1. Working Capital
Management
By CA Shubha Ganesh
Moneyshiksha
www.shubhaganesh.com
www.moneyshiksha.co.in
shubha.ganesh@gmail.com

2. LearningObjectives
 Importance of working capital in a small business
 Differentiate between long term and
short term assets
 Components of working capital
 Working capital cycle of a small business
 Managing the big three
 Identify working capital stress signals

3. Theoretically
 Working Capital is stated in two ways:
 Gross Working capital - Sum of all current
assets

 Net Working capital - Current assets less
current
liabilities

4. Practically
 Apart from one time buying land, machinery, furniture and
other fixed assets for manufacturing your firm’s products, you
will need short –term assets and short –run resources to run
the firm
This is called working capital

5. Need for Working capital
Working capital is required to ensure that a firm has sufficient
funds to pay maturing short-term debt, upcoming operational
expenses and for regular operations.

6. Current Assets
 Those assets which in ordinary course of business
will be converted to cash within one year without
losing value or without disrupting the operations
of the firm

7. The differentiator
 Time dimension
 Short term asset lose their identity very
quickly say within a year/operating cycle
 Time factor not crucial for decision
making

8. Current Assets
 Inventories
Raw material
Work in progress
Finished goods
 Sundry debtors
 Loans and advances
 Cash and bank balances
 Other current assets

9. Current Liabilities
 Current liabilities are those liabilities which are
intended at their inception, to be paid within one
year out of current assets or profits of the firm
 Sundry creditors
 Borrowings (short term)
Commercial banks
Others
 Provisions

10. Managing working capital
 This involves decisions regarding:
Stock levels
Debtor levels
Cash levels
Creditors

11. Working capital management
 Decisions regarding working capital should be taken very
carefully as they affect either:-
 Profitability of the firm
 Liquidity of the firm
 Increases or decreases the relative risk of the firm

12. Why managethem?
 Working capital management should therefore aim at striking a
balance such that there is an optimum amount of short term
assets so that there is sufficient liquidity to pay the liabilities at
minimum cost

13. Liquidity a primary concern
A company can be endowed with assets and
profitability but is short of liquidity if its assets
cannot readily be converted into cash
The key issue in working capital management is
to avoid running out of cash

14. Learning to balance
 If the size of current assets are large the comfort
zone increases and liquidity increases but profits
will go down as funds are kept idle. They have a
cost too
 If the size of current assets is too small profits will
improve but liquidity will decline and you are
exposed to technical insolvency

15. Working Capital
 Cash flow in a business is:
uncertain
asynchronous

16. Buffers
 There is a need for buffers
 To manage the mismatch
 Decouple sourcing and production
 Makes activity smooth, efficient

17. Types of capital
 Permanent
 Temporary

18. Working capitalmix
 Hedging
 Conservative
 Mix of both
• Choice will be based on trade off of risk vs. cost

19. Sourcesof workingcapital
 Bank credit
 Trade credit
 Factoring
 Commercial paper
 Cost of these funds

20. Determinantsofworkingcapitalrequirements
 Nature of business
 Time taken for production
 Availability of raw materials
 Production policy
 Credit policy
 Operating efficiency

21.  Approximate working capital required can be pre-determined

22. Determinationof working capitalrequired
 Caselet -1

23. Working capital cycle
 The daily flow of resources through a firm's short term assets and
liabilities

24. Operatingcycle
 The continuing flow from cash to suppliers to inventory, to
accounts receivable and back to cash is called the operating
cycle

26. Timeline
OG1 RG15 PI40 SG218 DG221 SI230 CP280

27. Cash flow chart
Cash
Accts. Payable
Cash Purchases
Inventory
Cash Sales
Accounts Receivable
L
L

28. Cash flow
 There is a continuous flow of cash in a business
 Cash inflows and outflows do not match
 Cash flows in and out of business from sale of
goods to purchase of inventory
 They happen in stages
 If all stages were completed instantaneously there
would be no need for working capital

29. Cash flow cycle
 The time lag between paying the suppliers and receiving
payment from customers
 The time lag between each of these is called cash cycle
Conversion of cash to inventory
Conversion of inventory to receivables
Conversion of receivables to cash

30. Cash conversioncycle

31. Exercise
 Garfield cat foods Ltd. On an average collects
debtors after 45 days, holds inventory for 75 days
and pays creditors in 30 days. It’s total spend Rs.
120 lakhs annually at constant rate. It can earn
10% if it invests this money.
 Find-cash cycle, cash turnover, minimum cash
balance and savings if inventory holding period is
45 days

32. Answer
 Cash cycle-45+75-30=90 days, 3 months
 Cash turnover-12mths/3mths=4
 Minimum working capital-120/4=Rs.30 lakhs
 New cash cycle-45+45-30=60 days, 2 months
 12/2=6
 120/6=Rs. 20 lakh
 Savings=10lakhs*10%=Rs.1 lakh

33. Thank you