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    Working Capital Management: Col Vivek Mathur, Retd

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    sanjog kshetri
    The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities. It states that adequate working capital is needed for smooth business operations to pay expenses and purchase raw materials. The document provides an example to calculate the working capital required for a construction project based on estimated revenues, credit periods, inventory levels, and costs of materials, labor, equipment and overheads. The total working capital required for the project is calculated to be Rs. 93,28,750.

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    Working Capital Management: Col Vivek Mathur, Retd

    Uploaded by

    sanjog kshetri
    35 views10 pages
    The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities. It states that adequate working capital is needed for smooth business operations to pay expenses and purchase raw materials. The document provides an example to calculate the working capital required for a construction project based on estimated revenues, credit periods, inventory levels, and costs of materials, labor, equipment and overheads. The total working capital required for the project is calculated to be Rs. 93,28,750.

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    The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities. It states that adequate working capital is needed for smooth business operations to pay expenses and purchase raw materials. The document provides an example to calculate the working capital required for a construction project based on estimated revenues, credit periods, inventory levels, and costs of materials, labor, equipment and overheads. The total working capital required for the project is calculated to be Rs. 93,28,750.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    35 views10 pages

    Working Capital Management: Col Vivek Mathur, Retd

    Uploaded by

    sanjog kshetri
    The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities. It states that adequate working capital is needed for smooth business operations to pay expenses and purchase raw materials. The document provides an example to calculate the working capital required for a construction project based on estimated revenues, credit periods, inventory levels, and costs of materials, labor, equipment and overheads. The total working capital required for the project is calculated to be Rs. 93,28,750.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 10

    Working Capital Management

    Col Vivek Mathur, Retd


    Working Capital
    • Working capital represents the excess of current
    assets over the current liabilities.
    • Working capital includes the cash or near-cash
    assets which are required for the daily
    operations in the business.
    • Adequate working capital is required for
    ensuring regular supply of raw materials and
    other consumables, timely payment of wages
    and for meeting other short-term expenses so
    as to have smooth running of the operations in
    the business.
    Working Capital
    • Working capital measures the sort-term financial
    strength
    • A company must have sufficient working capital to meet
    the short-term financial obligations.
    • Insufficient working capital may result in difficulty in
    meeting the cash requirement for the operations in the
    business.
    • Surplus working capital reduces the profit level of the
    company as excessive working capital makes the funds
    idle.
    • Thus working capital management aims at establishing
    the optimum level of working capital for smooth
    running of the operations in the business by maintaining
    the desired liquidity and profitability of the company.
    Working Capital
    • Liquidity and profitability are inversely related as
    higher investment in current assets with lesser
    short-term borrowings increases the liquidity and
    reduces the profitability of the company
    • Lesser investment in current assets with higher
    short-term borrowings decreases the liquidity and
    increases the profitability.
    • It is essential to have a balance between liquidity
    and profitability by maintaining the satisfactory
    level of working capital with the help of working
    capital management which assists in managing the
    desired level of current assets and current liabilities
    of the company.
    Operating Cycle
    Cash

    Raw
    Debtors
    Material

    Revenue
    Stock
    Sales

    Finished Work in
    Goods Progress
    Example
    • The estimated annual revenue of a construction company
    from a project is Rs.5,10,00,000. In the project, the
    proportions of material cost, labour cost, equipment cost,
    overhead cost and profit are 37%, 23%, 16%, 14% and 10% of
    the estimated annual revenue respectively.
    • On an average two months’ credit (i.e. average time period
    between commencement of a portion of work and receipt of
    payment from owner of the project) is allowed to the owner
    of the project. The materials are purchased from material
    suppliers and equipment is hired on rental charges from the
    equipment renting company. The credit period allowed by
    material suppliers and equipment renting firm to the
    construction company is one month. On average, two and half
    months’ supply of materials is kept in stock at all the times.
    • Calculate the working capital requirement of the construction
    company for the operations in the project.
    Example
    • Annual Material Cost = 5,10,00,000 x 0.37
    = Rs.1,88,70,000
    • Materials held at construction site = 2 months
    • Materials in stock = 2.5 months
    • Credit from suppliers = 1 month
    • Working Capital Required for materials
    = (2 + 2.5 -1) x 1,88,70,000/12
    = Rs 55,03,750.
    Example
    • Annual Labour Cost = 5,10,00,000 x 0.23
    = Rs. 1,17,30,000
    • Payment of Labour required for = 2 months
    • Working Capital Required for labour
    = (2) x 1,17,30,000 /12
    = Rs 19,55,000.
    Example
    • Annual Equipment Cost = 5,10,00,000 x 0.16
    = Rs.81,60,000
    • Equipment cost required for = 2 months
    • Credit from renting company = 1 month
    • Working Capital Required for equipment
    = (2 – 1) x 81,60,000 /12
    = Rs 6,80,000.
    Example
    • Annual Overhead Cost = 5,10,00,000 x 0.14
    = Rs.71,40,000
    • Overhead required for = 2 months
    • Working Capital Required for overheads
    = (2) x 71,40,000 /12
    = Rs 11,90,000.

    Total working capital required = 55,03,750 +


    19,55,000 + 6,80,000 + 11,90,000
    = Rs .93,28,750

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