slide on working capital management

1. PRESENTED BY:
Navaneeth k

2.  Working Capital

3. Working capital
Introduction
 Working capital typically means the firm’s
holding of current or short-term assets such as
cash, receivables, inventory and marketable
securities.
 These items are also referred to as circulating
capital
 Corporate executives devote a considerable
amount of attention to the management of
working capital

4. Working capital refers to that part of the
firm’s capital, which is required for financing
short-term or current assets such as cash
marketable securities, debtors and
inventories.
It is also known as revolving or circulating
capital or short-term capital

5. • Current Assets
These are those assets which change their
form within a short period of time,
generally within one year.
It includes-:
Debtors, B/R, Cash & Bank balance, Prepaid
expenses etc.

6. • Current Liabilities
These are those liabilities which are payable
within a short period of time, generally within
one year.
It includes-
Creditors, B/P, Bank o/d, Short term loan,
Proposed dividend etc.

7. Net Working Capital
Current Assets - Current Liabilities.
Gross Working Capital
The firm’s investment in current assets.

8.  Strengthen The Solvency
Working capital help to operate the business
smoothly with out any financial problem for
making the payment of short-term liabilities
such as payment to supplier, payment of
salary and wages...etc.
 Enhance Goodwill
Sufficient working capital enables a business
concern to make prompt payment and hence
help in creating and maintaining goodwill

9.  Easy Obtaining Loan
A firm having adequate working capital,
High solvency and good credit rating can
arrange loans from banks and financial
institutions in a easy and favourable terms.
Ability To Face Crisis
Adequate working capital enables a firm to
face business crisis in emergencies
Such as depression

10.  Regular Supply Of Raw Material
Quick payment of credit purchase of raw
materials ensure the regular supply of raw
material from suppliers.
 High Morale
Adequacy of working capital creates an
environment of security, confidence, high
morale and creates overall efficiency in
business.

11.  Smooth Business Operation
Adequate working capital enable us to met
any day to day financial requirement without
shortage of fund, and all expenses and
current liabilities are paid on time
Cash discounts
Adequate working capital also enable a
concern to avail cash discounts on the
purchase and hence it reduce costs

12.  Strengthen The Solvency
 Enhance Goodwill
 Easy Obtaining Loan
 Ability To Face Crisis
 Regular Supply Of Raw Material
 High Morale
 Smooth Business Operation
 Cash discounts

13. Working capital management simply refers to
management of working capital or it is the
management of current asset and current
liabilities .It involves the problem of decision
making regarding investment in various
current assets for maintaining the liquidity of
fund

14. “working capital management is concerned
with the problems that arise in attempting to
manage the current asset, current liabilities
and the interrelationship that exist between
them”
- SMITH

15. How the working capital
should be financed ?

16. Short term fund
Less costly= there is a “favourable impact on
profitability”
Long term fund
“It provide liquidity for a longer period of
time”

17. Approaches to Financing
Mix
The Hedging or
Matching Approach
The Conservative
Approach
The Aggressive
Approach

18.  Permanent working capital-
 Temporary working capital-
Permanent working capital- There is always a
minimum level of working capital which is
continuously required by a firm in order to
maintain its activities like cash, stock and other
current assets in order to meet its business
requirements irrespective of the level of
operations.

19.  Temporary working capital- Over and above the
permanent working capital, the firm may also
require additional working capital in order to meet
the requirements arising out of fluctuations in
sales volume. This extra working capital needed to
support the increased volume of sales is known as
temporary or fluctuating working capital

20. 8-20
Permanent
Working Capital
The amount of current assets required to
meet a firm’s long-term minimum needs.
Permanent current assets
TIME
DOLLARAMOUNT

21. 8-21
Temporary
Working Capital
The amount of current assets that varies
with seasonal requirements.
Permanent current assets
TIME
DOLLARAMOUNT
Temporary current assets

23.  This approach is also known as matching
approach.
 The hedging approach suggests that the
permanent working capital requirement
should be financed with fund from long term
sources while the temporary working capital
requirement should be financed with short
term funds

24. Hedging approach to asset financing
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
Short-term
Debt
Long-term
Debt +
Equity
Capital

25.  According to this approach, the expected
life of an asset is matched with the period
of source of finance by which the asset is
financed
 Financing Strategy Of Hedging
Approach
Long term fund= Fixed asset+ Total
permanent current asset
Short term fund= Total temporary current
asset

26.  This is an approach that emphasis on safety.
 This approach suggested that the entire
estimated investments in current asset should
be finance from long term source and short
term should be use only for emergency
requirement
 Availability of sufficient working capital will
enable the smooth operation of business and
reduce the risk of insolvency

27. Conservative approach to asset financing
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
Short-term
Debt
Long-term
Debt +
Equity
capital

28. Distinct features of this approach
 Liquidity is greater
 Risk is minimized
 The cost of financing is relatively more

29. Smooth operations with no stoppages
No insolvency risk
DISADVANTAGES
Higher interest cost
Idle fund

30.  Financing Strategy Of conservative
Approach
Long term fund= fixed asset + total
permanent asset + part of temporary current
asset
Short term fund= part of temporary current
asset

31. Risky approach
The aggressive approach suggests that the
entire estimated requirement of current asset
should be financed from short-term sources
and even a part of fixed asset investment be
financed from short - term sources
This approach make the finance mix :
 More Risky
 Less costly
 More Profitable

32. Aggressive approach to asset financing
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
Short-term
Debt
Long-term
Debt +
Equity
capital

33.  Financing Strategy Of Aggressive
Approach
Long term fund= fixed asset + part of
permanent current asset
Short term fund= part of permanent current
asset + total temporary current asset

35.  This is one of the latest trends in working
capital management
 Concept was advocated by
“KAMPOURIS”(CEO OF AMERICAN
STANDARD)
 under this policy working capital tends to
be zero
 Excess investment in current asset is
avoided and firm meets current liabilities
out of matching current asset