PRESENTATION ON

TEAM MEMBERS

ABHIRAJ BANGERA (05)

FAIZ SAYED (08)
TABASSUM NAGOTHANEKAR (34)
ABDUL K. SHAIKH (46)
SHAHBAZ TEMKER (55)
OVERVIEW
Working capital represents the value of current assets in the firm.
It converts an asset from non productive to productive one and vice versa.
It applies for all the factors of production. In every business the receipts are
uncertain where as the payments are certain.

DEFINITION
1. According to Guttmann & Dougall -
“Excess of current assets over current liabilities”.
2. According to Park & Gladson -
“The excess of current assets of a business over current items owned to employees
and others”.
PRIMARY OBJECTIVES OF WORKING CAPITAL
MANAGEMENT
ensure that sufficient cash is available for –
 Meet day to day cash flow needs.
 Pay wages and salaries when they fall due.
 Pay creditors to ensure continued supplies of goods and services.
 Pay government taxation and provider of capital – dividends and
 Ensure the long term survival of the business entity.
NEED FOR WORKING CAPITAL MANAGEMENT
 Firms differ in their requirements for the working capital.
 A firm should aim at maximizing the wealth of its shareholders.
 In its endeavor to do so, a firm should earn sufficient return from its operations.
 Earning a steady amount of profit requires successful sales activity.
 The firm has to invest enough funds in current assets for generating sales.
 Current assets are needed because sales do not convert into cash instantaneously.
 Similarly inventory cannot be converted into cash as and when the firm require.
 All the above aspects result in the funds of the firm being blocked for a certain
period. To operate the business in this period, a firm needs working capital.
WORKING CAPITAL CYCLE

 Each component of working capital has two dimensions TIME and MONEY.
 Cash flows in cycle into around and out of a business it the business’s lifeblood
and
every manager’s primary task to help keep it flowing and to use the cash flow to
generate profits.
 The shorter the period of operating cycle, the larger will be the turnover of the
TYPES OF WORKING CAPITAL
To run the organization well, it is necessary to maintain funds in the organization.
Generally, Working capital of every business firm may be of many types:
 Permanent, fixed or regular Working Capital

 Flexible or Temporary variable Working Capital

 Seasonal Working Capital or Special Working Capital

 Negative Working Capital

 Cash Working Capital and

 Balance Sheet Working Capital

PERMANENT, FIXED OR REGULAR WORKING
CAPITAL
It is minimum quantity which required to run the organization also referred as hard
care Working Capital.
If this quantity of Working capital is not maintained then the business may be greatly
handicapped in day to day working.

FLEXIBLE OR TEMPORARY WORKING CAPITAL

It is part of total Working Capital which is required by a business over and above
permanent Working Capital.
It is also called as variable Working Capital.
Since the volume of temporary Working Capital keeps on fluctuating from time to
time according to the business activities it may be financed from the short term
services.
SEASONAL WORKING CAPITAL OR SPECIAL
WORKING CAPITAL
It refers the extra Working Capital which are required due to additional demand on
some special occasions.
Additional Working Capital may also be needed on account certain abnormal
circumstances and it is termed as special Working Capital.
Thus, this type of Working Capital is needed to meet extra ordinary requirements or
contingencies.

NEGATIVE WORKING CAPITAL

Negative Working Capital is when current liabilities exceed current assets.
This position is not accurate theoretically and occur when a business firm is nearing a
crisis.
If any business concern to pay his liabilities, then it is called Negative Working Capital.
CASH WORKING CAPITAL
This Working Capital is calculated at the time shown in profit and loss account of a business.

It is the real flow of money or value at accurate time and is considered to be most realistic
approach to Working Capital.

BALANCE SHEET WORKING CAPITAL

It is that Working Capital which is calculated from the items appearing in the balance
sheet of organization.
CONCEPTS OF WORKING CAPITAL
Working Capital means the funds available for day to day operation of an enterprise.
There are two concepts of Working Capital.
(1) GROSS WORKING CAPITAL
Gross concept of Working Capital is quantitative in nature.
It represents the total of all current assets.
It is also known as circulating capital or current capital. The word current assets
means, those assets which can be converted into cash within an accounting period or
trade cycle like;
 Inventory  Trade debtors
 Loans and advances  Investments
 Cash and Bank Balance  Marketable securities
 Bills receivables

The gross concept of Working Capital is a going concern concept, because current
assets are necessary for the proper utilization of fixed assets.
(2) NET WORKING CAPITAL

Net Working Capital represents the excess of current assets over current liabilities or
the portion of current assets which is financed by long term funds.

