WORKING CAPITAL MANAGEMENT Capital required for a business can be classified under two main categories: A. Fixed capital : Capital required for purchase of fixed assets like land,building,plant,machinery,office equipment and furniture is called fixed capital. These assets are purchased for constant use in production and are not intended for re-sale. Working capital : Capital required for purchase of raw materials and for meeting the day to day expenditure on salaries,wages,rent,advertising etc. is called working capital management .

Concept of working capital A.Gross working capital: In a broad sense , the working capital refers to the gross working capital. This represents the amount of funds invested in current assets. Under the gross concept, working capital is equal to total current assets. B.Net working capital : In a narrow sense , working capital refers to net working capital. Working capital refers to networking capital. Net working capital is the excess of current assets over current liabilities. Both gross working capital and net working capital concepts are important aspects of working capital. Gross working capital is suitable to company form of organization where there is divorce between ownership and management and control.

But the net working capital concept may be suitable for sole proprietorship or partnership firm. Of the two net working capital ,concept is widely accepted. Types of working capital: Working capital may be classified into two types: a.Permanent or fixed working capital It is the minimum amount of working capital required to ensure effective utilization of fixed assets and support the normal operations of the business.

b.Temporary or Variable working capital It is the amount of working capital which is required by the business over and above the permanent working capital. The amount of such working capital keeps on fluctuating from time to time on the basis of business activities. Need or Objects of working capital : The need for working capital arises due to the time gap between purchase of raw materials and production and sales. The time gap is technically termed as ‘ Operating cycle’ of the business .The following stages are usually found in the operating cycle of a manufacturing firm.

1. Conversion of cash into raw ,materials. 2 1.Conversion of cash into raw ,materials. 2.Conversion of raw materials into work-in-progress. 3.Conversion of work-in-progress into finished goods. 4.Coversion of finished goods into debtors through sales. 5.Conversion of debtors into cash WORKING CAPITAL IS NEEDED FOR THE FOLLOWING PURPOSES: 1.To purchase raw materials, spares and component parts. 2.To pay wages and salaries. 3.To incur day to day expenses.. 4.To meet selling costs such as packing, advertising 5.To provide credit facilities to customers 6.To maintain inventories of raw material, work in progress and finished goods.

Importance or Advantages of working capital: Working capital is the life blood and nerve center of a business.No business can be run successfully without adequate amount of working capital.The advantages of maintaining adequate working capital are as follows: 1.Continuous production 2.Solvency and good will 3.Easy loans 4.Cash discounts 5.Regular payment expenses 6.Exploiatation of market condition 7.Ability to face crisis 8.High return on investment

Dangers of excess working capital Every business concern should have adequate working capital for its smooth function. It should have neither excess working capital nor shortage of working capital. Both excessive working capital as well as inadequate working capital positions are bad for any business. How ever , out of the two ,inadequate working capital positions inadequacy of working capital is more dangerous for a firm.

Disadvantages of excessive working capital 1.Excessive working capital means idle funds which earn no profit for the business. Hence, the business cannot earn a proper rate of return on its investments. 2.Due to low rate of return on investments, the value of shares may also fall 3.Reduntant working capital may lead to unnecessary purchasing and accumulation of inventories. As a result ,chances of theft ,waste and losses will increase. 4.Excessive working capital makes management complication. It leads to overall inefficiency in the organization.

Disadvantages of inadequate working capital 1.A concern which has adequate working capital cannot pay its short term liabilities in time. A s a result, it loses its reputation and faces tight credit terms. 2.It cannot buy its requirements in bulk and take advantage of cash discounts. 3.The concern will experience difficulties in meeting its day to day expenses. 4.It becomes difficult to exploit favorable market conditions and undertake profitable projects due to lack of working capital. 5.Due to paucity of working capital, fixed assets are not effectively utilised.Thus the rate of return on investment falls.

Factors determining working capital needs The requirement of working capital depend on the following factors: 1.Nature of business –railways –less:; manufacturing -more 2.Size of business –greater size- more 3.Time consumed in manufacture Seasonal fluctuations –raw material availability- seasonal: bulk purchase; more wc 4.Fluctuations in supply – more wc 5.Speed of turnover-high turnover –low wc 6.Terms of sales- sale on cash-low wc 7.Terms of purchase - sales-purchase on credit –low wc

8.Growth and expansion of business-more wc required- growth increases 9.Price level changes –increase in price-increase in wc 10.Level of taxes- tax increases; wc increases

11. Production policy –wc requirements depend on demand for the product 12.Length of production cycle –longer –more wc 13. Earning capacity and dividend policy –more earning-less wc; more dividend payment-more wc 14. Other factors –operating efficiency, management ability, irregularities to supply, import policy, banking facilities etc.