Feb 14, 2016
Working Capital
• Money available to the company for day to day operations• It plays a vital role in keeping the wheel of the business running
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Working Capital- Determinants
• Nature of Business• Size of Business• Production Cycle Process• Credit Policy or Terms of Purchase and Sales• Growth and Expansion• Scarce Availability of Raw Materials• Profit Level• Dividend Policy• Availability of Credit
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Concept of working capital
• Gross Working Capital- total current assets• Significance Optimum Investment in Current Assets Financing of Current Assets
• Net Working Capital- the excess of current assets over current liabilities represents net working capital
• Significance Maintaining Liquidity Position To decide upon the Extent of Long-term Capital in Financing Current Assets
Why it matters?
Common measure - Liquidity
- Efficiency
- Over all Health of the organization
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Need of adequate working capital
Dangers of Excessive
Working Capital
unnecessary
accumulation of
inventories
indication of defective
credit policy
Managerial inefficiency
Dangers of Inadequate
Working Capital
stagnates growth
Operating inefficiencie
s
inefficient utilisation of fixed assets
Working Capital Cycle
Working capital cycle
Cash
Creditors
Inventory
Debtors
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Estimation of Working Capital
Estimation of Current Assets
Investment in Raw Materials Inventory
Investment in Work-in-process Inventory
Investment in Finished Goods Inventory
Investment in Debtors
Cash and Bank Balance
Estimation of Current Liabilities
Trade Debtors
Direct Wages
Overheads
Calculation of Working Capital
• Step 1 : Estimate the cash cost of various current assets required by the firm.
• Step 2 : Deduct the spontaneous current liabilities from the cash cost of current assets
Working Capital = Total Current Assets – Total Current Liabilities
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Financing of working capital needs
Short term
financing
Long term
financing
Spontaneous financing
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End of Chapter
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Thank you