WORKING CAPITAL MANAGEMENT

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WORKING CAPITAL MANAGEMENT:

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL MANAGEMENT Definition of Working Capital " Working capital is an excess of current assets over current liabilities. In other words, The amount of current assets which is more than current liabilities is known as Working Capital. If current liabilities are nil then, working capital will equal to current assets. Working capital shows strength of business in short period of time . If a company have some amount in the form of working capital , it means Company have liquid assets, with this money company can face every crises position in market. " Formula of Calculating Working Capital Working Capital = Current Assets - Current Liabilities Current Assets Current assets are those assets which can be converted into cash within One year or less then one year . In current assets, we includes cash, bank, debtors, bill receivables, prepaid expenses, outstanding incomes . Current Liabilities Current Liabilities are those liabilities which can be paid to respective parties within one year or less than one year at their maturity. In current liabilities, we includes creditors, outstanding bills, bank overdraft, bills payable and short term loans, outstanding expenses, advance incomes . Other names of Working Capital Some Professional accountants know working capital as operating capital, operating liquidity, positive working capital. :

WORKING CAPITAL MANAGEMENT Definition of Working Capital " Working capital is an excess of current assets over current liabilities. In other words, The amount of current assets which is more than current liabilities is known as Working Capital. If current liabilities are nil then, working capital will equal to current assets. Working capital shows strength of business in short period of time . If a company have some amount in the form of working capital , it means Company have liquid assets, with this money company can face every crises position in market. " Formula of Calculating Working Capital Working Capital = Current Assets - Current Liabilities Current Assets Current assets are those assets which can be converted into cash within One year or less then one year . In current assets, we includes cash, bank, debtors, bill receivables, prepaid expenses, outstanding incomes . Current Liabilities Current Liabilities are those liabilities which can be paid to respective parties within one year or less than one year at their maturity. In current liabilities, we includes creditors, outstanding bills, bank overdraft, bills payable and short term loans, outstanding expenses, advance incomes . Other names of Working Capital Some Professional accountants know working capital as operating capital, operating liquidity, positive working capital.

Important things about Working Capital 1. Working Capital can be negative. At that time, We add one word " deficiency" in the back of working capital . It means if Current Liabilities are more than current assets, it is known as working capital deficiency or inverse working capital or negative working capital. 2. Working capital can be easily adjusted, if Accounts manager knows different techniques of managing working capital . He can try to get short term loan or he can increase working capital by proper management of inventory and outstanding incomes and debtors . 3. Working capital can also change by Changing in Cash Conversion period. Cash conversion period is a period in which company changes current assets into cash or bank. 4. Working capital can also positive by increasing growth rate of company. If company does not invest more money and increase profit, the same amount will increase in the cash position of company and with cash company can increase their working capital position.:

Important things about Working Capital 1. Working Capital can be negative. At that time, We add one word " deficiency" in the back of working capital . It means if Current Liabilities are more than current assets, it is known as working capital deficiency or inverse working capital or negative working capital. 2. Working capital can be easily adjusted, if Accounts manager knows different techniques of managing working capital . He can try to get short term loan or he can increase working capital by proper management of inventory and outstanding incomes and debtors . 3. Working capital can also change by Changing in Cash Conversion period. Cash conversion period is a period in which company changes current assets into cash or bank. 4. Working capital can also positive by increasing growth rate of company. If company does not invest more money and increase profit, the same amount will increase in the cash position of company and with cash company can increase their working capital position.

Introduction of Working Capital Management Working capital management is the device of finance. It is related to manage of current assets and current liabilities. After learning working capital management, commerce students can use this tool for fund flow analysis. Working capital is very significant for paying day to day expenses and long term liabilities. Meaning and Concept of Working Capital and its management Working capital is that part of company’s capital which is used for purchasing raw material and 3 involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested your money to purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any production without raw material. From this example, you can understand that working capital is very useful for operating any business organization. We can also take one more liquid item of current assets that is cash. If you have not cash in hand, then you can not pay for different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities. :

Introduction of Working Capital Management Working capital management is the device of finance. It is related to manage of current assets and current liabilities. After learning working capital management, commerce students can use this tool for fund flow analysis. Working capital is very significant for paying day to day expenses and long term liabilities. Meaning and Concept of Working Capital and its management Working capital is that part of company’s capital which is used for purchasing raw material and 3 involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested your money to purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any production without raw material. From this example, you can understand that working capital is very useful for operating any business organization. We can also take one more liquid item of current assets that is cash. If you have not cash in hand, then you can not pay for different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities.

