202 Financial Management Working Capital Management Prepared By

202 - Financial Management

Working Capital Management Prepared By Prof. Vinay Bhalerao

Outline �Introduction �Examples �Structure �Classification of working Capital �Factors affecting working Capital �Measurement of working Capital �Advantages and Disadvantages

Introduction �Working capital refers to the circulating capital required to meet the day to day operations of a business firm. � Working capital is defined as “the excess of current assets over current liabilities and provisions”. But as per accounting terminology, it is difference between the inflow and outflow of funds.

Examples �Hotel Sector: for procurement of raw material � Dairy Products: �Seasonal Business :

Structure of Working Capital Current Liabilities Current Assets

Current Liabilities 1 • Bank Overdraft: 2 • Creditors: 3 • Outstanding Expenses: 4 • Bills Payable 5 • Provision for Taxation

Current assets 1 • Cash and Bank Balance : 2 • Inventories : 3 • Accounts receivable: 4 • S. Debtors

Classification of working capital � Gross working capital : �It refers to the firm’s investment in total current or circulating assets. �The gross working capital is �financial or going concern concept. �Net Working Capital : �It is the excess of current assets over current liabilities And �It is that portion of a firm’s current assets which is financed by long-term funds

Classification of working capital � Permanent Working Capital: �This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities

Factors affecting on Working Capital Internal External Nature of Business Production Policy Business Fluctuations Change in Technology Infrastructure Policy Credit policy Taxation policy Manufacturing policy Govt. Norms Size of Business

Important point for calculation of Working Capital Management 1. Depreciation : �The depreciation on the fixed assets, which are used in the production process or other activities, is not considered in working capital estimation. �The depreciation is a non-cash expense and there is no funds locked up in depreciation as such and �therefore, it is ignored.

Important point for calculation of Working Capital Management 2. Safety Margin : To meet any contingency situations The safety margin may be expressed as a % of total current assets or total current liabilities or net working capital. The quantum of safety is determined on the basis of business

Calculation of Debtors 1. Cash cost Basis : When company provides us information regarding “Sale goods on Gross Profit @ specific %” Then we have to calculate Cost structure & find out 1. Depreciation value 2. Cash Cost ( actual cost incurred excluding Depreciation )

Advantages 1. Solvency of business 2. Goodwill 3. Easy availability of funds 4. Regular supply of material 5. Regular payments to end users

Disadvantages 1. excessive working capital ( blockage of fund) 2. Excess of purchase for fund utilization 3. Difficult for firm to take advantages of change in market

Working capital Cycle CASH Debtors Procurment Stock WIP