio.
 Factors Determining WC

Factors:
1 . Nature of Business
3 . Production Cycle
5 . Business cycle
7 . Credit Policy
9 . Growth and Expansion
11 . Availability of raw materials
13 . Production Policy :
14 . Earning Capacity :
10.
 Operating
cycle

Operating cycle consists of

five Phases : -
I. Conversion of cash in to Raw materials.

II. Conversation of raw material in to work-in-process.

III. Conversion work in process in to finished goods.

IV. Conversion of finished goods in to receivables.

V. Conversion of Receivables in to cash

Operating cycle:
What group-8 did in his project