It is known as net working capital.

Current liabilities are those usually repaid within an accounting you like;

 Account Payable / sundry creditors  Bills Payable

 Trade Advances  Outstanding Expenses
 Short Term Bonus  Bank Overdraft

The net concept of Working Capital shows the financial soundness and liquidity of a
firm. This concept creates the confidence to the creditors about the security of their
amounts.
ESTIMATING WORKING CAPITAL REQUIREMENT
For this purpose the length of cash to cash cycle is measured:

Gross operating cycle = inventory Conversion period

+
Debtors conversion Period

= (RMCP + WIPCP + FGCP) + DCP

Conversion period depends on consumption per day Inventory

DETERMINING THE SIZE OF THE WORKING
CAPITAL

It is determined on the basis of certain factors, like

 Nature of Industry  Business Cycle

 Size of Business  Growth and Expansion

 Manufacturing Cycle  Supply of Raw Materials

 Production Policy  Price Level changes

 Volume of Sales  Operating Efficiency

 Terms of purchase & Sales  Profit Margin

 Capital Structure  Profit Appropriation

 Monetary Policy
IMPORTANCE OR ADVANTAGES OF ADEQUATE
WORKING CAPITAL

 Maintains solvency of business.

 Helps in creating & maintaining goodwill.

 Helps in arranging loans from banks & others on easy and favorable terms.

 Enables a concern to avail cash discount and hence reduce cost.

 Ensures regular supply of raw materials.

 Regular payment of salaries, wages & other day to day commitment.

 Exploitation of favourable market condition.

 Enables a concern to face business crisis.

EXCESS OR INADEQUATE WC

Disadvantages of redundant or excessive WC;

 Excessive WC means idle funds which earn no profit for the business & hence,
business cannot earn a proper rate of return on its investments.

 When there is redundant WC, it may lead to unnecessary purchasing & accumulation
of inventories causing more chance of theft, waste & losses.

 Excessive WC implies excessive debtors & defective credit policy which may cause
higher incidences of bad-debts.

 It may result in overall inefficiency in org.

 When there is excessive WC, relationships with banks &other financial institutions
may not be maintained due to low rate of returns on investments, the value of share
may also fall.
DISADVANTAGES OR DANGERS OF INADEQUATE
WORKING CAPITAL

 A concern which has inadequate WC cannot pay its short term liabilities
in time. Thus, loose its reputation & shall not be able to get good credit
facilities.

 Cannot buy its requirements in bulk & cannot avail of discounts etc.

 Becomes difficult for the firm to exploit favourable market conditions &
undertake profitable projects.

 Firm cannot pay its day to day expenses and it create inefficiency.

 Becomes impossible to use efficiently fixed assets due to non availability

of liquid funds.
USES OF WORKING CAPITAL

 BUSINESS LOSSES –
Working capital is also used to finance operational losses of
companies.
On the other hand if a company is in profit then fund is created.
When cash is paid to redeem preference shares or debentures or
repurchase the debentures, the result is that Working Capital is
reduced.

 PAYMENT OF LONG TERM LOAN –

It results in the reduction of current assets. Hence, there is use of
Working Capital.
Even if a long term debt is cancelled by issuing new securities, the
cancellation is shown as a use of fund and issue of new security as a
source of fund.
 PAYMENT OF DIVIDEND IN CASH –
There are two ways of dealing with proposed dividend and the
subsequent payment.
If the proposed dividend is treated as a current liability, actual
amount will not be shown as a use of funds.

 PAYMENT OF TAXES –
Working Capital is also used to pay the taxes.
When tax is paid from Working Capital, there is reduction in
Working Capital.

 PURCHASE OF FIXED ASSETS -

The purchase of fixed assets such as plant machinery either
reduces current assets or increase current liabilities.

 PAYMENT OF LONG TERM LIABILITIES –

Payment of long term liabilities reduces working Capital.