PRINCIPLES OF
W0RKING CAPITAL MANAGEMENT
CONCEPTS OF WORKING CAPITAL
• Gross Working Capital
• Net Working Capital
KINDS OF WORKING CAPITAL
• CONCEPT BASE
Gross Working Capital & Net Working Capital
• TIME BASE
Permanent Working Capital & Temporary
Working Capital
OBJECTIVES OF W0RKING CAPITAL
MANAGEMENT
• Ensure optimum investment in Current Assets
• Strike a balance b/w twin objectives of
LIQUIDITY & PROFITABILITY in the use of funds
• Ensure adequate flow of funds for current
operations
• Speed up the flow of funds or to minimize the
stagnation of funds
OPERATING CYCLE
• The TIME (in days) that ELAPSES to convert Raw
materials in to Cash
• Operating Cycle procedure (MANUFACTURING FIRM)
1. Conversion of Cash in to Raw materials.
2. Conversion of Raw materials in to Work in process.
3. Conversion of Work in process in to Finished goods.
4. Conversion of Finished goods in to Sales (Debtors &
Cash)
OPERATING CYCLE
• Operating Cycle procedure
(NONMANUFACTURING FIRM)
1. Conversion of Cash in to Finished goods in to
Receivables.
2. Conversion of Finished goods in to Receivables.
3. Conversion of Receivables in to Cash.
Factors Influencing Working Capital
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Nature of Business
Size of Business
Production Cycle Process
Credit Policy or Terms of Purchases & Sales
Business Cycle
Scarce Availability of Raw Materials
Dividend Policy
Operating Efficiency
From the following information of Z Ltd, estimate the working capital needed to finance
a level of activity of 1,10,000 units of production after adding a 10% safety contingency
Particulars
(per unit)
Raw materials
Direct Labour
Overheads (excluding depreciation)
Total Cost
Profit
Selling Price
Amount
78
29
58
165
24
189
Additional Information:
Average raw materials in stock: 1 month
Average materials in process (50% completion stage): Half a month
Credit allowed by suppliers: 1 month
Credit allowed to customers: 2 months
Time lag in payment of Wages: 1 ½ weeks
Overhead expenses: 1 month
1/4th of the sales is on Cash basis. Cash balance is expected to be Rs.2,15,000.
You may assume that the production is carried out evenly throughout the year & wages &
overhead expenses accrue similarly.
Estimation of Working Capital Needs
Particulars
Amount(Rs.)
A. Estimation of Current Assets
(i) Raw materials inventory:1 month:(110000 x 78 x 4/52)
6,60,000.00
(ii) Work in process inventory: ½ month
Raw materials (110000 x 78 x 2/52)
= 3,30,000
Direct Labour (110000 x 14.5 x 2/52)
= 61,346.15
Overheads
= 1,22,692.31
(110000 x 29 x 2/52)
5,14,038.46
(iii)Finished Goods Inventory: 1 month:(110000x78 x 4/52) 13,96,153.85
(iv) Debtors: 2 months: (82,500 x 165 x 8/52)
(v) Cash Balance required
Total Current Assets
20,94,230.77
2,15,000.00
48,79,423.08
Amount(Rs.)
Particulars
Amount(Rs.)
Amount(Rs.)
B. Estimation of Current Liabilities
(i) Creditors:1 month:(110000 x 78 x 4/52)
6,60,000.00
(ii) Expenses:
Overheads (110000 x 58 x 4/52)
= 4,90,769.23
Labour (110000 x 29 x 3/104)
= 92.109 .23
Total Current Liabilities
C. Working Capital (A-B)
Add: 10% Contingency
D. Working Capital required
5,82,788.46
12,42,788.46
36,36,634.62
3,63,663.46
40,00,298.08