WORKING 

CAPITA
L  MANAGEMENT

Sambhavi Pokhrel
Roll no. : 23
5 t h S e m e s t e r, S M S , T U

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CONTENTS
• Working Capital Position of a Company
• Inventory Management
• Accounts receivable Management
• Accounts payable Management
• Short term cash position of a company
• Measures to manage the short term cash position of a company
• Dividend Sustainability

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 WHAT IS WORKING CAPITAL?
• Working Capital is defined as the excess of current assets over current liabilities.

Working Capital = Total Current Assets – Total Current Liabilities

• Businesses require working capital :
- to pay for day-to-day operational expenses
- to pay for short-term dues
- to purchase inventory
- to cover unexpected costs
• Working capital is a measure of business’ liquidity position, operational efficiency, and
short-term financial soundness.

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 TYPES OF WORKING CAPITAL
On the • Gross Working Capital= sum of all Current Assets
basis of • Net Working Capital = Current Assets – Current Liabilities
value

• Fixed Working Capital

• Regular Working Capital (Salaries, Wages)
• Reserve Margin Working Capital (amt. kept for unforeseen
On the circumstances)
basis of • Variable Working Capital
time • Seasonal Variable Working Capital (excess capital for
seasonal demands)
• Special Variable Working Capital (excess funds for events
such as accidental fires, etc. )

Source: https://quickbooks.intuit.com/in/resources/accounting/what-is-working-capital-meaning-types-factors/
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FACTORS INFLUENCING WORKING CAPITAL
REQUIREMENTS
1. Nature of Business

2. Seasonality of Operations

3. Production and Sales Policy

4. Market Conditions

5. Supply Conditions

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RIGHT AMOUNT OF WORKING CAPITAL?
• Insufficient working capital creates the risk of insolvency.
• Insufficient cash to meet the company’s liabilities could lead to deterioration
of credit rating, forced sale of assets, bankruptcy, or liquidation.
• On the other hand, increasing working capital creates the possibility of
unnecessary and inefficient holding.
• In such cases, current assets are unproductive and management team can be
considered to be inefficient.

There is no single correct solution, but generally companies will aim to have just slightly more working capital
than they need.

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 WORKING CAPITAL MANAGEMENT

• Working Capital Management is a business strategy designed to ensure that a

company operates efficiently by monitoring and using its current assets and
liabilities to their most effective use.

• Objective: To maintain sufficient cash flow to meet its short-term operating

costs and short-term debt obligations, and maximize profitability.

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 BALANCE
Increase Sales

Growth Improve Quality

Reduce operational costs

Working Capital Increase profit margin

Management aims to
maintain a solid Make profitable investments
Working
balance in the Capital
growth , profitability Management Use resources effectively
and efficiently
and liquidity of a
business. Liquidity Profitability Make timely payments

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 Cre
nt Cash Pu dit
e r ch
a ym ase
P

Payments
Suppliers
Debtors

Ca
(Creditors)

sh
Pur
c
h as
es

supply
Credit Salaries, Wages,

Sal
Sales electricity bills,

h
etc.

Cas
Finished Raw

Us
Goods materials

ed
in

in
ed
Us

Pro
c ess Work in
ing s i ng
Progress s
r o ce
P
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 ASPECTS OF
WORKING CAPITAL MANAGEMENT

Inventory Receivables Payable Cashflow

Management Management Management Management

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 INVENTORY MANAGEMENT
• Inventory management aims to make sure that the company keeps an adequate level
of inventory to deal with ordinary operations without investing too much capital in
the asset.
• An excessive level of inventory means that an excessive amount of capital is tied to
it.
Excess holding Unsold
Obsolescence Wastage
costs Inventory

• A shortage of inventory should also be avoided, as it would determine lost sales for
the company.
Lack of raw Increased
Losing customers
materials during dependency on Lost sales
to competitors
production suppliers
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INVENTORY VALUATION
Costing methods On the basis of Updation of
Inventory data

1. FIFO method 1. Periodic Inventory System

2. LIFO method 2. Perpetual Inventory System

3. Average method

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JUST IN TIME (JIT) APPROACH
• The method of JIT enables firms to minimize the level of inventory needed to support sales.
• JIT is a strategy that aligns raw materials orders from suppliers directly with production
schedules.
• JIT aims to minimize inventory and maximize efficiency.
• This approach requires careful management; any delay could disrupt production.

Advantages:
Disadvantages:
• Reduction in holding costs
• Dependency on suppliers
• Reduced wastage of materials
• Sudden unexpected order may delay the
• Improved Quality of products
delivery of finished products to end clients.
• Improved Cash Flow
• Risk of running out of stock
• Suitable for small-scale industry

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 MINIMIZING COST APPROACH
• This approach aims to minimize the total cost of ordering and • D= Annual Demand
holding inventory. • Q= Amt. of inventory per
order
• Total cost of ordering and holding inventory: • O = Ordering cost per unit
• C= Holding cost per unit

Total annual cost of holding

= Average inventory x
Holding cost per unit(C)

Total annual cost of ordering inventory = number of Assumptions:

orders per year x Ordering Cost per unit
• Annual demand, D, is
certain and uniform
• Minimizing C with respect to Q gives . Q gives the amount of
• Lead times and delivery
inventory to order each time an order is placed. times are zero.
• There are no bulk-
buying discounts.

