Chevalier T Thomas Elizabeth College for Women

Working capital management

- Bhagyashree S. Wanle

Assistant Professor

Chevalier T Thomas Elizabeth College for Women

CONTENTS

� Working capital – Meaning

� Classification of Working capital

� Need for Working capital

� Operating Cycle

� Advantages of adequate Working capital

� Disadvantages of excessive Working capital

� Working capital management

Working capital – Meaning

� Working capital typically means the firm’s holding of current or

short – term assets such as cash, receivables, inventory and

marketable securities .

� These items are referred to as circulating capital .

� Corporate executives devote a considerable amount of attention to

the management of working capital.

Working capital - Formula

Classification of working capital

NEED FOR WORKING CAPITAL

The need of working capital arises due to the time gap between production

and realization of cash from sales .

� The purchase of raw materials and production

� Sales and realization of Cash

� Purchases of components & spares

NEED FOR WORKING CAPITAL

� Wages & Salaries

� Day to day expenses & overhead costs

� Meet the selling costs

� Provide credit facilities

� Maintain the inventories of R-M ,W-I-P, Stores , Spares and Finished

stock .

Operating Cycle

Advantages of Adequate wc

� Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

� Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.

� A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms.

� Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.

Advantages of Adequate wc

� Sufficient working capital ensures regular supply of raw materials and continuous production.

� A company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits.

� Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.

Disadvantages of excessive wc

� A concern which has inadequate working capital cannot pay its short-term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credit facilities.

� It cannot buy its requirements in bulk and cannot avail of discounts, etc.

� It becomes difficult for the firm to exploit favourable market conditions and undertake profitable projects due to lack of working capital

� The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business.

� It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds.

� The rate of return on investments also falls with the shortage of working capital.

Working capital management

� Working Capital Management (WCM) refers to all the strategies

adopted by the company to manage the relationship between its short

term assets and short term liabilities with the objective to ensure that

it continues with its operations and meet its debt obligations when

they fall due.

Working capital management

Inventory

Management

Creditors

ManagementDebtors

Management

Bibliography

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• Working Capital Management – V.K.Bhalla

• Working Capital Management and Finance – R.K.Gupta & Himanshu Gupta

• Working Capital Management – Dr.L.Natrajan