• Working capital is concerned with short term finance or finance required for routine activities

or operations.

• Working capital deals with activities like purchase of raw materials , payment of labour
charges.

• Also called as circulating capital because the funds invested in current assets revolves fast and
constantly converted into cash and flows out again in exchange for other current assets.

• “ Working capital is the amount of funds necessary to cover the cost of operating the
enterprise – Shubin”
 Meaning of Working Capital:

▶ Working Capital is the amount of funds necessary to cover the cost

of operating the enterprises.”
▶ Capital required for the business can be of two types:
Fixed Capital

Kinds of Working Capital

▶

▶ Working Capital Gross working Capital

On the Basis of
Concept
Net Working Capital

Permanent or Fixed
working Capital
On the basis of Time
Temporary or variable
working capital
On the basis of concept
▶ Gross working capital concept: According to this concept, working capital means total of all
current assets of business..
▶ Gross working capital =Total current assets.
▶ Net working capital concept: According to this concept, working capital means excess of
current assets over current liabilities.
▶ Net Working capital =Current Assets – current Liabilities

On the basis of time

▶ Fixed or permanent working capital: There is always a minimum level of current assets which is
continuously required by the enterprise to carry out normal business operation. For ex. Every
firm has to maintain a minimum level of stock and cash balance. This minimum level of current
assets is called fixed working capital as this amount is permanently blocked in currant assets
▶ Temporary or variable working capital. It is that amount of working capital which is required to
meet the seasonal demand and some special needs. Any amount over and above the
permanent level of working capital is called as Temporary or variable working capital.
 SIGNIFICANCE OF ADEQUATE WORKING
CAPITAL
To provide uninterrupted flow of production which strengthens the solvency of a business.

Acts as a cushion in emergencies like strikes, floods etc.

To permit a sufficient level of inventories for continuous production

It helps the business to pay all its current liabilities and expenses which will enhance/maintain
goodwill.

Helpful in providing funds for expansion.

 PROBLEMS ARISING FROM INADEQUATE
WORKING CAPITAL
Unable to take advantage of new opportunities to develop new products or adapt to modification of
production techniques.

Loosing reputation when the firm cant honor its short term obligations.

A company cannot avail cash discount facilities in case of bulk orders.

During the period of emergencies withstanding business from depression would be difficult.

Non payment of wages or salaries demoralizes employees and affecting the efficiency, production
slows down and profitability of the firm declines.
 DETERMINANTS OF WORKING
CAPITAL
Terms of
Nature & size Cash Volume of
Purchase &
of business requirements sales
Sales

Inventory and
Seasonal Repayment
receivables Business Cycle
Fluctuations ability
Turnover

Changes in Changes in
Price level technology
 SOURCES OF WORKING CAPITAL

LONG TERM SHORT TERM

ISSUE OF SHARES TRADE CREDIT

ACCRUED EXPENSES AND

FLOATING OF DEBENTURES
DEFERRED INCOME

RAISING FUNDS BY
BANK FINANCE
INTERNAL FINANCING
CASH
 Cash Management
Itisthe duty of the financemanager to provideadequate cash to each of the units.Forthe survivalof the businessitis absolutely necessarythat there
shouldbe adequate cash. Itisthe duty of the financemanager to maintainliquidityat allpartsof the organization whilemanaging cash.

Precautionary needs:
To take advantage of unexpected 03 04 Compensatory Motive
Minimum balance is required to be
opportunities like favourable/
reduced prices of material , maintained with the banks for vario
discount for bulk purchases etc. us services provided by them.

Speculative needs: 02 05 Future Requirements:

To provide for unexpected/ Business opportunities and to meet
unpredic table events like uncertainties.
strike, flood, increase in raw
material cost etc
Contractual Motive
Transaction needs: 01 06 when the company needs to meet
For routine business/ the contract requirements
operating payments
 CASH MANAGEMENT
• It is required to meet business obligations and it is
unproductive when not used.

• It deals with the following :-

• Cash inflows and outflows

• Cash flows within the firm

• Cash balances held by the firm at a point of time.

 FACETS OF CASH MANAGEMENT

Cash planning

Cash forecasts and budgeting

Cash budget / Receipts and disbursements method

Adjusted net income method

 INVENTORY MANAGEMENT
• Inventory management refers to the process of ordering, storing and using a company's
inventory. This includes the management of raw materials, components and finished
products, as well as warehousing and processing such items.

• The main purpose of inventory management is to keep the stocks in such a way that neither
there is over-stocking nor under-stocking.

• There are three motives – transaction, precautionary and speculative motive.

OBJECTIVES OF INVENTORY MANAGEMENT
To ensure continuous supply of materials, so that production should not suffer and
customers demand should also be met.
To avoid both over-stocking and under-stocking of inventory.
To maintain investments in inventories at the optimum level as required by the
operational and sales activities.
To eliminate duplication.
To ensure perpetual inventory control so that materials shown in stock ledgers should
be actually lying in the stores.
To design proper organisation for inventory management.
 TOOLS AND TECHNIQUES OF INVENTORY
MANAGEMENT
• ABC analysis
• VED Analysis
• Inventory turnover ratios
• Perpetual inventory system
• JIT Control system
• Determination of stock levels
• Economic order Quantity
RECEIVABLES MANAGEMENT

• Receivables represent amount owed to the firm as a result of sale

of goods or services.

• Receivables management is the process of making decisions

relating to investment in trade debtors.

• It involves taking careful considerations of formulation of credit

policy and executing the credit policy.
 OBJECTIVES
• Maximize the return on investment in receivables.

• Maximize the sales to the extent the risk involved remains within the
acceptable limit.

• Maintaining up-to-date record.

• Accurate billing.

• Establish the credit policies.

 FACTORING

• Factor is a financial institution which offers services relating to management and

financing of debtors arising out of credit sales

• Factoring is a relationship created by an agreement between the seller of goods and

a financial institution called as factor, whereby the later purchases the receivables
of the former and also controls and administers the receivables of the former.

• It is considered as a tool of receivables management.