MD RAHMAT KARIM

1. WORKING
CAPITAL
MANAGEMENT
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2.  Concept of working capital
 Importance of working capital
 Determents of working capital
 Source of working capital financing
 Determination of Operating Cycle
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3. Gross working capital (GWC)
GWC refers to the firm’s total investment in
current assets.
Current assets are the assets which can be
converted into cash within an accounting
year (or operating cycle) and include cash,
short-term securities, debtors, (accounts
receivable or book debts) bills receivable
and stock (inventory).
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4.  Net working capital (NWC).
NWC
 refers to the difference between current assets
and current liabilities.
 It is the excess of current assets over current
liabilities.
 It is that portion of a firm’s current assets
which is financed by long-term funds.
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5.  Net working capital (NWC).
 Current liabilities (CL) are those claims of
outsiders which are expected to mature for
payment within an accounting year and include
creditors (accounts payable), bills payable, and
outstanding expenses.
 NWC can be positive or negative.
 Positive NWC = CA > CL
 Negative NWC = CA < CL
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6.  GWC focuses on
 Optimization of investment in
current liabilities
 Financing of current assets
 NWC focuses on
 Liquidity position of the firm
 Judicious mix of short-term and
long-tern financing
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7.  Nature of business
 Manufacturing cycle
 Production process
 Business cycle
 Seasonal variation
 Scale of Operation
 Inventory policy
 Credit policy
 Depreciation policy
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8.  Business Standing
 Growth of business
 Market condition
 Supply Situation
 Nature of Raw Material Used
 Process Technology Used
 Nature of Finished Goods
 Degree of Competition in the Market
 Profit level
 Dividend policy
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9.  Liquidity vs. Profitability
 Choosing the Pattern of Financing
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10. amitabha maheshwari 10

11.  Working capital management refers to the administration of all
components of working capital-cash , marketable securities, debtors
(receivables), stock (inventories),creditors (payables).
 The financial manager must determine the levels and composition of
current assets.
 He must see that right sources are tapped to finance current assets,
and that current liabilities are paid in time.
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12.  There are many aspects of working capital management
which make it an important function of the financial
manager.
◦ Time: Working capital management requires much of the
financial manager's time.
◦ Investment: Working capital represents a large portion of
the total investment in assets.
◦ Criticality: Working capital management has great
significance for all. Firms but it is very critical for small
firms.
◦ Growth The need for working capital is directly related to
the firm's growth.
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13.  The financial manager should determine the
optimum level of current assets so that the wealth of
shareholders is maximized.
 A firm needs fixed and current assets to support a
particular level of output.
 However, to support the same level of output, the
firm can have different levels of current assets.
 As the firm's output and sales increase, the need for
current assets increases.
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14.  Generally, Current assets do not increase in direct proportion
to output.
 Current assets may increase at a decreasing rate with output.
 The level of the current assets can be measured by relating
current assets to fixed assets. Dividing current assets by
fixed assets gives CA/FA ratio. Assuming a constant level of
fixed assets,
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15.  A higher CA/FA ratio indicates a conservative current
assets policy. It implies greater liquidity and lower risk;
 A lower CA/FA ratio means an aggressive current assets
policy, it indicates higher risk and poor liquidity.
 Moderate Coverage current assets policy falls in the middle
of conservative and aggressive policies. The current assets
policy of the most firms may fall between these two extreme
policies.
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16.  Gross working capital and Net working capital.
 Gross working capital is equal to the total of all current
assets (including ‘loans and advances’) of a company.
 Net working capital is defined as the difference
between gross working capital and current liabilities
(including ‘provisions’). Sometimes net working capital
is also referred to as ‘net current assets.’
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17.  Working capital can be viewed as the amount of
capital required for the smooth and uninterrupted
functioning of the normal business operations of a
company ranging from the procurement of raw
materials, converting the same into finished
products for sale and realizing cash along with
profit from the accounts receivables that arise from
the sale of finished goods on credit.
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18.  Operating cycle is the time duration required to
convert sales, after the conversion of resources
into inventories, into cash. The operating cycle of a
manufacturing company involves three phases:
 Acquisition of resources such as raw material, labour,
power and fuel etc.
 Manufacture of the product which includes conversion of
raw material into work-in-progress into finished goods.
 Sale of the product either for cash or on credit. Credit
sales create account receivable for collection.
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19.  The length of the operating cycle of a
manufacturing firm is the sum of:
 inventory conversion period (ICP).
 Debtors (receivable) conversion period (DCP).
 Creditors or payables deferral period (CDP)
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20.  Inventory conversion period is the total time
needed for producing and selling the product.
Typically, it includes:
 raw material conversion period (RMCP)
 work-in-process conversion period (WIPCP)
 finished goods conversion period (FGCP)
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21.  Inventory conversion period is the total time needed for
producing and selling the product. Typically, it
includes:
raw material conversion period (RMCP)
Average Raw Materials
=------------------- x 365
Raw material consumed
 work-in-process conversion period (WIPCP)
 finished goods conversion period (FGCP)
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22.  Inventory conversion period is the total time needed for
producing and selling the product. Typically, it
includes:
 raw material conversion period (RMCP)
work-in-process conversion period (WIPCP)
Average work in process
=------------------- x 365
Total cost of production
 finished goods conversion period (FGCP)
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23.  Inventory conversion period is the total time needed for
producing and selling the product. Typically, it
includes:
 raw material conversion period (RMCP)
 work-in-process conversion period (WIPCP)
finished goods conversion period (FGCP)
Average stock (FG)
=------------------- x 365
Total cost of goods sold
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24. The debtors conversion period is the time required
to collect the outstanding amount from the
customers.
