WORKING

CAPITAL

MANAGEMENT

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 WORKING CAPITAL MANAGEMENT

Working capital management is concerned

with the problems that arise in managing
the current assets, current liabilities and
the interrelationships between them.

GOAL:
To manage the firm’s current assets and
liabilities in such a way that a satisfactory
level of working capital is maintained.
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CONCEPTS:

GROSS WORKING CAPITAL – The current

assets which represent the proportion of
investment that circulates from one form to
another in the ordinary conduct of business.

NET WORKING CAPITAL – The portion of

current assets financed with long term funds
or current assets – current liabilities

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PURPOSE:
The NWC is necessary because the cash outflows and
inflows do not coincide.
The purpose of NWC is to measure the liquidity of the
firm.

DETERMINING FINANCING MIX:

Financing mix is the choice of sources of financing of
current assets.

SOURCES OF ASSET FINANCE:

1. Short term sources (Current liabilities)
2. Long term sources (Share capital, long term
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INSTRUMENTS OF SHORT TERM
FINANCING

Trade Credit
Bill Discounting
Inter Corporate Deposits
Public deposits
Commercial papers
Factoring

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APPROACHES TO DETERMINE FINANCING MIX:

1. Hedging approach
2. Conservative approach
3. Trade off between the
above mentioned two
approaches.

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HEDGING APPROACH (MATCHING
APPROACH):

This is the process of matching maturities of debt

with the maturities of financial needs.

According to Hedging approach, the

permanent portion of funds required should
be financed with long term funds and the
seasonal portion with short term funds.

Under this approach working capital = 0 since CA are

not financed by long term funds (CA = CL).

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CONSERVATIVE FINANCING APPROACH:
This is a strategy by which the firm finances all
funds requirement, with long term funds and
uses short term funds for emergencies or
unexpected outflows.

TRADE OFF BETWEEN HEDGING AND

CONSERVATIVE APPROACHES:
One possible trade off could be equal to the
average of the minimum and maximum
monthly requirements of funds during the
given period of time. This level of requirement
of funds may be financed through long run
sources and for any additional financing need,8
 FACTORS DETERMINING AMOUNT OF WORKING CAPITAL
Purchase Payment for Sell product
Receive
resources resource purchase on credit
cash

Inventory
Receivable
conversion
conversion
period
period

Payables
Cash
period
Conversion
period
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q The ‘length of the operating cycle’ is the most
widely used method to determine working capital need.
q The longer the production cycle, the larger is the
working capital need or vice versa.
q Manufacturing and trading enterprises require
fairly large amount of working capital to support their
production and sales activity. Service enterprises like
hotels, restaurants etc., need less working capital.
q During boom conditions need for working capital
is more.
q Growth industries and firms need more working
capital.
q Working capital requirement are to be determined
on the basis of cash cost i.e excluding depreciation.
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 THANK
YOU

BHUPENDRA .IMRT