Working Capital Management

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MANAGEMENT OF WORKING CAPITAL
1. Meaning and Types of Finance: Finance
- Finance is the Art & Science of Managing Money - Finance is the Art of passing currency from hand to hand until it finally disappears

Types & Sources of Finance
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________ Long Term Sources of Finance
- Finance required to meet Capital Expenditure - Also, known as Fixed Capital Finance

Short Term Sources of Finance
- Finance required to meet day-to-day Business requirements - Also, known as Working Capital Finance

2. Working Capital Management: Working Capital (WC)
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____________________________ Basics regarding WC Meaning of WC Working Capital Concept Factors Affecting WC Meaning of WC Management Importance of WC Management Classification/Type of WC A On the Basis of Concept (i) (ii)

Gross Working Capital Net Working Capital (Positive & Negative Working Capital)

Methods of estimating WC Conventional Method Operating Cycle Method Cash Cost Method Balance Sheet Method

B On the Basis of Periodicity
(i) (ii)
Fixed / Permanent Working Capital (Regular & Reserve Margin/ Cushion WC) Variable Working Capital (Seasonal & Special Working Capital)

Parag Nalin Doshi

1/12/2009

www.CAalley.com

Meaning of Working Capital:
- Working Capital is the amount of Capital that a Business has available to meet the day-to-day cash requirements of its operations - Working Capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities) - It refers to the amount of Current Assets that exceeds Current Liabilities (i.e. CA - CL) - Working Capital refers to that part of the firm’s Capital, which is required for Financing Short-Term or Current Assets such as Cash, Marketable Securities, Debtors and Inventories. Working Capital is also known as Revolving or Circulating Capital or Short-Term Capital

Working Capital Concepts:
- Gross Concept: It means Current Assets. This is knows as Quantitative aspect of Working Capital (Focus is on (i) Optimum Investment in Current Assets and (ii) Financing of Current Assets) - Net Concept: It means difference between Currents Assets & Current Liabilities. This is knows as Qualitative aspect of Working Capital (Focus is on (i) Liquidity Position of the Firm and (ii) WC Amount that can be financed by Permanent sources of Funds)

Meaning of Operating Cycle/Working Capital Cycle:
- Cash Raw-Materials Work-in-Process Finished Goods Cash

Factors affecting Working Capital/ Determinants of Working Capital: Nature of Business/Industry; Size of Business/Scale of Operations; Growth prospects Business Cycle; Manufacturing Cycle; Operating Cycle & Rapidity of Turnover; Operating Efficiency; Profit Margin; Profit Appropriation Depreciation Policy; Taxation Policy; Dividend Policy and Government Regulations

Approaches (Methods) of estimating Working Capital:
- Conventional Method: Matching of Cash Inflows & Outflows. This method ignores Time Value of Money - Operating Cycle Method: Debtors + Stock (RM/WIP/FG) - Creditors. This method takes into Account length of Time which is required to convert cash into resources, resources to final product, final product to Debtors and Debtors to Cash again. - Cash Cost Technique: Working Capital forecast is done on Cost Basis (i.e. taking P&L items into account) - Balance Sheet Method: Working Capital forecast is done on various Assets & Liabilities (i.e. taking B/S items into account)

Parag Nalin Doshi

1/12/2009

www.CAalley.com

Meaning of Working Capital Management:
- Working Capital Management is concerned with the problems that arise in attempting to manage the Current Assets, Current Liabilities and the interrelationship that exists between them - Working Capital Management means the deployment of current...
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