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W O R K I N G C A P I TA L R E F E R S T O T H O S E A SS E T S
W H I C H A R E R E Q U I R E D F O R T H E D AY T O D AY
W O R K I N G O F T H E C O M PA N Y.
E G : P U R C H A S E O F R AW M AT E R I A L S, PAY M E N T
O F S A L A R I E S, WA G E S, R E N T, A DV E RT I S I N G E T C
Working capital
KINDS OF WORKING CAPITAL
A. On the basis of conceptI. Gross working capitalII. Net working capitalB. On the basis of timeIII. Permanent working capitalIV. Temporary or variable working capital
I. Gross working capital
It refers to firms investment in total
current assets It requires that a firm should have
adequate investment in current assets and proper management of these assets. Their should be neither excessive nor inadequate assets and it should be responsive to the changing requirements of business which depend on the level of business.
Net working capital
It is the difference between current assets and current liabilities. When current assets is higher than current liabilities net working capital will be positive but if current liabilities exceed current assets then net working capital will result in negative.
Net working capital = current assets – current liabilities
On the basis of time
Permanent working capitalIt will remain permanently in business and
will not be returned until the business is wound up.Eg: Every business has to maintain a minimum level
of raw materials, work-in-progress, finished goods and cash balance.
Temporary or Variable working capital It is the amount of working capital required
for short periods It is intended to meet seasonal demands and
some special emergencies
Needs of working capital
For the purchase of raw materialTo pay wages and salaries.To meet selling costs such as packing,
advertising etc.To provide credit facilities to the customers.To maintain the inventories of raw material,
work-in-progress, and finished stock.
Factors affecting working capital
a. Nature of businessb. Business cycle/Operating cyclec. Seasonal variationsd. Credit policye. Availability of raw materialsf. Dividend policyg. Relation with banksh. Rapidity of turnoveri. Growth and expansion of business
DANGERS OF INADEQUATE WORKING CAPITAL
Cannot pay short-term liabilities in time Not able to get good credit facilities loose its reputation.Cannot buy requirements in bulk so it will not get
Discounts etc.Difficult to exploit favorable market conditions.Create inefficiencies.Impossible to utilize fixed assets efficiently.Rate of return on investments fall.
Operating cycle
Working capital is required because of the true gap between sales and their actual realization of cash.
Operating cycle of a Manufacturing concern
Raw materialFinished goods
Work in progress
Cash Accounts Receivables
Operating cycle (Cont…d)
Operating cycle of a Trading Firm
Cash Inventories
•Account receivables
Operating cycle (Cont…d)
Operating cycle of a Financing Firm
Cash Debtors