V Working Capital

V Fixed Assets
V Significance
V Composition
V Gross Vs Net
V Negative working capital
V Factors affecting working capital etc.
V @ e working funds are necessary, on t e
ot er and, to meet t e day-to-day revenue
expenses, like materials purc ase, wages
payments, meeting over ead expenses, etc .
V Working Capital actually keep t e business
going since p ysical assets like plant and
mac inery cannot effects any production or
generate any sales unless t ese are
adequately and regularly fed wit materials
and varied services. @ e finance required to
buy suc materials and pay for suc services
is really t e working capital.
V @ e ›
   
 
 lies in
t e fact t at it enables an industrial unit to
convert into actuality t e potential of its fixed
assets in terms of level of production and
sales.
V Wit out working capital, fixed assets cannot be
activated or made to generate business
activities. @ is would mean also t at, given a set
of fixed assets, t ere s ould be an  
 
 
  .Anyt ing ig er t an
t is optimum level may not generate ig er
production or sales .Likewise, working capital
below t e optimum level would mean
opportunity loss in term of a part of fixed assets
potential left unexploited.
V Fixed assets are land, building, plant
mac inery, equipment etc , meant for use in
t e business (for a period of time greater
t an one year) , to earn profits t roug
recurring production and sales .
V From t e accounting point of view, working
capital is t e money locked up in inventory,
debtors and ot er current assets (like cas ,
advances made to suppliers, etc.)minus
ot ersǯ money locked up wit t e business in
t e form of sundry creditors, bills payable,
etc . By definition working capital is current
assets minus current liabilities.
V
V W en only t e current assets consisting of inventory,
debtors, cas , etc., are considered as working capital,
it is called gross working capital. If from t e total of
t e current assets, current liabilities (creditors, bill
payable, etc) are deducted, t e result is net working
capital. In business and ot er sp eres, often t ese two
expression are not used and t e general expression
working capital is used to mean sometimes t e gross
and sometimes t e net also. Very often, t is creates
confusion in understanding and interpretation.
V
V
V
V After t e publication of t e report of t e
Study Group ( eaded by Prakas @andon and
t erefore , called @andon Committee Report),
t e expression Net Working Capital as been
given a new meaning t at is, t e Gross
Working Capital less Sundry Creditors and
s orts-term bank borrowings also. @ us Net
Working Capital means only t at part of t e
working capital w ic is financed t roug
internal resources and long-term borrowings.
V @ e composition of working capital varies
according to t e nature of t e business,
particularly w et er it is a purely trading
business or a manufacturing-cum-marketing
organisation. @ ere are ot er factors too w ic
cause variation, suc as customary credit terms
in t e industry, in w ic business is engaged,
general financial climate and conditions, and so
on. For a purely trading or marketing
organisation t e composition or working capital
would be as follows :
V a) Inventory ----
V finis ed goods only
V b) Receivable ----
V sundry debtors
V bills receivable ǥǥǥ
V
V For a manufacturing-cum-marketing organisation
t e inventory will include, besides finis ed goods,
raw materials (of all types ) and work-in process .
V
V c) Ot er current assets ----
V cas ,
V sundry advances
V for value to be received
V etc . ...ǥǥ
@otal (Current Assets) „ǥ. (a) +(b)+( c)
V d) Sundry creditors,
V bills payable,
V Advances to customers etc .

V
V
V e) Outstanding liabilities
V (to employees and outsiders) ǥǥ...
V @otal (Current Liabilities) 
V ǥ. ǥǥ

