Mukul Bhatia

Business needs Capital

Classification By Sources of Capital A) Equity- Owned Funds B) Loans Borrowed Funds Classification by duration
A) Long Term B) Short Term

Capital (Liability) is used to create Assets for the business. (Liabilities are promises and commitments made by the business in course of the operations)- Term and Current Fixed Assets (Long Term) E.g. Land, Building, Machines, Vehicles etc. Current Assets (Short Term) e.g. Raw Materials, Sundry Debtors, Finished Goods etc.

Fixed Assets are those assets which are used to convert raw materials to finished goods and to provide the facilities for the operations of the business

Current assets are those assets which are created or consumed in the process of the conversion. Another way of definingrequired for day to day operations

Text book definition of Current Assets is those assets which can be converted to cash within one year. (More practical definitionwithin one operating cycle). These are assets required for the day to day operations and to sustain the operating levels of the business

An entrepreneur likes to hold Fixed Assets but lower the current assets in his business the higher is his business efficiency i.e. he is able to turn over his current assets at a greater pace and generate more profits due to the higher operating levels.

There are two possible interpretations of working capital concept:

1. Balance sheet concept 2. Operating cycle concept

Balance Sheet Concept

There are two interpretations of working capital under the balance sheet concept: a. Excess of current assets over current liabilities b. Gross or total current assets.

Cash
Bills RM

FG

WIP

Accounts Payable

Value Addition

Raw Materials

WIP

Cash

THE WORKING CAPITAL CYCLE (OPERATING CYCLE)

Finished Goods

Accounts Receivable

SALES

Structure of the Balance Sheet Liabilities Assets

Term Liabilities Current Liabilities

Fixed Assets Current Assets

Working Capital Management Deals with the Current Assets and the Current Liabilities side of the Balance Sheet Basically Working Capital is a perpetual requirement of funds for short term uses to keep the business running

The size and nature of investment in current assets is a function of different factors such as type of products manufactured, the length of operating cycle, the sales level, inventory policies, unexpected demand and unanticipated delays in obtaining new inventories, credit policies and current assets.

Factors affecting working capital

1. 2. 3. 4. 5. 6.

Nature of the Industry Demand of Industry Cash requirements Nature of the Business Manufacturing time Volume of Sales

Factors contd.
7. 8. 9. 10. 11. 12. Terms of Purchase and Sales Inventory Turnover Business Turnover Business Cycle Current Assets requirements Production Cycle

Factors contd.
13. 14. 15. 16. 17. Credit control Inflation or Price level changes Profit planning and control Repayment ability Cash reserves

Factors contd.
18. 19. 20. 21. Operation efficiency Change in Technology Firms finance and dividend policy Attitude towards Risk

Thank you

Mukul Bhatia