y Samreen Bangi (7) y Wasim Dalvi (12) y Shweta Gujar (17)

y Tabish Parkar (36) y Reshma Shaikh (48) y Reshma Singh (54)

y Working capital means current assets such as cash,

accounts receivables and inventory etc. y Working capital or circulating capital indicates circular flow of funds is the day-to-day or routine activities of business y The management of working capital is more important than the management of fixed assets y The fate of most of the businesses very largely depends upon the manner in which their working capital is managed.

y Gerstenberg Circulating capital means current assets of a

company that are changed in the ordinary course of business from one form to another ,as for example , from cash to inventories , inventories to receivable, receivables into cash.

y According to one school of thought, working capital

represents all current assets of the Company. They believe that working capital represents those assets, which change their form during the process of production. Working Capital = Total Current Assets
y According to the other school of thought, working capital is

the excess of current assets over current liabilities. Working Capital = Current Assets Current Liabilities

CONSTITUENTS OF WORKING CAPITAL

y CURRENT ASSETS y Inventory y Sundry Debtors y Cash and Bank Balances y Loans and advances y CURRENT LIABILITIES y Sundry creditors y Short term loans y Outstanding expenses

Type of Working Capital

On basis of concept

Requirement
Measurement

Temporary Gross Wc Net Wc Positive

Permanent

Negative

y Operating Cycle is the time duration required to convert sales,

after the conversion of resources into inventories, into cash

y A company s operating cycle typically consists of

three primary activities:

Purchasing resources Producing the product and Distributing (selling) the product These activities results in inflow and out flow of funds that are both unsynchronized and uncertain. y Unsynchronized because cash disbursements (for example, payments for resource purchases) usually take place before cash receipts (for example collection of receivables). y They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy.
y y y y

Accounts Payable

Value Addition

Raw Materials

WIP

Cash

THE WORKING CAPITAL CYCLE (OPERATING CYCLE)

Finished Goods

Accounts Receivable

SALES

Ratios associated with WCM

Stock Turnover Ratio (Times) Stock Turnover Ratio (Days) COGS AVERAGE STOCK Average Stock COGS x 365

Receivables Turnover Ratio (Times)

Net Credit Sales Average Accounts Receivable

Average Receivables Period (Days)

Avg A/C Receivable x 365 Net Credit Sales

Payables Turnover Ratio (Times)

Net Credit Purchases Average Accounts Receivable

Average Payables Period (Days)

Avg A/C Receivable x 365 Net Credit Sales

Current Ratio

Current Assets Current Liabilities CA Stock Current Liabilities Net Sales Net Working Capital

Quick Ratio

Working Capital Turnover Ratio

Particulars Material Labour Factory Over Head Total Cost Add: Profit Sales

Amount 48000 36000 24000 108000 12000 120000

Raw Material is stock for two months before it is issued to factory. Production cycle takes one month. FG are in stock for 1 months Debtors are allowed 3 months credit, creditors give 2 months credit Expenses are outstanding for 1 month Company maintains a cash balance of 20000

Particulars Current Assets Stock: Raw Material: 48000 x 2/12 WIP: Material: 48000 x 1/12 OH = 4000 Labour : 36000 x 1/12*50% = 1500 : 24000 x 1/12*50% = 1000

Amount

8000

6500 13500 30000 20000 78000

Finished Goods : 108000 x 1.5/12 Debtors : 120000 x 3/12 Cash / Bank Total A

Particulars Current Liabilities Creditors : 48000 x 2/12 O/S Expenses (36000+24000)* 1/12 Total B Total A Total B: Estimated WC

Amount 8000 5000 13000 65000

Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ........TIME ......... and MONEY, when it comes to managing working capital

 You can get money to move faster around the

up. cycle or reduce the amount of money tied up. Then, business will generate more cash or it will need to borrow less money to fund working capital. capital .  As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. investment.  Similarly, if you can negotiate improved terms with suppliers e .g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales. sales.

If you
Collect receivables (debtors) faster Collect receivables (debtors) slower Get better credit (in terms of duration or amount) from suppliers Shift inventory (stocks) faster Move inventory slower (stocks)

Then ......
You release cash from the cycle Your receivables soak up cash You increase resources You free up cash You consume more cash your cash

y 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.

y y y y y y y y y y y

Nature of the Industry & Business Demand of Industry Volume of Sales Terms of Purchase and Sales Inventory Turnover Current Assets requirements Production Cycle Inflation or Price level changes Profit planning and control Operation efficiency Attitude towards Risk

Amount of Working Capital

Variable Working Capital

Permanent Working Capital

Time

Variable Working Capital Amount of Working Capital Permanent Working Capital

Time

Working Capital Management

Working Capital Management

Cash Management

Receivables Management

Inventory Management

Cash Management
Identify the cash balance which allows for the business to meet day to day expenses reduces cash holding costs

Receivables Management
Money which is owed to a company by a customer for products and services provided on credit Identify the appropriate credit policy

Inventory Management
Identify the level of inventory which allows for uninterrupted production Reduces the investment in raw materials, minimizes reordering costs and hence increases cash flow