The document discusses working capital, which refers to the capital required to finance short-term operating needs for current assets like cash, inventory, and debtors. It revolves quickly as current assets are converted to cash and back again. The objectives of working capital management are maintaining optimal ratios of working to fixed capital, and smooth cash flows. Factors like industry, business size, purchase/sales terms, inventory turnover, and cash needs determine working capital requirements. Working capital is classified as permanent/fixed or temporary/variable depending on time horizon, and includes seasonal or special components as needed.
The document discusses working capital, which refers to the capital required to finance short-term operating needs for current assets like cash, inventory, and debtors. It revolves quickly as current assets are converted to cash and back again. The objectives of working capital management are maintaining optimal ratios of working to fixed capital, and smooth cash flows. Factors like industry, business size, purchase/sales terms, inventory turnover, and cash needs determine working capital requirements. Working capital is classified as permanent/fixed or temporary/variable depending on time horizon, and includes seasonal or special components as needed.
The document discusses working capital, which refers to the capital required to finance short-term operating needs for current assets like cash, inventory, and debtors. It revolves quickly as current assets are converted to cash and back again. The objectives of working capital management are maintaining optimal ratios of working to fixed capital, and smooth cash flows. Factors like industry, business size, purchase/sales terms, inventory turnover, and cash needs determine working capital requirements. Working capital is classified as permanent/fixed or temporary/variable depending on time horizon, and includes seasonal or special components as needed.
The document discusses working capital, which refers to the capital required to finance short-term operating needs for current assets like cash, inventory, and debtors. It revolves quickly as current assets are converted to cash and back again. The objectives of working capital management are maintaining optimal ratios of working to fixed capital, and smooth cash flows. Factors like industry, business size, purchase/sales terms, inventory turnover, and cash needs determine working capital requirements. Working capital is classified as permanent/fixed or temporary/variable depending on time horizon, and includes seasonal or special components as needed.
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PRESENTATION
ON WORKING CAPITAL WORKING CAPITAL Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital. OBJECTIVES OF WORKING CAPITAL 1. The management wants maximum productivity and profits in the employment of capital. This is possible by striving to maintain a correct ratio between working capital and fixed capital.
2. The management has another objective and that is to maintain a
smooth and rapid flow of funds in order to enhance the efficiency of working capital or profitability of the firm.
3. If cash receipts and cash outlay synchronize, there is no need to
maintain a cash reserve. In business; it would be a miracle to have perfect coincidence and co-ordination between receipts and payments. Hence, firms must have sufficient cash reserve to meet all normal as well as abnormal cash needs. FACTORS GOVERNING WORKING CAPITAL 1. General Type of Business: A trading Company requires large working capital. Industrial concerns may require relatively lower working capital. A banking company, of course requires maximum amount of working capital. Basic and key industries, public utilities, businesses dealing in staple products, e.g., necessaries, require low working capital because they have a steady demand and continuous cash-inflow enough for current liabilities.
2. Size of the Business Unit:
The amount of working capital depends directly upon the volume of business. The greater the size of a business unit, the larger will be the requirements of working capital. 3. Terms of Purchase and Terms of Sale: Use of trade credit may lead to lower working capital, while cash purchases will demand large working capital. Similarly, credit sales will require larger working capital, while cash sales will require lower working capital.
4. Turnover of Inventories: If inventories are large and their turn-over is slow we shall require larger capital but if inventories are small and their turnover is quick we shall require lower working capital.
5. Process of Manufacture: Long period, complex and round about process of production will require larger working capital, while simple, short period process of production will require lower working capital. 6. Importance of Labour: Capital intensive industries, i.e., mechanised and automated industries, will require lower working capital, while labour intensive industries such as small-scale and cottage industries will require larger working capital.
7. Proportion of Raw Material to Total Costs:
If our raw materials are costly, we shall have larger working capital while if raw materials are cheaper and constitute a small part of the total cost of production, we shall require lower working capital.
