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INTRODUCTION

Working capital management is one of the most important area in the day to day management of the firm.It is concerned with the short-term financial decisions.The primary objective of working capital management is to manage the firm s current assets and current liabilities in such a way that a satisfactory level of working capital is maintained.The firm is likely to become insolvent if it cannot maintain a satisfactory level of working capital as it keeps the wheels of a business enterprise running. As the name indicates the term working capital is defned as the capital which is needed for the daily working of an organization.In other words , the capital which is required for day-to-day oprations of the business is known as working capital.The total requirement of capital for a business can be classified into two categories, 1. Fixed capital 2. working capital Funds needed for the purpose of establishment,investment in fixed asset(such as plant ,machinery,land) over a long period of time to create production facilities,is known as fixed capital.on the other hand,funds required for short-term purposes for the purchase of raw material and for other day-to-day expenses is known as working capital. IMPORTANCE OF WORKING CAPITAL Working capital may be regarded as the lifeblood of the business. Without insufficient working capital, any business organization cannot run smoothly or successfully .In the business the Working capital is comparable to the blood of the human body. Therefore the study of working capital is of major importance to the internal and external analysis because of its close relationship with the current day to day operations of a business. The inadequacy or mismanagement of working capital is the leading cause of business failures. To meet the current

requirements of a business enterprise such as the purchases of services, raw materials etc. working capital is necessary Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities & the inter relationship that exists between them. Composition of working capital Major Current Assets 1) Cash 2) Accounts Receivables 3) Inventory 4) Marketable Securities Major Current Liabilities 1) Bank Overdraft 2) Outstanding Expenses 3) Accounts Payable 4) Bills Payable The Goal of Capital Management is to manage the firm s current assets & liabilities, so that the satisfactory level of working capital is maintained. If the firm can not maintain the satisfactory level of working capital, it is likely to become insolvent & may be forced into bankruptcy. There are 2 concepts: Gross working capital= It is referred as total current assets. Focuses on,Optimum investment in current assets:Excessive investments impairs firm s profitability, as idle investment earns nothing. Net working capital= Current asset- current liabilities ADVANTAGE OF ADEQUATE WORKING CAPITAL 1. SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production. 2. Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL 1. Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments.

2. Redundant working capital leads to unnecessary purchasing and accumulation of inventories. FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS 1. NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments. 2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of working capital. 3. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital.

cash

debtors

raw materials

finished goods

work-inprogress

Itcan be determined by adding the number of days

required for each stage in the cycle. For example, company holds raw materials for 40 days,work-in-progress conversion period is 80 days,finished goods conversion period is 60 days,book debt conversion period is 45 days and credit payment period is 35 days. then net operating cycle period=(40+80+60+45-35)=190 days number of times the operating cycle is rotated in a year=365/nocp=365/190=1.9 times. working capital requirement=total operating expenses during the year/NOCP*365 where,operating expenses=materials+wages+factoryexpenses+ adninistative expenses+selling and distribution expenses(all expenses excluding depreciation)

CONCLUSION Any change in the working capital will have an effect on a business's cash flows. A positive change in working capital indicates that the business has paid out cash, for example in purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital will have a negative effect on the business's cash holding. However, a negative change in working capital indicates lower funds to pay off short term liabilities (current liabilities), which may have bad repercussions to the future of the company.The role of a fnance manager in working capital management is very important as major portion of the working capital is being invested in stocks and remaining portions must be available to meet the day-today obligations.therefore a finance manager should search a level of working capital which is optimum although it is very difficult to calculate in practice.ways by which length of operating cycle can be minimized are, 1. demand fluctuations 2. price fluctuations 3. Government fiscal and monetary policies 4. debtors management-The firm should follow a rationalized credit policy based on the credit worthiness of customers in order to decrease the debtors conversion period.Prompt measures should be taken for collection as slack collection policy will block the funds for a longer period of time,increasing the length of operating cycle.

WORKING CAPITAL MANAGEMENT


Financial Management
Prof A. Roy

ANUJ SUSHANT BAGE ROLL NO:447 ROOM NO:31