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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.
     d). gross concepts of WC is more useful in determining
    rate of return on investments in WC.
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 investments, the value of share
    may also fall.
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:-
   Preparing schedules 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 these resources.
References


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

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14040291 working-capital-management-finance-ppt-

  • 1. Working Capital Management
  • 2. 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.
  • 3. 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. d). gross concepts of WC is more useful in determining rate of return on investments in WC.
  • 4. 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.
  • 5. 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.
  • 6. 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
  • 7. 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.
  • 8. 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 investments, the value of share may also fall.
  • 9. 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.
  • 10. 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.
  • 11. ANALYSIS OF WC Funds Working Ratio Flow Capital Analysis Analysis Budget
  • 12. 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.
  • 13. 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:-  Preparing schedules of changes in WC.  Statement of sources and application of funds.
  • 14. 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 these resources.