8. Cash Requirements: If a corporation has demand for larger cash needs, we shall have larger working capital, e.g., at the time of dividend payment, taxation, interest charges, wages and salaries, we require enough cash. There is a close connection between the dividend policy and the working capital. If a company has shortage of working capital, it may have to skip payment of cash dividends or reduce the dividend rate or issue stock dividends. 9. Seasonal Variations: During the busy season, a business requires larger working capital while during the slack season a company requires lower working capital. In sugar industry the season is December to April; while in the woolen industry the season is the winter season. Usually the seasonal or variable needs of working capital are financed by temporary borrowing.
10. Banking Connections:
If the corporation has good banking connections and bank credit facilities, it may have minimum margin of regular working capital over current liabilities. But in the absence of the availability of bank finance, it should have relatively larger amount of net working capital. TYPES OF WORKING CAPITAL
WORKING CAPITAL
BASIS OF BASIS OF CONCEPT TIME
Gross Net Permanent Temporary
Working Working / Fixed / Variable Capital Capital WC WC
Seasonal Special WC WC GROSS WORKING CAPITAL Gross working capital require that a firm have adequate investment in current assets and proper management of theses asset. It should be neither excessive nor inadequate asset. If there are surplus funds they should be immediately invested, and if the funds become low and the requirement is greater the financial manager should be able to get the required finance so that the commitments of the firm can be made short notice. NET WORKING CAPITAL It is the difference between current asset and current liabilities. When current asset are higher than current liability NWC will be positive, but if current liabilities exceed current assets NWC. The current asset should as a rule maintain a ratio of 2:1 with current liabilities. NWC explain the management of financing of working capital through the financing of long-term and short term funds. NWC= Current Assets – Current Liabilities CA= cash + marketable securities + accounting receivables + notes and Bills Receivables + Inventories CL = Accounts Payable + Notes and Bills + Outstanding Expenses + Short Term Loans. DIFFERENCE BETWEEN NET WORKING CAPITAL AND GROSS WORKING CAPITAL Net Working Capital Gross Working Capital
1. NWC is the concept of qualitative 1. GWC is the concept of quantitative
nature. nature. 2. It is indicating the firm’s ability to meet 2. It is pointing out the total amount its operating expenses and current available for financing the current liability. assets. 3. It expressed as current asset minus current liability. 3. It indicating the total sum of current 4. It is concept very popular in accounting assets. system. 4. It is a concept very popular in financial 5. Net concept suitable for sole trader management. and partnership firms. 5. Gross concept suitable for companies. 6. It is very useful to find out true the financial position of a company. 6. It cannot reveal the true financial 7. Increase in bank loan cannot increase position of a company. working capital. Retained profits, sale of 7. Every increase in borrowing will fixed assets will increase net working increase the gross working capital. capital. Under net concept, no change in PERMANENT OR REGULAR WORKING CAPITAL Permanent working capital is the minimum level of current assets which is continuously required by a firm for carrying out its business activities and that cannot be converted into cash in normal course of business. Permanent working capital is either constant or it increase with the size of the business or its scale of operations.
Charactertics: Continue to exist for a longer period of time is the business activities. Constantly changes in the business from one asset to another. Grows the size or volume of business operation. TEMPORARY OR VARIABLE WORKING CAPITAL Any amount over and above the permanent level of working capital is temporary working capital. It keeps on fluctuating from time to time as per the changes in production and sales activities.
Charactertics: It is an extra working capital needed to changing production and sales activities. It is created to meet liquidity requirements.
It fluctuates according to the level of operations.
Temporary working capital is fluctuating during the operating period. It is needed for shorter period.
Two types of temporary working capital
• Seasonal working capital.
• Specific working capital.
SEASONAL WORKING CAPITAL
The capital required to meet the seasonal
demands of the enterprise is called seasonal working capital. For example, a manufacture of woolen textiles, refrigerators or coolers may need extra funds to carry on production and to accumulate stock before the sales operations. Seasonal working capital being of short-term nature, it has to be financed from short-term sources like bank loan etc. SPECIFIC WORKING CAPITAL Specific working capital is that part of working capital which is required to meet unforeseen contingencies like slump, strike, flood, war etc. Additional working capital is to be arranged to meet special exigencies such as launching of extensive marketing campaign, purchase of goods for stock in view of future increase in price etc. THANK YOU
