WORKING CAPITAL MANAGEMENT

PREPARED BY:PRIYANKA SARRAF BBA V SEM.ISBM

Meaning of working capital

In very simple terms working capital means the amount required to do day to day business smoothly. It is excess of current assets over current liabilities.

From another point of view we can say that WC is that part of CA (i.e. raw material) which is required to run the fixed assets (i.e. machine) profitably.

WC = CA – CL

CURRENT ASSETS Current assets are those assets which can be converted into cash within one year or less then one year.

In current assets, we include cash, bank, debtors, bill receivables, prepaid expenses, outstanding incomes .

CURRENT LIABILITIES Current Liabilities are those liabilities which can be paid to respective parties within one year or less

than one year at their maturity. In current liabilities, we include creditors, outstanding bills, bank overdraft, bills payable and short term loans, outstanding expenses, advance incomes .

WORKING CAPITAL

VALUE TIME

NET WC PERMANENT WC TEMPORARY WC

CURRENT ASSETS

DIFFERENCE OF CA & CL

MINIMUM INVESTMENT THROUGHOUT THE YEAR

INVESRMENT ABOVE PERMANENT WC

CASH POSITIVE NEGATIVE CURRENT ASSETS VARIABLE WC

< 1YEAR ABLE TO PAY SHORT TERM LOAN

UNABLE TO PAY SHORT TERM LOAN

MINIMUM LEVEL OF ACTIVITIES

FLUCTUATING (SEASONS,FESTIVALS, ETC.)

WORKING CAPITAL

GROSS WC

ON THE BASIS OF VALUE IT HAVE TWO TYPES OF WC

1) Gross WC The gross working capital refers to investment in all the current assets. It is also

known as Gross current assets. The sum of all of a company's current assets (assets that are convertible to cash within a year or less).

2) NET WC It is a difference between current assets and current liabilities. It is the amount

invested by the promoters on the current assets of the organization.

ON THE BASIS OF TIME IT HAVE TWO TYPES WC

1) Permanent working capital Minimum amount of investment in current assets required at all point of time. Remains in the business in one form or another. Grows with the size of the business. Financed by long term funds.

2) Temporary working capital Variable working capital, required by business over and above permanent working capital. Additional current assets required at different point of time. E.g. Extra inventory should be maintained during peak sales period like festivals, seasons, etc. Will decrease in depression periods or off seasons. Financed from short term loans.

Is it a issue of today’s business?Yes, it is. Because every business landscape has become: Competitive Complex Ever-changingSo, building a profitable business and ensuring its success in future is increasingly difficult now.

Also it is facing problems like: Shortage of cash Heavy bad debts Cash block in inventories Spoiling reputation by late payment to creditors because of shortage of cash itself.

These all arises due to inefficient working capital management. So, it has become a significant issue in today’s business that how to manage it to optimize profit and ensure success.

ANALYSIS OF WORKING CAPITAL

WC LargeInadequate

Adequate(Short term and Long term)

Idle Funds

Risk

Survival (At different Points of

Time)

Cost

Insolvency

Growth

Interest Payment

The standard favorable ratio of CA in relation to CL is 2:1, this means, a company has total liabilities of one rupee. And, to pay that liability it has available cash or (say liquidity status) of two rupees. OR, say it has sufficient current assets to meet its current liability.

Note: This ratio may vary as per the nature of business.

IMPORTANCE OF WORKING CAPITAL MANAGEMENT

Working capital management is required to use fixed assets profitability. For e.g. Machine cannot be used productively without raw materials etc. Funds are required for day to day operations and transactions. These are

provided by cash and cash equivalents, forming part of current assets. Adequate working capital determine the short term solvency of the firm. Increase in activity levels and sales should be backed up by suitable

investment in working capital to expand business. Adequate working capital enables a firm to face business crisis in

emergencies such as depression.

WORKING CAPITAL MANAGEMENT STEPS

CURRENT ASSETS MANAGEMENT

CURRENT LIABILITIES MANAGEMENT

CASH MANAGEMENT

DEBTORS MANAGEMENT

INVENTORY MANAGEMENT

CREDITORS MANAGEMENT

OTHER SHORT TERM LIABILITIES

MANAGEMENT

STEPS OF WORKING CAPITAL MANAGEMENT

The techniques should be applied in different items of working capital (like cash, debtors, inventory, creditors.)

1) CASH MANAGEMENT (MOST IMPORTANT ASPECT OF WC)

Cash planning: The pattern of cash inflows and outflows should be properly predicted in advance by preparing cash budgets.

Managing the cash flows: The cash inflows should be accelerated/speeded up, while as far as possible, the cash outflows should be decelerated.

Optimum cash level: The optimum level of cash balance should be determined by balancing the twin objectives of liquidity and profitability.

Investing surplus cash: Surplus cash should be properly invested to earn profits. The firm should determine the timing and quantity of investment of surplus cash.

2) DEBTORS MANAGEMENT Collecting debts on time. Setting credit limits i.e. 10/15/30 or so on. Providing discounting facilities for early payment. Enforcing a clear credit policy. Considering debtor finance.

3) INVENTORY MANAGEMENT Classification and codification of inventory. Maintenance of inventory records. Control of the cycle flow of materials. Control of tools. Store room management.

4) CREDITORS MANAGEMENT Find reliable and competitively prices suppliers. Negotiate clear, written agreements from the outset. Communicate with the suppliers. Improve systems for paying suppliers. Keep good records.

5) OTHER SHORT TERM LOAN(STL) MANAGEMENT Payment of outstanding salaries, wages, expenses, etc. Payment of outstanding duties and taxes, outstanding interest, etc. Payment of short term loans.

CONCLUSION

From all the above discussion we can conclude that Working Capital Management is one of the tending CONTEMPORARY ISSUE which the business enterprises and organizations are facing now-a-days. So, they should apply the Working Capital Management techniques and prepare SMART PLANS for procurement of Working Capital for the growth, profitability and ultimate success of their business.