V Working Capital (A Ȃ B) ǥ.
V Nature of business
V Seasonality of operations
V Production policy
V Market conditions
V Condition of supply
V
V @ e working capital requirement of a firm is
closely related to t e nature of its business. A
service firm, like an electricity undertaking or a
transport corporation, w ic as a s ort operating
cycle and w ic sells predominantly on cas basis,
as a modest working capital requirement. On t e
ot er and, a manufacturing concern like a
mac ine tools unit, w ic as a long operating
cycle and w ic sells largely on credit, as very
substantial working capital requirement.
V
V Firm w ic ave marked seasonality in t eir
operations usually ave ig ly fluctuating
working capital requirement. @o illustrate,
consider a firm manufacturing ceiling fans.
@ e sale of ceiling fans reac es a peak during
t e summer mont s and drops s arply during
t e winter period.
V @ e working capital need of suc a firm is
likely to increase considerably in summer
mont s and decrease significantly during t e
winter period.
V On t e ot er and, a firm manufacturing a
product like lamps, w ic ave fairly even
sales round t e year, tends to ave stable
working capital needs.
V
V A firm marked by pronounced seasonal
fluctuation in its sales may pursue a production
policy w ic may reduce t e s arp variations in
working capital requirement. For example,
manufacturing of ceiling fans may maintain a
steady production t roug out t e year rat er
t an intensity t e production activity during t e
peak business season. Suc a production policy
may dampen t e fluctuations in working capital
requirements.
V
V @ e degree of competition prevailing in t e market
place as an important bearing on working capital
needs. W en competition is keen, a larger inventory
finis ed goods is required to promptly serve
customers w o may not be inclined to wait because
ot er manufactures are ready to meet t eir needs.
Furt er, generous credit terms may ave to be offered
to attract customers in a ig ly competitive market.
@ us, working capital needs tend to be ig because
of greater investment in finis ed goods inventory and
accounts receivable.
V If t e market is strong and competition
weak, a firm can manage wit smaller
inventory of finis ed goods because
customers can be serve wit delay. Furt er, in
suc situation t e firm can insist on cas
payment and avoid lock-up of funds in
accounts receivable-it can even ask for
advance payment, partial or total.
V @ e inventory of raw materials, spares, and
stores depends on t e conditions of supply.
V If t e supply is prompt and adequate, t e firm
can manage wit small inventory. However, if
t e supply is unpredictable and scant t en t e
firm, to ensure continuity of production, would
ave to acquire stocks as and w en t ey are
available and carry larger inventory on an
average. A similar policy may ave to be
followed w en t e raw material is available only
seasonally and production operations are carried
out round t e year.
V Situation, t oug rare but not unreal, may arise
w en t e net working capital of a business
s ows a negative figure because current
liabilities are ig er t an current assets.
V @ e preponderance of current liabilities to an
extent of more t an offsetting t e total current
assets, leading to a situation of negative working
capital, may enable us to arrive at eit er or t e
two diametrically opposite or extreme
conclusions as follows:
V It may be t at t e business is going to
collapse since it fails to meet t e
Commitment to its suppliers an ot er
creditors inspite of t e fact t at its
Outstanding are collected well and
inventories are not very ig .
V @ e cause may be overtrading by t e
business in general and/or inefficient financial
management.
V It may also be t at t e working capital
of t e business is extremely good and
also t at t e business enjoys some
monopoly power to ask its customers
for advance against t e goods to be
supplied at a future date.
V In every enterprise, a part of t e total
working capital, usually a small part
compared to t e total, represent t e fixed
element and t e balance, usually t e major
part, is variable. @o identify suc fixed and
variable elements one as to be clear about
t e meaning and frame of reference of t e
concept of variability.
V A business operates wit in t e range of a given
activity level and during a time-period (say, a
couple of years) t is activity level does not
c ange. Wit in t is activity level t e volume of
operations of t e enterprise keeps on c anging
from time to time due to seasonal factors,
cyclical factors and random variations. But t ere
must be a ard core element in working capital
commensurate wit t e board activity range
wit in w ic t e business operates.
V @ is part of working capital does not tend to
c ange in response to c ange in activity from
time to time. Suc ard core element of
working capital is called   
 

 . @ ere may be, on t e contrary,
c anges in t e working capital position
resulting from c anges in actual activity from
time to time.
V 0uring t e peak season, working capital
requirement could be ig and t is may again
drop down during t e slack-season. @ is
working capital w ic varies more or less in
proportion to t e actual activity (indicated by
production and/or sales) may be called

 
 
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V@HANK YOU
VCA S.P.0 SAI