sonia mehta pgd11106

8/2/2019 Sonia Mehta PGD11106

1/15

Working CapitalManagement


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.


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.


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


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


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.


7/15

The fundamental principles of workingcapital management are reducing thecapital employed and improving efficiency

in the areas of receivables, inventories,and payables.


8/15


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.


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.


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


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.


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.


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 .


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.

sonia mehta pgd11106

Documents