DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name :Sreenivasa Rao B.
Designation :Lecturer in CCP
Branch :Commercial and Computer Practice
Institute :S.U.V.R&S.R GPW,Ethamukkala
Semester :VI Semster
Subject Name : Banking II
Subject Code : CCP 604 (B)
Major Topic :Loans and Advances – Short term
&Long term
Duration :50 minutes
Sub Topic :Determinants of working capital.
Teaching Aids :PPTs
CCP-604(B).10 1
Objectives :

On completion of this period, you would be

able to understand :

 Meaning of working capital.

 Need for working capital.

 Concepts of working capital.

 Importance of working capital management.

CCP-604(B).10 2
Working Capital
Meaning :
For an uninterrupted functioning of a firm, it
require a specified minimum level of current assets
namely raw materials, stock-in-process, finished goods.
Apart from this a reasonable cash in hand required to
payment of overhead expenses etc.
The amount required to meet the above expenditure is
called WORKING CAPITAL.

CCP-604(B).10 3
Recap
We have discussed
 The short term loans

 The medium term loans

 The long term loans

CCP-604(B).10 4
Need for working capital

Basically, working capital is needed because of the

existence of operating cycle. Operating cycle in a trading
firm is the length of time required.
To convert cash into inventory of finished goods.
To convert inventory of finished goods into
receivables.
To convert receivables into cash.

CCP-604(B).10 5
Concepts of working capital
 There are two concepts of working capital, namely,
gross concept and net concept.

Gross working capital:

It refers to the firm’s investment in current
assets.
Current assets refer to the assets which are
held for their conversion into cash within an
operating cycle i.e., time duration between the
conversion of cash into inventory items and
their conversion intoCCP-604(B).10
cash. 6
Net working capital:
 It refers to the difference between current assets
and current liabilities.
 Current liabilities refer to those claims of outsiders
which are expected to mature for payment within
an operating cycle and include creditors, bills
payable , outstanding expenses, bank overdraft. It
can be positive or negative.

CCP-604(B).10 7
 Net working capital:

 A positive net working capital occurs when

current assets exceed current liabilities and a
negative net working capital occurs when current
liabilities exceed current assets

CCP-604(B).10 8
 In the form of an equation, gross working capital can
be shown below:
Cash
Inventories
Gross working i) Raw-materials
capital = ii ) Work-in-progress
iii) Finished Goods
Accounts Receivables
I) Debtors
ii) Bills receivables
Short term marketable securities
and other current assets

Thus, Gross Working Capital = Total Current Assets

CCP-604(B).10 9
In the form of an equation, net working capital
has been shown below:

Net working capital = current assests- current

liabilities

(or)

gross working capital

CCP-604(B).10 10
Permanent and Temporary Working
Capital

Permanent Working Capital:

It refers to a certain minimum level of current

assets which is essentially for the firm to carry on
its business irrespective of the level of operations.

CCP-604(B).10 11
Temporary Working Capital:
It refers to the amount of working capital over and above

the fixed minimum amount of working capital, which is

required to meet seasonal and other temporary

requirements.

It may keep on fluctuating from period to period

depending upon several factors. It is also called

fluctuating or variable or seasonal working capital.

CCP-604(B).10 12
Working capital in case of stable firm
and a growing firm

Working capital in case of a stable firm:

In case of a stable firm, the permanent working

capital is stable over time and takes the shape of
a horizontal line while temporary working capital is
fluctuating – some times increasing and some
times decreasing.

CCP-604(B).10 13
Working capital in case of a growing
firm:
In case of a growing firm, the permanent working
capital may also keep on increasing over time to
support a rising level of activity and hence
permanent working capital line may not always be
horizontal.

CCP-604(B).10 14
Importance of Working Capital
Management
 The management of working capital is an integral
part of the overall financial management and
ultimately of the overall corporate management.
 Neglect of management of working capital may result
in technical insolvency and even liquidation of a
business unit.
 Inefficient working capital management may cause
either inadequate or excessive working capital which
is dangerous.
CCP-604(B).10 15
Summary

 Working capital is required:

 To meet day to day operating expenses
 For holding stocks of raw-materials, spare parts,
consumables, work in progress and finished
goods.
 Book debts [I.e. debtors balances and bills
receivable].

CCP-604(B).10 16
Summary

 Basically , working capital depends upon the

existence of operating cycle.
 Concepts of working capital, namely, gross
concept and net concept.
 Inefficient working capital management may
cause either inadequate or excessive working
capital which is dangerous.

CCP-604(B).10 17
Frequently Asked Questions

1. What is meant by working capital?

3. Explain the importance of working capital?

CCP-604(B).10 18