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Working Capital Management

The document discusses key concepts related to working capital management including: 1. Working capital is a measure of liquid assets available to a company and is calculated as current assets minus current liabilities. 2. Working capital management involves managing inventories, receivables, payables, and cash to meet operational expenses and debt obligations. 3. The fundamental principles of working capital management are reducing capital employed and improving efficiency in managing receivables, inventories, and payables.

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78 views12 pages

Working Capital Management

The document discusses key concepts related to working capital management including: 1. Working capital is a measure of liquid assets available to a company and is calculated as current assets minus current liabilities. 2. Working capital management involves managing inventories, receivables, payables, and cash to meet operational expenses and debt obligations. 3. The fundamental principles of working capital management are reducing capital employed and improving efficiency in managing receivables, inventories, and payables.

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ankush_garg_36
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© Attribution Non-Commercial (BY-NC)
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Date:28-sept-2011

Ankush Kumar MBA 3rd Sem

1012003

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 earning assets. Allows to avail of unexpected opportunities. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing shortterm debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.

Decisions relating to working capital and short term financing are referred to as working capital management. Short term financial management concerned with decisions regarding to CA and CL. Management of Working capital refers to management of CA as well as CL. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

The fundamental principles of working capital management are reducing the capital employed and improving efficiency in the areas of receivables, inventories, and payables.

Investment in CA represents a substantial portion of total investment. Investment in CA and level of CL have to be geared quickly to changes in sales.

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Balance Sheet Concepts Gross Working Capital Net working Capital Operating Cycle Concepts

Total Current assets Where Current assets are the assets that can be converted into cash within an accounting year & include cash , debtors etc. Argument In Favour Of Gross Working Capital 1. Management is concern with total current assets as they represents fund available for operating expenses 2. Gross concept give the idea about the Liquidity and profitability of the Business

CA CL It indicates liquidity position of a firm & suggests the extent to which working capital needs may be financed by permanent sources of funds.

Argument In Favour Of Net Working Capital 1. This concepts help the creditors in measuring liquidity 2. It gives idea about how much to investing in CA 3. Only the surplus can be used to meet contingency

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Conversion of cash into inventory or Raw material Conversion of Raw material into Goods Distribution Of Goods Conversion of inventory into Receivables Or Sale of Goods on Credit Conversion of Receivables into Cash

Duration of raw material storage stage Duration in work in Progress Duration of finished goods Stage Duration of Receivable collection Duration of the credit period allow by the supplier O = R+W+F+D-C

(In a year) No. of operating cycle =365/no. of days in a cycle Total operating expenses/no. of the operating cycle The result amount + additional amount for contingency will be the average requirement of the working capital

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