Types of Working Capital 1. Gross working capital Total or gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital. 2. Net Working Capital Net working capital is the excess of current assets over current liabilities. Net Working Capital = Total Current Assets – Total Current Liabilities This amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long term debts at any time. 3. Permanent Working Capital Permanent working capital is that amount of capital which must be in cash or current assets for continuing the activities of business. 4. Temporary Working Capital Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital. :

Types of Working Capital 1. Gross working capital Total or gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital. 2. Net Working Capital Net working capital is the excess of current assets over current liabilities. Net Working Capital = Total Current Assets – Total Current Liabilities This amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long term debts at any time. 3. Permanent Working Capital Permanent working capital is that amount of capital which must be in cash or current assets for continuing the activities of business. 4. Temporary Working Capital Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital .

Operating cycle of a business Background to the operating cycle of a business The operating cycle of a business is also known as the "Cash Operating Cycle", the "Cash to Cash Cycle", the "Cash Conversion Cycle" or simply the "Cash Cycle". Business conducts a stream of value-adding activities designed to satisfy customer needs. The key components of this value-adding stream include management's decision making and actions, the equipment and assets that transform raw materials into the finished products and a ready access to cash. Cash is a critical support factor in the value-adding process of businesses. Cash can be locked-up in assets like inventory and accounts receivables (debtors). This cash cannot be invested in activities that may further enhance the value-adding stream. Excessive amounts of cash lock-up in these assets becomes unproductive and therefore a waste of valuable resources. Business decision makers wish to monitor the amount of cash that is locked up and out of reach because it impacts on the working capital requirements of the business. The metric that has been developed to do this is the called the Operating Cycle ratio of the business. The Operating Cycle ratio is a metric that expresses the length of time, in days, that it takes for a business to convert resource inputs into cash flows. The Operating Cycle incorporates the amount of time that is needed to sell inventory, the amount of time that is needed to collect account receivables and the length of time :

Operating cycle of a business Background to the operating cycle of a business The operating cycle of a business is also known as the "Cash Operating Cycle", the "Cash to Cash Cycle", the "Cash Conversion Cycle" or simply the "Cash Cycle". Business conducts a stream of value-adding activities designed to satisfy customer needs. The key components of this value-adding stream include management's decision making and actions, the equipment and assets that transform raw materials into the finished products and a ready access to cash. Cash is a critical support factor in the value-adding process of businesses. Cash can be locked-up in assets like inventory and accounts receivables (debtors). This cash cannot be invested in activities that may further enhance the value-adding stream. Excessive amounts of cash lock-up in these assets becomes unproductive and therefore a waste of valuable resources. Business decision makers wish to monitor the amount of cash that is locked up and out of reach because it impacts on the working capital requirements of the business. The metric that has been developed to do this is the called the Operating Cycle ratio of the business. The Operating Cycle ratio is a metric that expresses the length of time, in days, that it takes for a business to convert resource inputs into cash flows. The Operating Cycle incorporates the amount of time that is needed to sell inventory, the amount of time that is needed to collect account receivables and the length of time

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Define the Operating Cycle of a business The Operating Cycle of a business is the length of time between the cash outflow on purchased material and cash inflow from the sale of goods. The Operating Cycle determines the amount of working capital that a business requires to operate on a day-to-day basis. The shorter the Operating Cycle the lower the amount of working capital required for the business and the greater opportunity for investments in other value-adding activities. The Operating Cycle for a manufacturing based business can involve many stages, namely: 1. Purchase - the receipt of raw materials from suppliers on account. 2. Conversion - the conversion of these raw materials into finished goods 3. Inventory - the holding and storage of raw materials, Work-In-Progress (WIP) and Finished Goods. 4. Payment - the payment of the supplier's account for the raw materials received earlier. 5. Sale - the sale of finished goods to customers on account

