WORKING CAPITAL MANAGEMENT

FINANCIAL MANAGEMENT--II
Prof. Sitangshu Khatua
XISS, RANCHI
 WCM

• GROSS W.C.= TOTAL OF ALL CA

• NET W.C./ NET CA= CA – CL

• OBJECTIVES:
5. Liquidity Vs. Profitability
6. Conservative Vs. Aggressive
7. Static view of W.C.
8. Dynamic view of W.C.
 Conservative Aggressive
policy policy
1 Net sales Rs.50 L Rs.50L
2 Operating PBIT Rs.5 L Rs.5 L
3 Net FA Rs.10 L Rs.10 L
4 CA Rs.8 L Rs.5 L
5 Total Asset(3+4) Rs.18L Rs.15 L
6 Net Op. Profit margin= 2/1 10 % 10%
7 T.O. of FA= 1/3 5 5
8 T.O. of CA=1/4 6.25 10
9 T.O. of TA=1/5 2.78 3.33
10 Rate of Ret of TA=6*9 27.8% 33.3%
11 Ratio of CA to FA= 4/3 80% 50%
 Factors Affecting W.C.

• Nature of Business
• Nature of Raw material
• Production policy/ technology used
• Nature of finished goods
• Degree of competition in the market
• Paying habits of customers
• Degree of synchronization of cash inflow &
outflow
 Interdependence of Components of W.C.

• W.C. Policy
• What the ratio of CA to sales should be?
• What the ratio of short term to long term financing
should be?
• 3 types of policy
5. Conservative
6. Moderate
7. Aggressive
 Operating Cycle Approach to
W.C. Management
• Raw Material Storage Period
2. Annual consumption of raw material
3. Average daily consumption of raw
material= 1/360
4. Average stock of raw material=
( opening stock + closing stock)/2
4. Raw material storage period= 3/2=n1days
• Conversion Period
• Annual cost of production= Opening stock of WIP +
consumption of raw material+ other manufacturing
cost like wage, sal etc. + Depreciation – closing WIP
• Average daily cost of production=1/360
• Average stock of WIP= (opening WIP + closing WIP)/2
• Conversion Period = 3/2 = n2 days
• Finished Goods Storage Period

• Annual cost of sales= opening stock of FG+ cost of

production + excise duty+ Selling & distribution cost+
administrative cost+ financial cost – closing stock of
FG
• Average daily cost of sales= 1/360
• Average stock of FG= (opening FG + closing FG)/2
• Finished goods storage period = 3/2 = n3 days
• Average Collection Period (ACP)
1.Annual credit sales of the company
2. Average daily credit sales = 1/360
3. Average balance of Sundry Debtors
= ( opening balance + closing balance of AR)/2
4. ACP= 3/2 = n4 days

GROSS OPERATING CYCLE = ( n1 + n2 + n3 + n4 ) days

• Average Payment Period (APP)
2. Annual credit purchase made by the company
3. Average daily credit purchases= 1/360
4. Average balance of Sundry Creditors
( opening balance + closing balance of AP)/2
4. APP = 3/2 = n5 days

NET OPERATING CYCLE=( n1 + n2 + n3 + n4 – n5)days