Kamal Kant Sharma MBA 02313703920 FM

Kamal kant sharma
MBA
02313703920
FM
Working capital Introduction
 Working capital typically means the firm’s holding of

current or short-term assets such as cash, receivables,
inventory and marketable securities.
 These items are also referred to as circulating capital
 Corporate executives devote a considerable amount of
attention to the management of working capital.
Definition of Working Capital
Working Capital refers to that part of the firm’s capital,
which is required for financing short-term or current
assets such a 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.
Definition of working capital-
Working capital is the difference between the inflow
and outflow of funds.
Working capital= current asset- current liability
Working Capital is a short terms finance required
to
meet regular expenses.
•Current asset Current liabilities
 Cash in hand  Bills payable
 bank balance  Sundry creditors
 Prepaid expenses  Outstanding expenses
 Bills receivable  Dividends payable
 Short term investment  Provision for taxation
 Sundry debtors  Short term loans
 Stock of raw material  Bank overdraft
 Marketable securities  Proposed dividend
TYPES OF WORKING CAPITAL
WORKING CAPITAL
BASIS OF BASIS OF
TIME
CONCEPT
Gross Net Permanent Temporary
Workin Workin / Fixed / Variable
g g WC WC
Capital Capital
Seasonal Special
WC WC
Regular Reserve
WC WC
Net working capital
 The net working capital is the difference between
current asset and current liability
 The concept of net working capital enables the firm

to determine how much amount is left for
operational requirements.
Gross working capital
 It is the amount of funds invested in the
various components of current assets.
Permanent working capital
 It is the minimum amount of current asset which is
needed to conduct a business even during the
dullest season of the year.
 The amount varies from year to year
 It represent the current assets which are required on

a continuing basis over the entire year.
Factors determining WC
 Nature of industry
 Demand of industry
 Cash requirements
 Nature of business
 Manufacturing time
 Volume of sales
 Terms of purchase and sales
 Inventory turnover
 Receivable turnover
 Production schedule
Current asset policy
 Flexible policy
 The investment in current asset is very high.
 The firm maintains huge cash and marketable
securities
 Grants generous credits
 Restrictive policy
 The investment in current asset is low
 Firm keeps small option in cash and marketable
securities
 Offers stiff terms of credit which leads to low level
of debtors
Current asset finance policy
 Strategy A: Long term financing is used to meet fixed
assets requirements as well as peak working capital
requirements.
 Strategy B: Long term financing is used to meet fixed
asset requirements, permanent working capital.
 Strategy C: Long term financing is used to meet fixed
asset requirements and permanent working capital
requirements. Short term financing is used to meet
fluctuating working capital requirements
Operating cycle
 The operating cycle is the amount of time it takes for a
company to turn cash used to purchase inventory
into cash once again. This number is calculated by
adding the age of inventory (the number of days that
inventory is held prior to sale) with the collection
period (the number of days required to collect
receivables). A company with a short operating cycle
is able to quickly recover its investment. A company
with a long operating cycle will have less cash
available to meet any short-term needs, which can
result in increased borrowing and interest expense.
Cash Cycle
 Usually a company acquires inventory on credit, which
results in accounts payable. A company can also sell
products on credit, which results in accounts
receivable. Cash, therefore, is not involved until the
company pays the accounts payable and collects
accounts receivable. So the cash conversion cycle
measures the time between outlay of cash and cash
recovery.
The operating cycle is the time
period from inventory purchase
until the receipt of cash.
 The cash cycle is the time period from when

cash is paid out, to when cash is received.
PROFORMA - WORKING CAPTIAL ESTIMATES
1. TRADING CONCERN
STATEMENT OF WORKING CAPITAL REQUIREMENTS
Amount (Rs.)
Current Assets ----

(i) Cash ----
----
(ii) Receivables ( For…..Month’s Sales)----
----
(iii) Stocks ( For……Month’s Sales)-----
(iv) Advance Payments if any ----
Less -----_
: Current Liabilities
xxx
(i) Creditors (For….. Month’s Purchases)- -----
(ii) Lag in payment of expenses
WORKING CAPITAL ( CA – CL )
NET WORKING CAPITAL REQUIRED XXX
Add : Provision / Margin for Contingencies
1. MANUFACTURING CONCERN
STATEMENT OF WORKING CAPITAL REQUIREMENTS
Amount (Rs.)
Current Assets
(i)Stock of R M( for ….month’s consumption) -----
(ii)Work-in-progress (for…months)
(a) Raw Materials -----
(b) Direct Labour -----
(c) Overheads -----
(iii) Stock of Finished Goods ( for …month’s
sales) -----
(c) Overheads
(iv) Sundry Debtors ( for …month’s sales) -----
(c) Overheads -----
(v) Payments in Advance (if any) -----
(iv) Balance of Cash for daily -----
expenses (vii)Any other item
Less : Current Liabilities
(i) Creditors (For….. Month’s Purchases) -----
(ii) Lag in payment of expenses -----
(iii) Any other -----
WORKING CAPITAL ( CA – CL )xxxx
Add : Provision / Margin for Contingencies -----
NET WORKING CAPITAL REQUIRED XXX

Points to be remembered while estimating WC
 (1) Profits should be ignored while calculating working capital
requirements for the following reasons.
 (a) Profits may or may not be used as working capital
 (b) Even if it is used, it may be reduced by the amount of Income
tax, Drawings, Dividend paid etc.
 (2) Calculation of WIP depends on the degree of completion as
regards to materials, labour and overheads. However, if nothing
is mentioned in the problem, take 100% of the value as WIP.
Because in such a case, the average period of WIP must have
been calculated as equivalent period of completed units.
 (3) Calculation of Stocks of Finished Goods and Debtors should
be made at cost unless otherwise asked in the question.
Thank
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Kamal Kant Sharma MBA 02313703920 FM

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Kamal Kant Sharma MBA 02313703920 FM

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Kamal kant sharma

 Working capital typically means the firm’s holding of

Working capital= current asset- current liability

Working Capital is a short terms finance required

 The concept of net working capital enables the firm

 The amount varies from year to year

 It represent the current assets which are required on

 The cash cycle is the time period from when

Current Assets ----

NET WORKING CAPITAL REQUIRED XXX

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