Operating cycle and cash cycle are two important components of working capital management. Together they determine the efficiency of a firm regarding working capital management. While the operating cycle is the time period from inventory purchase until the receipt of cash, the cash cycle is the time period from when cash is paid out, to when cash is received. Operating cycle refers to the delay between the buying of raw materials and the receipt of cash from sales proceeds. In other words, operating cycle refers to the number of days taken for the conversion of cash to inventory through the conversion of accounts receivable to cash. It indicates towards the time period for which cash is engaged in inventory and accounts receivable. If an operating cycle is long, then there is lower accessibility to cash for satisfying liabilities for the short term. :

Operating cycle and cash cycle are two important components of working capital management. Together they determine the efficiency of a firm regarding working capital management. While the operating cycle is the time period from inventory purchase until the receipt of cash, the cash cycle is the time period from when cash is paid out, to when cash is received. Operating cycle refers to the delay between the buying of raw materials and the receipt of cash from sales proceeds. In other words, operating cycle refers to the number of days taken for the conversion of cash to inventory through the conversion of accounts receivable to cash. It indicates towards the time period for which cash is engaged in inventory and accounts receivable. If an operating cycle is long, then there is lower accessibility to cash for satisfying liabilities for the short term.

Operating cycle takes into consideration the following elements: accounts payable, cash, accounts receivable, and inventory replacement. The following formula is used for calculating operating cycle: Operating cycle = age of inventory + collection period Here, Age of Inventory (in days) = Inventory/ (Cost of Sales/365) = 365/Inventory Turnover Collection Period (in days) = Receivables/ (Sales/365) = 365/Receivables Turnover Cash cycle is also termed as net operating cycle, asset conversion cycle, working capital cycle or cash conversion cycle. Cash cycle is implemented in the financial assessment of a commercial enterprise. The cash cycle is interpreted as the number of days between the payment for inputs and getting cash by sales of commodities manufactured from that input. The fundamental formula that is applied for the calculation of cash conversion cycle is as follows: :

Operating cycle takes into consideration the following elements: accounts payable, cash, accounts receivable, and inventory replacement. The following formula is used for calculating operating cycle: Operating cycle = age of inventory + collection period Here, Age of Inventory (in days) = Inventory/ (Cost of Sales/365) = 365/Inventory Turnover Collection Period (in days) = Receivables/ (Sales/365) = 365/Receivables Turnover Cash cycle is also termed as net operating cycle, asset conversion cycle, working capital cycle or cash conversion cycle. Cash cycle is implemented in the financial assessment of a commercial enterprise. The cash cycle is interpreted as the number of days between the payment for inputs and getting cash by sales of commodities manufactured from that input. The fundamental formula that is applied for the calculation of cash conversion cycle is as follows:

Cash cycle = (Average Stockholding Period) + (Average Receivables Processing Period) - (Average Payables Processing Period) Here Average Receivables Processing Period (in days) = Accounts Receivable/Average Daily Credit Sales Average Stockholding Period (in days) = Closing Stock/Average Daily Purchases Average Payable Processing Period (in days) = Accounts Payable/Average Daily Credit Purchases A short cash cycle reflects sound management of working capital. On the other hand, a long cash cycle denotes that capital is occupied when the commercial entity is expecting its clients to make payments. There is always a probability that a commercial enterprise can face negative cash conversion cycle, in which case they are getting payments from the clients before any payment is made to the suppliers. Instances of such business entities are commonly those companies, which apply JIT or Just in Time techniques, for example Dell, as well as commercial enterprises, which purchase on terms and conditions of longer duration credits and perform sales against cash, for instance Tesco. :

Cash cycle = (Average Stockholding Period) + (Average Receivables Processing Period) - (Average Payables Processing Period) Here Average Receivables Processing Period (in days) = Accounts Receivable/Average Daily Credit Sales Average Stockholding Period (in days) = Closing Stock/Average Daily Purchases Average Payable Processing Period (in days) = Accounts Payable/Average Daily Credit Purchases A short cash cycle reflects sound management of working capital. On the other hand, a long cash cycle denotes that capital is occupied when the commercial entity is expecting its clients to make payments. There is always a probability that a commercial enterprise can face negative cash conversion cycle, in which case they are getting payments from the clients before any payment is made to the suppliers. Instances of such business entities are commonly those companies, which apply JIT or Just in Time techniques, for example Dell, as well as commercial enterprises, which purchase on terms and conditions of longer duration credits and perform sales against cash, for instance Tesco.

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