working capital

WORKING CAPITAL:

WORKING CAPITAL Presented by: MANOJ SHARMA

Contents:

Contents Kinds of Working Capital Importance of adequate working capital Excess or inadequate working capital Need or objects of working capital Factors determining working capital’s requirement

Types of working capital:

Types of working capital 1. On the basis of concept (a) Gross working capital (b) Net working capital 2. On the basis of Requirement (a) Permanent (b) Variable exp- seasonal

Gross Working Capital : :

Gross Working Capital : It show the amount Invested in current assets. It is the capital Invested in total current assets of the enterprise. Cash in hand & Bank balance. Bills Receivables Debtors Stock Raw Material Work in Progress Prepaid Expenses. Finished

Net Working Capital ::

Net Working Capital : It is the excess of current assets over current Liabilities. Current Liabilities : 1. Bills Payables 2. Sundry creditors 3. O/s Expenses 4. Bank overdraft 5. Dividend payable .

On the basis of Time:

On the basis of Time 1. Fixed working capital : It is the minimum amount which required to ensure effective utilization of fixed facilities of fixed facilities and for maintaining the circulation of CA e.g.. every firm maintain a minimum level of Ra material, WI progress etc. The minimum level of CA is called fixed working capital.

Slide 8:

2. Variable working capital : It is the amount of working capital which is required to meet the seasonal demand and some special exigencies e.g. bank credit. Seasonal : Industries work Special : For some special job

IMPORTANCE OF ADEQUATE WORKING CAPITAL:

IMPORTANCE OF ADEQUATE WORKING CAPITAL Working capital is the life blood and nerve centre of a business . Just as circulation of blood is essential in the human body for maintain life, working capital to maintain the smooth running of a business. The main advantages of maintaining adequate amount of working capital are as follows:

Slide 10:

Solvency of the business: Adequate amount of working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Good will: Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.

Slide 11:

Regular supply of Raw material: Sufficient working capital ensures regular supply of raw materials and continuous production. Regular payment of salaries, wages & other day commitments: A company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which rates the morale of its employees., increase their efficiency, reduces wastage and cost and enhances production and profits.

Slide 12:

Quick & regular return on Investment: Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to investors as there may not much pressure to plough back profits. This gain confidence of its investors and creates a favorable market to raise additional funds. Cash discount: Adequate amount of working capital also enables a concern to avail cash discount on the purchases and hence it reduces costs.

Slide 13:

Easy loans: A concern having adequate amount of working capital, having solvency and good credit standing can arrange loans from banks and others on easy and favorable term. Ability to face crisis: Sufficient working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.

Slide 14:

Exploitation of favorable market conditions: Only concern with adequate working capital can exploit favorable conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.

EXCESS OR INADEQUATE WORKING CAPITAL:

EXCESS OR INADEQUATE WORKING CAPITAL Disadvantage of redundant or excessive working capital When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses. Excessive working capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate on its investments. Excessive working capital implies excessive debtors and defective credit policies which may cause higher incidence of bad debts.

Slide 16:

When there is excessive working capital, relations with banks and other financial institution may not be maintained. Due to low rate of return on investments, the value of share may also fall. Due to low rate of return on investments, the value of shares may also fall. The redundant working capital gives rise to speculative transactions. It may results into overall inefficiency in the organization.

Slide 17:

Disadvantage or danger of inadequate working capital A concern which has inadequate working capital cannot pay its short term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credit facilities. It cannot buy its requirements in bulk and cannot avail of discounts, etc. It become difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital.

Slide 18:

The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business. It becomes impossible to utilizes the fixed assets due to non-availabilities of liquid funds. The rate of return on investments also fall with the shortage of working capital.

THE NEED OR OBJECTS OF WORKING CAPITAL :

THE NEED OR OBJECTS OF WORKING CAPITAL 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 meet the selling costs as packing, advertising, etc. To provide credit facilities to the customers. To maintain their inventories of raw material, work-in-progress, stores and spares and finished socks.

FACTORS AFFECTING THE WORKING CAPITAL REQUIREMENT:

FACTORS AFFECTING THE WORKING CAPITAL REQUIREMENT

Slide 21:

The working capital requirements of a concern depends upon a large number of factors such as nature & size of business , The character of there operation, The length of production cycle, The rate of stock turnover & The state of economic situation. Following are important factors generally influencing the working capital requirements:

Slide 22:

NATURE OR CHARACTER OF BUSINESS. SIZE OF BUSINESS. PRODUCTION POLICY. MANUFACTURING PROCESS. SEASONAL VARIATION. WORKING CAPITAL CYCLE. RATE OF STOCK TURNOVER. CREDIT POLICY. BUSINESS CYCLE. RATE OF GROWTH OF BUSINESS. EARNING CAPACITY. PRICE LEVEL CHANGE. OTHER FACTORS.

