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    Unit V: Working Capital Management

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    Devyansh Gupta
    [1] The document discusses concepts related to working capital management including gross working capital, net working capital, operating cycle, inventory conversion period, debtors conversion period, and gross operating cycle. [2] It explains that working capital management involves determining current assets and financing methods. The objectives are to maintain the operating cycle, mitigate costs, and maximize returns on current assets. [3] An adequate amount of working capital provides benefits like increased goodwill and debt capacity, while excessive working capital can cause issues like profit reduction and managerial inefficiency.

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    Unit V: Working Capital Management

    Uploaded by

    Devyansh Gupta
    33 views28 pages
    [1] The document discusses concepts related to working capital management including gross working capital, net working capital, operating cycle, inventory conversion period, debtors conversion period, and gross operating cycle. [2] It explains that working capital management involves determining current assets and financing methods. The objectives are to maintain the operating cycle, mitigate costs, and maximize returns on current assets. [3] An adequate amount of working capital provides benefits like increased goodwill and debt capacity, while excessive working capital can cause issues like profit reduction and managerial inefficiency.

    Original Title

    Lecture 30 Working Capital Management

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    [1] The document discusses concepts related to working capital management including gross working capital, net working capital, operating cycle, inventory conversion period, debtors conversion period, and gross operating cycle. [2] It explains that working capital management involves determining current assets and financing methods. The objectives are to maintain the operating cycle, mitigate costs, and maximize returns on current assets. [3] An adequate amount of working capital provides benefits like increased goodwill and debt capacity, while excessive working capital can cause issues like profit reduction and managerial inefficiency.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    33 views28 pages

    Unit V: Working Capital Management

    Uploaded by

    Devyansh Gupta
    [1] The document discusses concepts related to working capital management including gross working capital, net working capital, operating cycle, inventory conversion period, debtors conversion period, and gross operating cycle. [2] It explains that working capital management involves determining current assets and financing methods. The objectives are to maintain the operating cycle, mitigate costs, and maximize returns on current assets. [3] An adequate amount of working capital provides benefits like increased goodwill and debt capacity, while excessive working capital can cause issues like profit reduction and managerial inefficiency.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 28

    UNIT V

    Working Capital
    Management
    ………………………………contd.

    .
    Unit VI
    Working Capital Management : Concept and Significance,
    Financing of working capital needs,
    Estimation of working capital requirement, Approaches for
    working capital management, Management
    of cash, receivable and inventory
    Outcome

    • Appraise the concept of working capital


    management and analyze the concept operating
    cycle.
    News Analysis
    Working Capital

    Working capital management is concerned with the problems that


    arise in attempting to manage the current assets and current liabilities
    and the inter-relationship that exists between them.

    Two major aspects of management of working capital are:

    (1) To ascertain the current assets

    (2) To conclude the method of financing


    News Analysis Nov 22,2021
    Concept of Working Capital

    Gross working capital


    refers to the firm’s investment in current assets or sum of current
    assets. Current assets are the assets which can be converted into
    cash within an accounting year and include cash, short term
    securities, debtors, bills receivables and stock.
    Contd….
    Net working capital
    refers to the difference between current assets and current liabilities.
    Current liabilities are those claims of outsiders which are expected to
    mature for payment within an accounting year and include creditors,
    bills payable and outstanding expenses.

    Net working capital can be positive or negative. A positive net working


    capital will arise when current assets exceed current liabilities. A
    negative net working capital occurs when current liabilities are in
    excess of current assets.
    MCQ

    ____________ is the length of time between the firm’s


    actual cash expenditure and its own cash receipt.

    a) Net operating cycle

    b) Cash conversion cycle

    c) Working capital cycle

    d) Gross operating cycle


    Answer
    a) Net operating cycle
    Working Capital Structure
    Objectives of Working Capital
    Management

    • Maintaining the working capital operating cycle and to


    ensure its smooth operation

    • Mitigating the cost of capital

    • Maximizing the return on current asset investments


    Working Capital Determinants
    1) Nature of the business

    2) Market and demand condition

    3) Technology and manufacturing policy

    4) Credit policy

    5) Availability of credit from suppliers

    6) Operating efficiency

    7) Price level changes


    MCQ
    _______________ refers to the length of time allowed by a
    firm for its customers to make payment for their purchases.

    a) Holding period

    b) Pay-back period

    c) Average collection period

    d) Credit period
    Answer
    d) Credit period
    Significance of working Capital(Adequate)
    • 1. Increase in Goodwill and Debt Capacity
    • 2. Cash Discount
    • 3. Payment of Dividend
    • 4. Exploitation of Favourable Opportunities
    • 5. Regular availability of Raw material
    • 6. Optimum use of fixed assets
    • 7. Meeting unpredictable events
    • 8. High self esteem
    Disadvantages of Excessive working Capital

    1. Misuse of funds
    2. Reduction in profitability
    3. Increase in the amount of bad debts
    4. Managerial Efficiency
    5. Unrest among shareholders
    6. Negative Impact on Profits
    7. Speculative Transactions
    Operating cycle

    Operating cycle is the time duration required to convert sales, after the
    conversion of resources into inventories, into cash. The operating cycle
    of a manufacturing company involves three phases:

    1)Acquisition of resources

    2)Manufacture of the product

    3)Sale of the product


    Length of Operating Cycle
    The length of the operating cycle of a manufacturing firm can be defined
    as the sum of inventory conversion period (ICP) and debtor’s
    conversion period (DCP).

    The inventory conversion period (ICP) is the total time


    needed for producing and selling the product. Typically it includes:
    a)Raw material conversion period (RMCP)
    b)WIP conversion period (WIPCP)
    c)Finished goods conversion period (FGCP)
    Contd….
    Debtors (receivables) Conversion Period (DCP)
    It is the time required to collect the outstanding amount from
    customers. The total of inventory conversion period and debtors
    conversion period is referred to as gross operating cycle (GOC).
    Operating cycle of a manufacturing firm
    Gross Operating Cycle (GOC)
    The firm’s gross operating cycle (GOC) can be determined as inventory
    conversion period (ICP) plus debtors conversion period (DCP). Thus,
    GOC is given as follows:
    Gross operating cycle = Inventory conversion period + Debtors
    conversion period

    GOC = ICP +DCP


    The inventory conversion (ICP) is the sum of raw material conversion
    period (RMCP), work-in-process conversion period (WIPCP) and
    finished goods conversion period (FGCP):

    ICP = RMCP +WIPCP + FGCP


    MCQ
    Net working capital refers to
    a) total assets minus fixed assets.

    b) current assets minus current liabilities.

    c) current assets minus inventories.

    d) current assets.
    Answer
    b) current assets minus current liabilities.
    Contd…..
    Contd…..
    Contd……
    MCQ
    Increasing the credit period from 30 to 60 days, in response
    to a similar action taken by all of our competitors, would
    likely result in:

    a) an increase in the average collection period.

    b) a decrease in bad debt losses.

    c) an increase in sales.

    d) higher profits.
    Answer
    a) an increase in the average collection period.

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