By, Rati Sunil Madhusudan surrendra sushanth

Introduction to working capital management Concepts of working capital Operating cycle Permanent and variable working capital Determinants of working capital Cash management

 Definition:

It is a financial metric which represents operating liquidity available to a business. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

Gross working capital : gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital. Net working capital: Net working capital is the excess of current assets over current liabilities.

CURRENT ASSETS Inventory Sundry Debtors Cash and Bank Balances Loans and advances CURRENT LIABILITIES Sundry creditors Short term loans Provisions

Net Working Capital = Total Current Assets Total Current Liabilities . Net working capital can be positive or negative . Positive net working capital=current assets > current liabilities Negative net working capital =current assets<current liabilities.

Issue of debt Long term debt Commercial bank Reserve and other funds

The time between the purchase of an asset and its sale, or the sale of a product made from the asset.

The Operating Cycle of a manufacturing company involves three phases: 1. Acquisition of resources 2. Manufacture of the product 3. Sales of the product

Suppose a business buy raw material on 1st jan and it takes one month to convert this raw material into finished goods. On 1st feb good are ready for sale i.e. stocked at warehouse on 1st march goods are sold And on 1st april payment is received. Now this revenue will be used to buy fresh raw material. The Operating cycle is 3 months.. The time taken to convert Working capital into revenue

There is always a minimum level of CA which is continuously required by a firm to carry on its business operations. Thus , the minimum level of investment in current assets that is required to continue the business without interruption is referred as

permanent working capital.

Permanent and Temporary working capital

temporary of fluctuating Amount Of working capital permanent

Time

 This

is the amount of investment required to take care of fluctuations in business activity or needed to meet fluctuations in demand consequent upon changes in production & sales as a result of seasonal changes.

For Growing firm

Temporary or fluctuating

permanent

Amount Of working Capital( rs)

Time

DISTINCTION

permanent is stable over time whereas variable is fluctuating according to seasonal demands.

investment in permanent portion can be predicted with some profitability whereas investment in variable cannot be predicted easily.
while permanent is minimum investment in various ca , variable is expected to take care for peak in business activity.

Determinants of working capital

Nature and size of business Production cycle Demand conditions Credit policy Production policy Availability of credit Price level changes Operating efficiency

Definition: Cash management is the concern with the managing of : Cash flows into and out of the firm Cash flows with in the firm Cash balances held by the firm at a point of time by financing deficit or investing surplus cash.

Collections

Information and control

Borrow Or invest

Payments

Cash planning Managing the cash flows Optimum cash level Investing surplus cash

Transaction motive Precautionary motive Speculative motive