Working Capital Management Presentation by A.K.Sharma, DGM(F&A)

Working Capital - Meaning Working Capital refers to short term assets of the firm Normally denotes investment in current assets.

Working Capital - Concepts There are two concepts of Working Capital 1.Gross Working Capital – This refers to the investment in all the current assets. 2.Net Working Capital – This refers to excess of current assets over current liabilities.(Difference between Current Assets and Current Liabilities.)

Working Capital Management Working Capital Management is concerned with decisions involving current assets and current liabilities. Major thrust, is on the management of current assets. This is also called short term financial Management.

Working Capital Management Working capital management is significant facet of Financial management. Its importance stems from two reasons- Investment in current assets represents a substantial portion of total investment. Investment in current assets and the level of current liabilities have to be geared quickly to changes in sales.

Working Capital Management Managing Current Assets and Current Liability involves – –Arranging short-term financing, –Negotiating favorable credit terms, –Controlling the movement of cash, –Administering accounts receivable, and – Monitoring the investment in inventories.

Working Capital Management Characteristics of Current Assets –Short life span –Swift transformation into other asset forms.

Working Capital Management Implications of short life span of working capital – –Decisions relating to working capital management are repetitive and frequent. –The difference between profit and present value is insignificant.

Operating Cycle and Working Capital Operating cycle is the time period between acquisition of raw materials and the collection of cash from receivable. In trading concern operating cycle begins with procuring of goods to be sold and ends with realizing cash from Debtors after the sale of these goods.

Cash Wages, Salaries, Maintenance and other operating exp. Provision of Services Accounts receivable Current Assets Cycle

Types of Working Capital Depending upon the nature of funds blocked, working capital can be categorised as – 1. Permanent Working Capital – It represents the minimum amount of investment in current assets that is deemed necessary for carrying out operations for a period. It is an investment in the nature of long term, like that of fixed assets. This is also termed as ‘Regular Working Capital’. 2. Fluctuating Working Capital – It represents additional assets required at different times during the operating year to cover any change or variability from the operations.

Types of Working Capital (Contd.) 3. Seasonal Fluctuating Working Capital – Additional inventory or other current assets are held due to the seasonal nature of the industry. 4. Special Fluctuating Working Capital – Extra funds needed to meet contingencies during inflationary situation, recession or a strike, or to take advantage of a bulk discount are examples of the Special Fluctuating Working Capital

Importance of Working Capital Working Capital is needed to carry out manufacturing, administrative, and distribution function. An adequate level of working capital is essential for the profitable operations of every enterprise. The need for working capital arises as cash expenditures and cash receipts are non-synchronous.

Factors Affecting the Working Capital Length of operating cycle. Nature of business Business cycle fluctuation Seasonal operations Technology and production cycle Credit policy Price level changes Market competition

1.Current Ratio =Current Assets Current Liability Measures ability to p- ay current liabilities with current assets 2. Quick ratio =Cash +Short-term investment + Net Current receivable Current liabilities Shows ability to pay all current liabilities if they come due immediately 3. Accounts receivable turnover = Net Credit Sales Average net accounts receivable Measures ability to collect cash from credit customers 4. Days’ sales in receivables Average net accounts receivable One day’s sales Shows how many days’ sales remain in Accounts Receivable – how many days it takes to collect the average level of receivables. Decision Guidelines – Using Ratios in Financial Statement Analysis