Financial Management

2.  Introduction to Working Capital
 Definition of Working Capital
 Objectives of Working Capital
 Sources of Working Capital
 Working Capital & Ratio Analysis
 Types of Working Capital
 Working Capital Policies
 Advantages
 Disadvantages

3.  Working capital is the life blood and nerve centre of a business. Just
as, working capital is very essential to maintain the smooth running of a
business
 Working capital refers to that part of firm’s capital which is required for
financing short term or current assets such as cash, marketable
securities, debtors, and inventories. In other words working capital is the
amount of funds necessary to cover the cost of operating the enterprise.
 Meaning: Working capital means the funds (capital) available and used
for day to day operations ( working) of an enterprise. It consists broadly
of that portion of assets of a business which are used in or related to its
current operations. It refers to funds which are used during an
accounting period to generate a current income of a type which is
consistent with major purpose of a firm existence.

4.  Working capital :is the fund which is used for daily operation of
businesses. That acts as important concept in finance.
 Working capital: represents the funds available with the
company for day to day operations.
 working capital: finances the cash conversion cycle. company
cannot survive with negative working capital which represents
that the company has no funds for day to day operations
 Working capital is: Current asset – current Liabilities.

5.  Every business needs some amount of working capital. It is needed for
following purposes-
 For the purchase of raw materials, components and spares.
 To pay wages and salaries.
 To incur day to day expenses and overhead costs such as fuel, power, and
office expenses etc.
 To provide credit facilities to customers etc.
 Factors that determine working capital:
 The working capital requirement of a concern depend upon a large number
of factors such as
 Size of business? Nature of business.
 Seasonal variations working capital cycle
 Operating efficiency
 Profit level.

6.  The working capital requirements should be met both
from short term as well as long term sources of funds.
 Financing of working capital through short term
sources of funds has the benefits of lower cost and
establishing close relationship with banks.
 Financing of working capital through long term sources
provides the benefits of reduces risk and increases
liquidity.

7.  Ratio Analysis is one of the important techniques that can be used to check
the efficiency with which working capital is being managed by a firm. The
most important ratios for working capital management are as follows.
 Gross Working Capital : Cash and short-term assets expected to be
converted to cash within a year. Businesses use the calculation of gross
working capital to measure cash flow Gross working capital does not
account for current liabilities, but is simply the measure of total cash and
cash equivalent on hand. Gross working capital tends not to add much to
the business' assets, but helps keep it running on a day-to-day basis.
 Net working capital: is the difference between current assets and current
liabilities. An analysis of the net working capital will be very help full for
knowing the operational efficiency of the company
 NET WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIS

8.  Positive working capital: means that the company
is able to pay off its short-term liabilities
-> When current asset outweigh Debts.
 Negative working capital: means that a company
currently is unable to meet its short-term liabilities
with its current assets (cash, accounts receivable
and inventory).
-> When a company has debts than C.Asset.


9.  Essentially: working capital is the answer to the
question: *How much short term funding do you need
to operate this business?*. Short term funding is
important because, with long term funding already in
place, the business still needs short term funding to
operate. Without the short term funding, the business
will go bankrupt.

10.  if you have invested your money to purchase
machineries of company and if you don’t have enough
money to buy raw material, then your machinery will
no use for any production without raw material

11.  Working capital an be divided into two categories:
 Permanent working capital:
 It 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.
 Temporary working capital:
 The amount of such working capital keeps on fluctuating
from time to time on the basis of business activities.

12. Liquidity:
 Under this policy, finance manager will increase the amount of
liquidity for reducing the risk of business. If business has high volume
of cash and balance, then business can easily pays its dues at
maturity.
 Profitability policy
Under this policy, finance manger will keep low amount of cash in
business and try to invest maximum amount of cash and bank balance.
It will sure that profit of business will increase due to increasing of
investment in proper way but risk of business will also increase because
liquidity of business will decrease and it can create bankruptcy position
of business. So, profitability policy should make after seeing liquidity
policy and after this both policies will helpful for proper management
of working capital.

13. Policies Liqui profit Risk
ability
dity
GWC Average Average Average
NWC High Low Low
PWC Low High High

14.  It can arrange loans from banks and others on easy
and favorable terms.
 It helps the business concern in maintaining the
goodwill.
 It enables a concern to face business crisis in
emergencies such as depression
 It creates an environment of security, confidence, and
over all efficiency in a business.
 It helps in maintaining solvency of the business.

15.  Gives a company the ability to meet its current
liabilities.
 Expand its volume of business.
 Take advantage of financial opportunities as they arise.

16.  Rate of return on investments also fall with the
shortage of working capital.
 Excess working capital may result into over all
inefficiency in organization.
 Excess working capital means idle funds which earn
no profits.
 Inadequate working capital can not pay its short term
liabilities in time.

17.  · You can't expand, can't pay your staff, can't pay
yourself, and can't pay your suppliers. So in a nutshell,
no cash flow, or working capital, no viable business.
 · Lack of sufficient working capital and inability to
liquidate current assets are frequent causes of business
failure.

18.  After study the nature of production, we can estimate the need for
working capital. If company produces products at large scale and
continues producing goods, then company needs high amount of
working capital.
 As we discussed working capital is the life blood of the
business so we should keep it controlled I think if we
use from Gross Working capital we can expedite our
business well and every thing in average will work
more.

19. Thank you!
Prepared by Abdul
Fahim Ehsas
RIHS
Kabul, Afghanistan