Working Capital Management

By :- Group B

Gopal Kumar Agarwal

Sangita Pattnaik

Shipra Kumari

Vikash Kedia

Seema Kumari

“Operating Cycle is a time duration required converted raw materials into sale”

The Length of the operating cycle of a manufacturing firm is the sum of :• Inventory Conversion Period• Debtors Conversion Period• Creditors deferral Period

Debtors

Cash

Raw MaterialWIP

Finished Goods

Sales

Raw Material Conversion Period = Raw Material Inventory

Raw Material Consumption Per Day

Working Progress Conversion Period = Work In Process Inventory

Cost Of Production Per Day

Finished Goods Conversion Period = Finished Goods Inventory

Cost Of Goods Sold

Debtors Conversion Period = Debtors

Credit Sale Per Day

Gross Operating Cycle = Inventory Conversion Period

+ Debtors Conversion Period

Operating Cycle = Gross Operating Cycle + Net Operating Cycle

Net Operating Cycle = Inventory Conversion Period +

Debtors Conversion Period + Creditors deferral Period

Creditors deferral Period = CreditorsCredit Purchase Per

Day

Net Operating Cycle = Operating Cycle – Creditors deferral period

“Working Capital is a life-blood & controlling nerve centre of a Business”. No Business can be successfully run without an adequate amount of Working Capital.

Methods of Estimating Working Capital Requirements :-• Percentage Sales Method• Regression Analysis Method• Cash Forecasting Method• Operating Cycle Method• Projected Balance Sheet Method

1. Percentage of Sales Method : This method of estimating Working

Capital is based on the assumptions that the level of

the working capital of the firm is directly related to the

sales value.

2. Regression Analysis Method : This method is based upon the

statistical technique of estimating or predicting the

unknown value of a dependent variable of a dependent

variable from the known value of an independent variable.

3. Cash Forecasting Method : This method of estimating Working

Capital requirements involves forecasting of cash receipts

& disbursements during a future period of time.

It is similar to the preparation of the Cash Budget.

4. Operating Cycle Method : This method is based upon the

operating cycle concept of working capital.

WC= Cost Of Goods Sold * Operating Cycle(days) + Desired Cash Balance

365 or 360 days

5. Projected B/S Method : Under this method, Projected balance sheet

for future date is prepared by forecasting of assets &

liabilities by following any of the methods stated above.

• Issue Of Shares• Issue Of Debentures• Retained Profits• Sales Of Fixed Assets• Terms Loans

Long Term Sources

Short Term Sources

Internal

External

• Depreciation Funds• Provision for Taxation• Accrued Expenses

• Trade Credit• Credit papers• Bank Credit• Public Deposits

It refers to the credit extended by the suppliers of goods in the normal course of business.

Commercial banks are the most important source of short term capital. The major portion of working capital loans are provided by Commercial Banks.Such as :-• Loans.• Cash Credit.• Overdrafts.• Purchasing & Discounting of Bills.

Commercial Papers represents unsecured promissory notes issued by firms to raise short term funds.

In India Reserve Bank of India introduced commercial paper in the Indian money market.