NATURE OR CHARACTER OF BUSINESS.:

NATURE OR CHARACTER OF BUSINESS. It is of a firm basically depends upon the nature of he business. Public utility undertakings like Electricity, Water supply & Railways need very limited W.C. because they offer cash sales only & supply services. On the same side Trading & Financial firms require less investment in fixed assets but have to invest large amount in current assets like Receivables, Inventories & Cash.

SIZE OF BUSINESS:

SIZE OF BUSINESS It may be measured in term of SCALE OF OPERATIONS. Greater the size of a Business unit, Generally larger will be the requirements of W.C. However, in some cases even a smaller concern may need more W.C. due to High overhead charges, Inefficient use of available resources & Other economic advantage of small size.

PRODUCTION POLICY:

PRODUCTION POLICY The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season. If the policy is to be kept production steady by inventories it will require higher working capital.

MANUFACTURING PROCESS:

MANUFACTURING PROCESS Longer the process period the manufacture, large is the amount of W.C. required. The Raw material & Other supplies have to be carried for a long period in the process with progressive increment of Labor & Services cost before the finished products in finally obtained. Therefore, if there are alternative processes of production, the process with the shortest production period should be chosen.

SEASONAL VARIATION:

SEASONAL VARIATION In Industries, they have to buy raw material in bulk during the season to ensure uninterrupted flow & process them during the entire year. A huge amount is thus, blocked in the form of material inventory during such season, which gives rise to more W.C. requirement. During the busy season, a firm requires large W.C. than in the slack season.

WORKING CAPITAL CYCLE:

WORKING CAPITAL CYCLE CASH RAW MATERIAL DEBTORS (RECEIVABLES) FINISHED GOODS WORK IN PROGRESS

RATE OF STOCK TURNOVER:

RATE OF STOCK TURNOVER There is a high degree of inverse co-relationship between the Quantum of working capital & the speed with which the sales are effected. A firm having a high rate of stock turnover will need lower amount of W.C. as compared to firm having a low rate of turnover.

CREDIT POLICY:

CREDIT POLICY It is a concern in its dealing with debtors & creditors influence considerable the requirements of W.C. A concern that purchase its req. on credit & sell its product or services on cash req. lesser amount of W.C.

BUSINESS CYCLE:

BUSINESS CYCLE It refers to alternate expansion & contraction in general business activity. In a period of boom i.e. there is a need for large amount of W.C. due to increase in sales, rise in price, optimistic expansion e.g. business. On the contrary in the time of depression, when there is a down swing of cycle, the business contracts, sales decline, difficulty are faced in collection from debtors & firms may have a large amount of W.C. lying idle.

RATE OF GROWTH OF BUSINESS:

RATE OF GROWTH OF BUSINESS It is difficult to determine the relationship between the growth in the volume of business & growth in W.C. of a business, it may be concluded that for normal rate of expansion in the volume of the business, we may have retained profit to provide for more W.C. but in fast growing concern, we shall require larger amount of working capital.

EARNING CAPACITY & DIVIDEND POLICY:

EARNING CAPACITY & DIVIDEND POLICY Some firms have more earning capacity than other due to quality of there product, monopoly conditions etc. these firms with high earning capacity may generate cash profit from operation & contribute to there W.C. The dividend policy of a concern also influence the req. of its W.C. A firm can maintain a steady high rate of cash dividend irrespective of its generation of profit need more W.C. than the firm that retains larger parts of its profit & doesn’t pay so high rate of cash dividend.

PRICE LEVEL CHANGES:

PRICE LEVEL CHANGES Change in price level also affect the W.C. req. The rising price will require the firm to maintain larger amount of W.C. as more funds will be required to maintain the same current assets. The effect of rising price may be different for different firms. Some firms may be affected must while some others may not be affected at all by the rising in prices.

OTHER FACTORS:

OTHER FACTORS Certain other factor such as operating efficiency, management ability, a irregularities of supply, import policy, asset structure, importance of labor , banking facilities etc.. Also influence the requirements of working capital.

Thank you :

Thank you