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RECEIVABLES MANAGEMENT
• Receivables simply means credit extended by a company to its customers.
• Motives of holding receivables: - Sales Growth – Increased Profits -Sales retention

• Receivables management aims to find a balance between the benefits and costs of
having trade receivables.
• Increased profit produced by increased sales from
Benefits
offering credit terms
• Uncollectable accounts
Costs • Late payments
• Opportunity cost of capital tied up in receivables

• Objectives: • Monitor and improve cash flow • Avoid invoice disputes

• Minimize bad debt losses • Improve customer satisfaction
• Boost sales • Help in facing competition

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RECEIVABLES MANAGEMENT
• Credit rating i.e the paying ability of the customers shall be reviewed before
agreeing to any terms and conditions.
• Any risk of non-payment or delay in receiving the payments should be
monitored continuously.
• Customer relations should be maintained.
• Terms on which credit is granted to customers should be specified, eg. Periodic
payments, etc.
• Methods of payment collection should be established.
• Implement systems to monitor receivables and collections.
• Offer cash discount to encourage early payments.

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PAYABLES MANAGEMENT
Payables mean unpaid debt to suppliers/ creditors for purchase made on credit.
• Take full advantage of creditor payment terms. 
• Carefully consider suppliers' offers of discounts for earlier payments.
• Automated payable management:
1. ​ utomatically generate purchase orders
A
2. Track goods received
3. Validate and accept invoices
4. Approve requisitions
5. Pay invoices on the right due dates
• Maintain healthy relations with suppliers.
• Select suppliers wisely.
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 WORKING CAPITAL CYCLE

Working Inventory Receivables Payables

Capital = turnover + turnover
- turnover
period period period
Cycle

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CASH FLOW MANAGEMENT
• Cash flow management is the tracking of inflow and outflow of cash in the
business.
• It is a matter of making realistic estimate of the timing and amount of any
inflows and outflows.
• Cash flow management aims to avoid:

Excessive Cash deficit Excessive Cash surplus

• Inability to meet expenses • Assets used inefficiently

• Having to resort to costly • Lost opportunity for
finance methods profitable activities

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CASH FLOW MANAGEMENT
• Use reliable cash flow forecasting.
• Keep costs under control.
• Manage working capital effectively and efficiently.
• Choose the right source of finance.

Example: A company has 120 days of inventory and receivables are due in 60 days. The payable
terms are 30 days. The company will face a cash crunch as the funds are blocked in debtors and
inventory, and the payables are due in a lesser period.
To manage the cash, the company should either speed up the realization of inventory or debtors; or
negotiate the payment terms with creditors. If the company fails to do so, it would need to borrow
funds to fill the deficit.

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SOURCES OF SHORT-TERM FINANCE
Short-term financing is used to acquire current assets and pay the current liabilities.
Sources of short-term funds:
• Trade credit : credit extended by suppliers of goods or services in the normal
course of business.
• Commercial Papers : short-term unsecured promissory note issued by firms that
have a fairly high credit rating.
• Commercial Banks: Most important source of finance. Interest has to be paid.
1. Purchase and Discount of bills
2. (Single, short-term) Bank loan
3. Bank Overdraft
4. Secured Lending

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DIVIDEND SUSTAINABILITY
• Dividend is a distribution of a portion of company’s earnings to the shareholders of the
company.
• Businesses need to be managed wisely such that their future cash flows can maintain
and grow dividend.
Why? To attract investors to the business and to create a loyal shareholding base.
• As dividend is a part of profit earned, a company must have made a profit before
dividend can be paid. Paying dividends without enough profit will result in reduction of
retained earnings.
The company may pay dividend without earning profit if it has sufficient balance in the reserve.
• It is necessary to have enough cash available to pay as dividend. Profit and cash are not
same. Dividend is paid out from the profit earned; using cash from other sources, such as
disposal of assets or borrowing to pay a dividend is irresponsible and will not be
sustainable.

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REFERENCES
• https://tallysolutions.com/us/inventory/too-much-or-too-little-stock-how-do-small-businesses-and-start-ups-can-over
come/
• https://quickbooks.intuit.com/in/resources/accounting/what-is-working-capital-meaning-types-factors/
• https://www.investopedia.com/ask/answers/100715/why-working-capital-management-important-company.asp
• https://quickbooks.intuit.com/in/resources/accounting/what-is-working-capital-meaning-types-factors/
• https://commercemates.com/objectives-of-receivable-management/ https://
cleartax.in/s/accounts-receivable-management
• https://tipalti.com/optimizing-accounts-payable-management/#:~:text=Payables%20management%20is%20the%20
handling,timing%20and%20flow%20of%20purchase
.
• https://www.entrepreneur.com/encyclopedia/payables-management
• https://www.wallstreetmojo.com/cash-management/
• CB1 CMP

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THANK YOU!

ANY
QUESTIONS?

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