ORKING CAPITALORKING CAPITALMANAGEMENTMANAGEMENT

WORKING

CAPITAL

MANAGEMENT

WORKING CAPITAL

•Current assets – Current liabilities•It measures how much in liquid assets a company has available to build its business.•A short term loan which provides money to buy earning assets.•Allows to avail of unexpected opportunities.

• An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.

WORKING CAPITAL

• Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.

• Decisions relation to working capital and short term financing are referred to as working capital management.

Working Capital Management

• Management of Working capital refers to management of CA as well as CL.• If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.• These involve managing the relationship bet. A firm’s short term assets and its short term liabilities.

Working Capital Management

• The goal of working capital management is to ensure that the firm is able to continueits operations and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses.

Operating Cycle

Also known as working capital cycle. The time between purchase of

inventory items and their conversion into cash.

Operating Cycle

Concepts of Working Capital Management

• Gross Working capital• Net Working Capital

a. Gross Working Capital Total Current assets Where current assets are the

assets that can be converted into cash within an accounting year & include cash, debtors, etc.

referred as “Economic concept” since assets are employed to derive a rate of return.

b. Net Working Capital• CA – CL• Referred as ‘point of view of an

Accountant’• It indicates liquidity position of a

firm & suggests the extent to which working capital needs may be financed by permanent sources of funds.

Kinds of Working Capital

• Fixed, Regular or Permanent Working Capital

• Variable, Fluctuating, Seasonal, Temporary or Special Working Capital.

Kinds of Working Capital

a. Fixed Working Capital• The is always s a minimum level of

CA which is continuously required by a firm to carry on its business.

• Thus, the minimum level of investment in current assets that is required to continue the business w/o interruption is referred as permanent working capital.

Kinds of Working Capital

b. Variable Working Capital

•This is the amount of investment required to take care of fluctuations in demand consequent upon changes in production & sales as a result of seasonal changes.

Distinction• Permanent is stable over time whereas

Variable is fluctuating according to seasonal demands.

• Investment in permanent portion can be predicted with some profitability whereas investment in Variable cannot be predicted easily.

• While permanent is minimum investment in various CA, Variable is expected to take care for peak in business activity.

Distinction

• Permanent component reflects the need for a certain irreducible level of CA on continuous and uninterrupted basis, the Temporary portion is needed to meet seasonal && other Temporary requirements.