WORKING CAPITAL MANAGEMENT

By

Dr.K.P.Malathi Shiri

GROSS CONCEPTAlso called as “Current Capital” or

“Circulating Capital”Earnings of a firm depend on both the fixed

and current assetsIncrease in funds leads to increase in

working capitalUsed in calculation of ROI in w.capital

CONCEPTS OF W.CAPITAL

Net Concept Working Capital = Current Assets – Current

Liabilities Used in Fund Flow Analysis Used in Ratio Analysis Identifies the firm’s capacity to meet

operating expenses and short term liabilities Reflects the Financial standing of the

business

Permanent Working Capital– Features Based on time It increases with the size of business operations Always better to finance it out of long term

funds It changes from one type of current asset to

another Is a part of the business process Temporary Working Capital- Features It is always ideal for a business that is seasonal

in nature Is not always completely utilised in business

Types of Working Capital

Permanent or fixed - types

Regular

Reserve for contingencies like;-Unprecedented price hikesDepression in business and trade cyclesUnexpected strikes, fire, strategies of

competitorsSpecial operations like new product launch,

supply to new businesses, war etc

TYPES OF WORKING CAPITAL

It is the working capital that is required by a business in addition to the permanent working capital

It is dependant on trade cycles, peak seasons like Pongal, Diwali, Christmas, New Year etc

Types of variable working capital Seasonal – sugar, cotton, timber

Special

Temporary/variable/fluctuating

Nature of the business

Length of production cycle – directly proportional

Earning capacity and divided policy

Operating cycle- (cash – raw materials- FG- B/R-cash)

Operating efficiency – optimum utilization of resources

DETERMINANTS OF WORKING CAPITAL

Price Level Changes- directly proportional

Degree of Mechanisation – inverse relationship

Growth and expansion of business – direct impact

Seasonal Variations

Capital Structure of the business

Credit Policy – Cash/ credit sales

Size of the Business

Determinants-contd….

Capacity to repay

Value of Current Assets

Means of Transport and Communication – inverse

Profit Margin – inverse relationship

Liquidity and Profitability – direct relationship

Rate of stock turnover- inverse relationship

Business cycle – high requirement in both cases

Determinants – contd….

Cash Discount

Security and Confidence

Credit Worthiness

Continuous Supply of Raw Materials

Exploitation of business opportunities

Increase in Productivity

Attractive Dividend for Market Value of shares

Meeting exigencies

MERITS OF SUFFICIENT WORKING CAPITAL

Inefficient Management Increased capital expenditure Over capitalisationCapitalization is the sum total of all long term

funds and surplus retained earnings.Capitalization = Share capital+ Debentures+

Long term Borrowings+ Reserve FundShare Capital – Equity and Preference sharesDebentures – Redeemable/ Non-Redeemable;

Convertible/ Non-ConvertibleLong term borrowings – loans, bonds, term

loans from banks, long term deposits

DEMERITS OF EXCESS CAPITAL

Low return on capital employed Improper use of funds Reflection by poor turnover ratios Imbalance of liquidity and profitability

Determinants – contd….