2. Definition of working capital-
Working capital is the difference between the inflow and
outflow of funds.
Working capital= current asset- current liability
3. Current asset Current liabilities
Cash in hand
bank balance
Prepaid expenses
Bills receivable
Short term investment
Sundry debtors
Stock of raw material
Marketable securities
Bills payable
Sundry creditors
Outstanding expenses
Dividends payable
Provision for taxation
Short term loans
Bank overdraft
Proposed dividend
4. Types of working capital
Net working capital
Gross working capital
Permanent working capital
Variable working capital
Balance sheet working capital
5. Net working capital
The net working capital is the difference between
current asset and current liability
The concept of net working capital enables the firm to
determine how much amount is left for operational
requirements.
6. Gross working capital
It is the amount of funds invested in the various
components of current assets.
7. Permanent working capital
It is the minimum amount of current asset which is
needed to conduct a business even during the dullest
season of the year.
The amount varies from year to year
It represent the current assets which are required on a
continuing basis over the entire year.
8. Variable working capital
It is the additional assets which are required at
different times during the operational year.
Ex – purchasing of inventory
need of cash to tackle the unexpected
situation.
9. Balance Sheet Working Capital
Balance sheet working capital is the one which is
calculated from the items appearing in the balance
sheet.
10. Cash Working Capital
This is calculated from the items appearing in the
Profit and Loss account.
It shows the real flow of money
11. Negative working capital
This happens when current liabilities exceeds current
asset.
This condition shows that the firm is in crisis.
12. Factors determining WC
Nature of industry
Demand of industry
Cash requirements
Nature of business
Manufacturing time
Volume of sales
Terms of purchase and sales
Inventory turnover
Receivable turnover
Production schedule
13. Cont …
Business cycle
Current asset
Valuations in sales
Production cycle
Credit control
Liquidity and profitability
Inflation
Seasonal fluctuations
Profit planning and control
Repayment ability
14. Cont …
Cash reserves
Operational efficiency
Change in technology
Firm’s policy
Size of the firm
Activities of the firm
Attitude to risk
Storage time and etc,.
15. Nature of business
Working capital requirement depends upon the nature
of business carried by the firm. Normally,
manufacturing industries and trading organizations
need more working capital than in the service business
organizations. A service sector does not require any
amount of stock of goods. In service enterprises, there
are less credit transactions. But in the manufacturing
or trading firm, credit sales and advance related
transactions are in large amount. So, they need more
working capital.
16. Credit control
Credit period allowed to customers is also one of the
major factors which influence the requirement of
working capital. Longer credit period requires more
investment in debtors and hence more working capital
is needed.But, the firm which allows less credit period
to customers needs less working capital.
17. Seasonal fluctuations
In certain business, raw material is not available
throughout the year. Such business organizations have
to buy raw material in bulk during the season to
ensure an uninterrupted flow and process them during
the entire year. Thus, a huge amount is blocked in the
form of raw material inventories which gives rise to
more working capital requirements.
18. Size of the firm/business
Working capital requirement of a firm is directly
influenced by the size of its business operation. Big
business organizations require more working capital
than the small business organization. Therefore, the
size of organization is one of the major determinants
of working capital.
19. Storage time
Time needed for keeping the stock in store is called
storage period. The amount of working capital is
influenced by the storage period. If storage period is
high, a firm should keep more quantity of goods in
store and hence requires more working capital.
Similarly, if the processing time is more, then more
stock of goods must be held in store as work-in-
progress.
20. Changes in price level
Change in price level also affects the working capital
requirements. Generally, the rise in price will require
the firm to maintain large amount of working capital
as more funds will be required to maintain the sale
level of current assets.
21. Dividend policy
The dividend policy of the firm is an important
determinant of working capital. The need for working
capital can be met with the retained earning. If a firm
retains more profit and distributes lower amount of
dividend, it needs less working capital.
22. Access to money market
If a firm has good access to capital market, it can raise
loan from bank and financial institutions. It results in
minimization of need of working capital.
23. Working capital cycle
When the working capital cycle of a firm is long, it will
require larger amount of working capital. But, if
working capital cycle is short, it will need less working
capital.
24. Operating efficiency
The operating efficiency of a firm also affects
the firm's need of working capital. The operating
efficiency of the firm results in optimum utilization of
assets. The optimum utilization of assets in turn
results in more fund release for working capital.
25. Market conditions
When competition is keen, larger inventory of finished
goods is required to promptly serve the customers who
may not be inclined to wait because other
manufacturers are ready to meet their needs. Further
generous credit terms may have to be offered to attract
customers in highly competitive market . Thus ,
working capital needs tend to be high because of
greater investment in finished goods inventory and
accounts receivable .
26. If the market is strong and competition is weak , a firm
can manage with smaller inventory of finished goods
because customers can be served with delay . Further
in such situation the firm can insist on cash payment
and avoid lock up of funds in accounts receivables - it
can even ask for advance payment , partial or total .
27. Conditions of supply
The inventory of raw material, spares and stores
depends on the conditions of supply. If supply is
prompt and adequate, the firm can manage with small
inventories.
28. Risk factor
Risky business requires greater need of working capital
than the less risky business.
29. Purchases and sale method
If a firm purchases the raw materiel on credit and sells
the product on cash then less amount of working
capital will be required.
30. Quickly Sale-able Product
If the product is quickly sale-able for cash then less
amount of working capital is needed. On the other
hand greater amount will be needed.
31. Size of labor
If a large number of workers are employed in any
business then a large amount of working capital will be
needed
