corporate finance

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Corporate Finance

Prof.Dimple Pandey dimple.pandey@nmims.edu

Working Capital

• Money available to the company for day to day operations• It plays a vital role in keeping the wheel of the business running

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Working Capital- Determinants

• Nature of Business• Size of Business• Production Cycle Process• Credit Policy or Terms of Purchase and Sales• Growth and Expansion• Scarce Availability of Raw Materials• Profit Level• Dividend Policy• Availability of Credit

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Concept of working capital

• Gross Working Capital- total current assets• Significance Optimum Investment in Current Assets Financing of Current Assets

• Net Working Capital- the excess of current assets over current liabilities represents net working capital

• Significance Maintaining Liquidity Position To decide upon the Extent of Long-term Capital in Financing Current Assets

Why it matters?

Common measure - Liquidity

- Efficiency

- Over all Health of the organization

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Need of adequate working capital

Dangers of Excessive

Working Capital

unnecessary

accumulation of

inventories

indication of defective

credit policy

Managerial inefficiency

Dangers of Inadequate

Working Capital

stagnates growth

Operating inefficiencie

s

inefficient utilisation of fixed assets

Working Capital Cycle

Working capital cycle

Cash

Creditors

Inventory

Debtors

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Estimation of Working Capital

Estimation of Current Assets

Investment in Raw Materials Inventory

Investment in Work-in-process Inventory

Investment in Finished Goods Inventory

Investment in Debtors

Cash and Bank Balance

Estimation of Current Liabilities

Trade Debtors

Direct Wages

Overheads

Calculation of Working Capital

• Step 1 : Estimate the cash cost of various current assets required by the firm.

• Step 2 : Deduct the spontaneous current liabilities from the cash cost of current assets

Working Capital = Total Current Assets – Total Current Liabilities

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Financing of working capital needs

Short term

financing

Long term

financing

Spontaneous financing

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End of Chapter

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Thank you