Average debtors
=------------------- x 365
Total credit sales
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25. Creditors or payables deferral period (CDP) is
the length of time the firm is able to defer
payments on various resource purchases.
Average Creditors
=------------------- x 365
Total credit Purchases
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26.  Gross operating cycle (GOC)
The total of inventory conversion period and
debtors conversion period is referred to as gross
operating cycle (GOC).
 Gross Operating Cycle =
Raw Material Storage Period + Conversion period +
Finished Goods Storage Period + Average Collection
Period
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27.  Net operating cycle (NOC)
NOC is the difference between GOC and
CDP.
 Net Operating Cycle =
Gross Operating Cycle – Average Payment period
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28.  RMCP -----
 +WPCP -----
 +FGCP -----
 +RCP(DCP) -----
 TOCP(Gross operating cycle) -----
 - CDP -----
 NOC -----
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29.  What has been considered in figure above as working
capital cycle is more popularly known as the operating
cycle.
 This title is more expressive in the sense that the normal
business operations of a manufacturing and trading
company start with cash, go through the successive
segments of the operating cycle, viz, raw material storage
period, conversion period, finished goods storage period
and average collection period before getting back cash
along with profit.
 The total duration of all the segments mentioned above is
known as ‘gross operating cycle period’.
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30. Calculate operational cycle
No.of days requirement
 Inventory 60
 Work-in-process
30
 Finished products 30
 Credit allowed to customers 30
 Cash balance (approximate) 7
 Creditors 30
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31.  From the following information, extracted from the books of a
manufacturing company, compute the operational cycle in days.
 Period covered : 365 days.
 Average Period of credit allowed by Suppliers - 16 days.
Rs.’000
Average total of debtors outstanding 480
Raw-material consumption 4,400
Total Production Cost 10,000
Total Cost of Sales
10,500
Sales for the year
Value of Average Stock maintained -- 16,000
Raw-material 320
Work - in -Progress 350
Finished Goods 260
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32. From the following details, prepare an estimate of the requirement of working Capital
 Production 60,000Units
 Selling price per unit Rs. 5
 Raw Materials 60% of selling Price
 Direct wages 10% of selling Price
 Overheads 20% of selling Price
 Materials in hand 2 month’s requirements
 Production Time 1 month
 Finished Goods in Stores 3 months
 Credit for Material 2 months
 Credit allowed to Customers 3 months
 Average Cash Balance Rs. 20,000
 Wages and overheads are paid at the beginning of the month following. in
production all the required materials are charged in the initial stage and wages and
overheads accrue evenly.
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33. Cash conversion cycle (CCC)
CCC is the difference between NOP and
non-cash items like depreciation.
#NOP: net operating profit
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34.  Gross Operating Cycle =
Raw Material Storage Period + Conversion period +
Finished Goods Storage Period + Average Collection
Period
 Net Operating Cycle =
Gross Operating Cycle – Average Payment period
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35. Current Assets:
L Cash ----
L Debtors or Receivables(for ..month’s sales ) ----
v Stock (for…month’s sales) ----
’ Advance payment, if any ----
Others ----
Total Current Assets
----
Less: Current Liabilities
a Creditors (for..month’s Purchases) ----
m Lag in payment of expenses(o/s expenses, if any) ----
Total Current Liabilities ----
Working capital(C.A. – C.L. )
----
Add: Provision / Margin For Contingencies ----
Net Working Capital Required ----
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36. Current Assets
(i)Stock of Raw Material(for…month’s consumption) ----
(ii) Work – in- Process (For..month’s)
(a) Raw Materials ----
(b) Direct Labour ----
(c) Overheads ---- ----
(iii) Stock of finished Goods (For.. Month’s sales)
(a) Raw Materials ----
(b) Direct Labour ----
(c) Overheads ---- ----
(iv) Sundry Debtors(For..month’s sales)
(a) Raw Materials ----
(b) Direct Labour ----
(c) Overheads ---- ----
(V) Payment in advance ----
(vi) Balance of cash (Required to meet day-to-day exp.) ----
Total current Assets
Less: Current Liabilities:
a Creditors (for..month’s Purchases) ----
m Lag in payment of expenses(o/s expenses, if any) ---- ----
Total Current Liabilities ----
Working capital(C.A. – C.L. ) ----
Add: Provision / Margin For Contingencies ----
Net Working Capital Required -----
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37. Prepare an estimate of working capital requirement from
the following information of a trading concern
(b)Project annual sales 100000 units
(c) Selling price Rs. 8 per unit
(d)Net profit on sales 25%
(e)Average credit period allowed to customers 8 weeks
(f) Average credit period allowed by suppliers 4 weeks
(g)Average stock holding in terms of sales
requirement 12 weeks
(g) Allow 10% for contingencies
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38. Current Assets
Debtors(8 weeks) 92,308
Stock (12 weeks) 1,38,462
2,30,770
Less: Current Liabilities
Creditors(4 weeks) 46,154
Net Working Capital 1,84,616
Add 10% for Contingencies 18,462
Working Capital Required 2,03,078
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39.  Liquidity
 Availability of Cash
 Inventory Turnover
 Credit Extended to Customers
 Credit Obtained from Suppliers
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40.  Current Ratio
 Quick Ratio
 Cash to Current Assets
 Sales to Cash
 Average Collection Period
 Inventory Turnover Ratio
 Working Capital to Sales
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41.  Objective of Working Capital Management
 Static view of Working Capital
 Dynamic view of Working Capital
 Determination of Operating Cycle
 Evaluating Working Capital Management
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