Professional Documents
Culture Documents
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LEARNING OBJECTIVES
Know meaning of working capital State and explain the concepts of working capital Classify and explain the kinds of working capital List out the components of working capital Bring out the aspects and objectives of working capital management. Give the need for working capital Narrate the consequences of excess and inadequate working capital State and explain the factors affecting working capital Know estimation of working capital Say ways of financing current assets Explain the approaches available for financing current assets
involved in the current assets of the business. Basically, it is the capital which is required to meet the day to day expenses of the business.
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concept
Gross working
need
Permanent working
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Gross working capital: It is the sum of all current assets appear in balance sheet
2. Net working capital: Excess of current assets over current liabilities. It can be positive or negative
Gross working capital = Total current assets Net working capital = current assets current
liabilities
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The sum up of the funds required to finance the minimum level of current assets of the business is known as the permanent working capital. This capital is required every time to put the business into working condition.
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It is required to explore the short term opportunities of the market. The requirement of temporary working capital varies with time period. Seasonal working capital Special working capital
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O=R+W+F+D-C
1/3/2014 Prepared by:YOGITA SHARMA 11
Operating Cycle
The time that elapses in conversion of raw materials into cash
Work-inProcess
funds.
XXX
Ratio of sales To estimate working capital requirements as a ratio of sales on the assumption that current assets change with sales.
Ratio of fixed investment To estimate working capital requirements as a percentage of fixed investment
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Conservative Approach
Aggressive Approach
Matching Approach
Matching or Hedging Approach: Here funds raised for a
Short-term financing
Assets
Conservative approach
Conservative Approach: Use of long-term funds for
Assets
Aggressive approach
Aggressive Approach: A firm is aggressive in financing
working capital when it uses short-term funds to finance a part of permanent current assets
Temporary Current Assets (b) (a) Assets Permanent Current Assets Long term financing
Short term financing
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rates generally lower than long-term rates you are continually entering marketplace to borrow
Riskybecause
Borrower will face changing conditions (ex; higher interest rates and tight money)
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capital
Expensivelong-term
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Production cycle
Business fluctuations Production policy Sale policy
Efficiency of management
Price level changes
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