8/2/2019 Sonia Mehta PGD11106
1/15
Working CapitalManagement
8/2/2019 Sonia Mehta PGD11106
2/15
Current assets Current liabilities It measures how much in liquid assets a company has
available to build its business.
A short term loan which provides money to buy earningassets.
Allows to avail of unexpected opportunities.
Positive working capital is required to ensure that a firmis able to continue its operations and that it has sufficientfunds to satisfy both maturing short-term debt and
upcoming operational expenses. The management ofworking capital involves managing inventories, accountsreceivable and payable and cash.
8/2/2019 Sonia Mehta PGD11106
3/15
Working capital
An increase in working capital indicatesthat the business has either increased
current assets (that is received cash, orother current assets) or has decreasedcurrent liabilities, for example has paid off
some short-term creditors.
8/2/2019 Sonia Mehta PGD11106
4/15
Working Capital Management
Decisions relating to working capital and short termfinancing are referred to as working capital management.Short term financial management concerned withdecisions regarding to CA and CL.
Management of Working capital refers to management ofCA as well as CL.
If current assets are less than current liabilities, an entityhas a working capital deficiency, also called a working
capital deficit.
These involve managing the relationship between afirm's short-term assets and its short-term liabilities
8/2/2019 Sonia Mehta PGD11106
5/15
Working Capital Goal
The goal of working capital management is to ensurethat the firm is able to continue its operations and that ithas sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
Businesses face ever increasing pressure on costs andfinancing requirements as a result of intensifiedcompetition on globalised markets. When trying to attaingreater efficiency, it is important not to focus exclusively
on income and expense items, but to also take intoaccount the capital structure, whose improvement canfree up valuable financial resources
8/2/2019 Sonia Mehta PGD11106
6/15
Active working capital management is anextremely effective way to increase enterprisevalue. Optimising working capital results in a
rapid release of liquid resources and contributesto an improvement in free cash flow and to apermanent reduction in inventory and capitalcosts, thereby increasing liquidity for strategic
investment and debt reduction. Processoptimisation then helps increase profitability.
8/2/2019 Sonia Mehta PGD11106
7/15
The fundamental principles of workingcapital management are reducing thecapital employed and improving efficiency
in the areas of receivables, inventories,and payables.
8/2/2019 Sonia Mehta PGD11106
8/15
8/2/2019 Sonia Mehta PGD11106
9/15
Gross Working Capital
Total Current assets
Where Current assets are the assets thatcan be converted into cash within anaccounting year & include cash , debtorsetc.
Referred as Economics Concept since
assets are employed to derive a rate ofreturn.
8/2/2019 Sonia Mehta PGD11106
10/15
Net Working Capital
CA CL
Referred as point of view of an
Accountant.
It indicates liquidity position of a firm &suggests the extent to which workingcapital needs may be financed bypermanent sources of funds.
8/2/2019 Sonia Mehta PGD11106
11/15
CONSTITUENTS OF WORKINGCAPITAL
CURRENT ASSETS Inventory
Sundry Debtors
Cash and Bank Balances Loans and advances
CURRENT LIABILITIES
Sundry creditors Short term loans
Provisions
8/2/2019 Sonia Mehta PGD11106
12/15
Short Life Span
I.e. cash balances may be held idle for a weekor two , thus a/c may have a life span of 30-60days etc.
Swift Transformation into other Asset formsI.e.each CA is swiftly transformed into otherasset forms like cash is used for acquiring raw
materials , raw materials are transformed intofinished goods and these sold on credit areconvertible into A/R & finlly into cash.
8/2/2019 Sonia Mehta PGD11106
13/15
Matching Principle
If a firm finances a long term asset(likemachinery) with a S-T Debt then it will have tobe periodically finance the asset which will be
risky as well as inconvenient. i.e. maturity of sources of financing should be
properly matched with maturity of assets beingfinanced.
Thus Fixed Assets & permanent CA should besupported with L-T sources of finance &fluctuating CA by S-T sources.
8/2/2019 Sonia Mehta PGD11106
14/15
Need for Working Capital
As profits earned depend upon magnitude ofsales and they donot convert into cash instantly,thus there is a need for working capital in the
form of CA so as to deal with the problem arisingfrom lack of immediate realisation of cashagainst goods sold.
This is referred to as Operating or Cash Cycle .
It is defined as The continuing flow from cash to
suppliers, to inventory , to accounts receivable &back into cash .
8/2/2019 Sonia Mehta PGD11106
15/15
Need for Working Capital
Thus needs for working capital arises from cashor operating cycle of a firm.
Which refers to length of time required to
complete the sequence of events. Thus operating cycle creates the need for
working capital & its length in terms of time spanrequired to complete the cycle is the majordeterminant of the firms working capital needs.
Top Related