Working capital managment

Submitted By

Subhankar Das

Roll No-3720

Working Capital Management

METROPOLITAN SCHOOL OF MANAGEMENT

Capital

capital is the keynote of economic

development. In this modern age, the level of

economic development is determined by the

proportion of capital available.

Capital (economics), A factor of

production that is not wanted for itself but

for its ability to help in producing other

goods.

Working capital refers to the funds invested in Current assets , sundry debtors, inventories , cash and bank balance

It is the fund required to support day to day operations such as purchase of raw materials , payments of wages and defraying other expenses for operations

Working capital = Current assets – Current liabilities

It measures how much in liquid assets a company has available to build its business.

WHAT IS WORKING CAPITAL

Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.

The management of working capital involves managing inventories, accounts receivable and payable and cash.

An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities,

Contd…

Nature of Business

Size of business

Production policy

Operating efficiency

Credit policy

Dividend policy

Growth and expansion

Abnormal factor –strikes, lockout, inflation Etc

FACTORS AFFECTING WORKING CAPITAL REQUIREMENT

WORKING CAPITAL CYCLE

Conversion of cash into raw materials.

Conversion of raw materials into work in progress.

Conversion of work in progress into finished stock.

Conversion of finished stock into accounts receivables(Debtors)through sale

Conversion of account receivables into cash.

WORKING CAPITAL CYCLE

KINDS OF WORKING CAPITAL

WORKING CAPITAL

BASIS OF CONCEPT

BASIS OF TIME

Gross Working Capital

Net Working Capital

Permanent / Fixed

WC

Temporary / Variable

WC

Regular WC

Reserve WC

Special WC

Seasonal WC

Difference between permanent & temporary working capital

Amount Variable Working Capitalof WorkingCapital

Permanent Working Capital

Time Permanent and temporary working capital for Stable firm

Variable Working CapitalAmount of WorkingCapital

Permanent Working Capital

Time Permanent and temporary working capital for Growing firm

IMPORTANCE OF WORKING CAPITAL

• Goodwill • Easy loans• Cash discounts• Regular Supply of Raw Material: • Regular payment of salaries, wages

and other day to day commitments• Ability to Face Crises: • Quick and regular return on

investments

Reducing the capital employed

Debtors Manageme

nt (recievable

s) to increase

cash flow

Short term financing-

loans utilization,

cash conversion

cycle

Creditors manageme

nt (payables)

Cash manageme

nt

The fundamental principles of working capital management

ADVANTAGES

Goodwill Creditability

Creates environme

nt of security,

confidence

Maintains solvency

and liquidity

Unnecessary accumulatio

n of inventory

Indicates defective

credit policy

Inefficiency

Excessive W.C meant idle funds which may decrease return on

investment

ADVANTAGES AND DISADVANTAGES

DISADVANTAGES

Negative Working Capital McDonald's had a negative working capital of $698.5 million between 1999 and 2000

Amazon.com

Wal-Mart