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ORKING CAPITAL

MANAGEMENT

WORKING

CAPITALMANAGEMENT

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WORKING CAPITAL

Current assets Current liabilitiesIt measures how much in liquid assets acompany has available to build itsbusiness.

A short term loan which provides moneyto buy earning assets.Allows to avail of unexpectedopportunities.

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An increase in working capital indicates that thebusiness has either increased current assets (thatis received cash, or other current assets) or hasdecreased current liabilities, for example has paidoff some short-term creditors.

WORKING CAPITAL

Positive working capital is required to ensurethat a firm is able to continue its operations andthat it has sufficient funds to satisfy bothmaturing short-term debt and upcomingoperational expenses. The management of

working capital involves managing inventories,accounts receivable and payable and cash.

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Decisions relation to working capital andshort term financing are referred to as workingcapital management.

Working Capital Management

Management of Working capital refers to

management of CA as well as CL. If current assets are less than currentliabilities, an entity has a working capitaldeficiency, also called a working capital deficit.

These involve managing the relationship bet. Afirms short term assets and its short termliabilities.

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Working Capital Management

The goal of working capital management

is to ensure that the firm is able to continue

its operations and that it has sufficient

cash flow to satisfy both maturing shortterm debt and upcoming operational

expenses.

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Operating Cycle

Also known as working capital cycle.

The time between purchase ofinventory items and their conversioninto cash.

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Operating Cycle

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Concepts of Working CapitalManagement

Gross Working capital

Net Working Capital

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a. Gross Working Capital

Total Current assets Where current assets are the

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

referred as Economic conceptsince assets are employed to derive

a rate of return.

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b. Net Working Capital

CA CL Referred as point of view of an

Accountant

It indicates liquidity position of afirm & suggests the extent to whichworking capital needs may befinanced by permanent sources of

funds.

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Kinds of Working Capital

Fixed, Regular or PermanentWorking Capital

Variable, Fluctuating, Seasonal,Temporary or Special WorkingCapital.

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Kinds of Working Capital

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

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

Thus, the minimum level ofinvestment in current assets that isrequired to continue the business

w/o interruption is referred aspermanent working capital.

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Kinds of Working Capital

b. Variable Working Capital

This is the amount of investment

required to take care of fluctuationsin demand consequent uponchanges in production & sales as aresult of seasonal changes.

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Distinction

Permanent is stable over time whereasVariable is fluctuating according toseasonal demands.

Investment in permanent portion can

be predicted with some profitabilitywhereas investment in Variable cannotbe predicted easily.

While permanent is minimuminvestment in various CA, Variable isexpected to take care for peak inbusiness activity.

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Distinction

Permanent component reflects theneed for a certain irreducible level ofCA on continuous and uninterruptedbasis, the Temporary portion isneeded to meet seasonal && otherTemporary requirements.