WORKING CAPITAL REQUIREMENTS

Funds Required for short term purposes for purchase of raw materials, Payment of wages

and other day to day expenses. Refers to that part of Firms capital which is

requires for financing short term or current assets such as cash, marketable securities, debtors and

inventories.Also known as revolving and circulating capital or

Short term capital.

Two Concepts of Working Capital Balance Sheet Concept Operating Cycle and Circular Flow concept

Balance Sheet conceptTwo interpretations of working capital under

Balance Sheet concept :Gross Working CapitalNet working CapitalGross Working Capital = Capital invested in

total current assets of a firm.Net Working Capital = Current assets –

Current Liabilities

Constituents of Current AssetsCash in hand and bank balances.B/RSundry debtors less provision for bad debts Inventories of stock as

Raw material Work in progress Store and spares

Finished goodsTemporary investments in surplus FundsPrepaid ExpensesAccrued income

Constituents Of Current LiabilitiesBills payable.Sundry creditors or account payable.Accrued or outstanding expenses. Short term loans, advances and deposits.Dividend payable.Bank overdraft.Provision for taxation

Importance of Gross Concept

Provide correct amount of working capitalMgmt more interested to know about total

assets.Take into consideration that increase in funds

leads to increase in working capital.

Importance of Net Concept

Indicates firms ability to meet its liabilities.Indicates the margin of protection.Indicates financial soundness of Business.Suggests the need for financing part of

working capital requirements out of permanent source of funds.

Operating Cycle Concept

Cash

Sales

Debtors

Work in Progress

Finished Goods

Raw Material

Gross Operating Cycle

Gross working capital= RMCP + WIPCP +FGCP+RCP

RMCP=Raw material conversion periodWIPCP=work in process conversion periodFGCP=Finished goods conversion periodRCP=Receivables conversion period

Net Operating Cycle period

Net operating Cycle period = Gross operating cycle period – Payable Deferral Period.

Payables Deferral Period= Avg. Payables/ Net Credit Purchases Per Day

Kinds Of Working Capital On the basis of Concept Gross Working Capital Net Working Capital

On the basis of Time Permanent or Fixed working

Temporary working Capital

Permanent Working Capital :Minimum amount of working capital which

is required to ensure effective utilizations of fixed facilities and for maintaining the circulation of current assets.

Regular working Capital is that capital which is required to carry day to day operations.

Capital above regular working capital is reserve working capital. these require for special contingencies like Strikes, rise in price etc.

Temporary Working Capital : Required to meet seasonal demand and

special exigencies.Seasonal needsSpecial working capital: launching new

product, Campaign for research

Importance Of Adequate Working CapitalSolvency of businessGoodwillEasy loansCash discountsRegular supply of raw materialRegular payment of salariesHigh morale

Factor Determining The working Capital Requirement

Nature of business.Size of businessManufacturing ProcessSeasonal VariationsWorking Capital CycleCredit policyRate of Stock Turnover

Estimation OF Working CapitalOperating Cycle Method.Forecasting Of Current asset and Current

Liabilities Method.Cash forecasting Method.Percentage of Sales method.Projected Balance Sheet Method.

Operating Cycle Method Operating Cycle is the Time Span the firm require in

purchase of raw materials, conversion of raw material in to Work in progress and finished goods, conversion of finished goods sales and in collecting cash from debtors.

• Larger the time span of operating cycle, larger the investment in current assets.

• Time period of each stage of operating cycle is estimated and then working capital needed in each stage is computed on the basis of cost of each of them

Factors Considered while forecasting of Working Capital:

Cost of raw materials ,wages and overheads.Period during which raw material remain in

store before it is issued for production purpose.Period of production cycle.Period during which finished goods is stored

before sale.Period of credit allowed to debtors and

period of credit allowed.Time lag in payment of wages and

overheads.Minimum cash balanced required to be

maintained

Forecasting of current assets and current liabilities:

• Acc to this method, an estimate is made of forthcoming periods current assets and current liabilities on the basis of factors like past experience, credit policy, stock policy and payment policy of previous years.

• Such estimate is made for each current assets on basis of each month then monthly requirements are converted in to yearly requirements of current assets.

• The estimate amount of current liabilities is deducted from this amount in order to estimate the requirement of working capital.

• A certain percentage of contingencies may also be added to this amount.

Cash Forecasting MethodEstimate is made of cash receipts and

cash payments for the next period.Estimate cash receipt are added to the

amount of working capital which exists in beginning of the year and estimate cash payment are deducted from this amount.

The difference will be amount of working capital.

Percentage of sales methodCertain key ratios based on past years

information are established.Ratio of sales to raw materialSales to semi finished goods stock.Sales to finished goods stockSales to debtors Sales to cash balance After this sales for next year will be

estimated and requirement of working capital will be

determined on the basis of these ratios.

Projected Balance Sheet Method

• An estimate is made of assets and liabilities for a future date and projected balance sheet is prepared for that future date.

• The diff. in current assets and current liabilities shown in projected balance sheet will be amount of working capital.

CONCLUSIONWorking Capital is the life-blood of every

business organization. WC is very essential for every

business organization without it no business enterprise

can survive in the market.

Thank You