factors affect factors affecting working capitaling working capital
TRANSCRIPT
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FACTORS DETERMINING WORKING CAPITAL
REQUIREMENT
NATURE OR CHARACTER OF BUSINESS
SIZE OF BUSINESS/SCALE OF OPERATIONS
PRODUCTION POLICY
MANUFACTURING PROCESS/LENGTH OF PRODUCTION CYCLE
SEASONAL VARIATION
WORKING CAPITAL CYCLE
RATE OF STOCK TURNOVER
CREDIT POLICY
BUSINESS CYCLE
RATE OF GROWTH OF BUSINESS
EARNING CAPACITY AND DIVIDEND POLICY
PRICE LEVEL CHANGES
OTHER FACTORS
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NATURE OR CHARACTER OF BUSINESS
Public undertaking need very limited working capital
since they offer cash sales only.
Trading and finance firm require less investment in
fixed capital and will have more investment in
working capital. Manufacturing undertaking require sizable working
capital between these two extremes
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SIZE OF BUSINESS/SCALE OF OPERATIONS
Working capital requirement is directly influenced by size
of business.
reater the size larger will be the requirement of working
capital.
!n some cases even small concern may need more working
capital due to high overhead charges" inefficient use of
available resources and other economic disadvantage of
small size.
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PRODUCTION POLICY
The production could be kept either steady by
accumulating inventories during slack periods with a view
to meet high demand during the peak season.
The production could be curtailed during the slack season
and increase during the peak season.
!f the policy is to keep production steady by accumulating
inventories it will require higher working capital.
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MANUFACTURING PROCESS/LENGTH OF
PRODUCTION CYCLE
!n manufacturing business the requirements of
working capital increase in direct proportion to
length of manufacturing process.
The raw materials and other supplies have to be
carried for a longer period.
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SEASONAL VARIATION
!n certain industries raw material is not available
throughout the year.
The raw materials is bought in bulk.
#uge amount is blocked in the form of material
inventories during such seasons demanding moreworking capital requirement.
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WORKING CAPITAL CYCLE
!n manufacturing firm working capital cycle starts with
the purchase of raw material and ends with the
realisation of cash from the sale of finished products.
The speed with which the working capital complete one
cycle determines the requirement of working capital. $onger the period of the cycle larger the requirement of
working capital.
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WORK-IN-PROGRESS
DEBTORS(RECEIVABLES)
FINISHED GOODSCASH
RAW MATERIALS
WORKING CAPITAL/OPERATING CYCLE OF A MANUFACTURING CONCERN
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RATE OF STOCK TURNOVER
There is a high degree of inverse co%relationship
between the quantum of working capital and the
velocity with which the sale is effected.
&irm with high stock turnover will need lower
working capital compared to a firm having low rateof turnover.
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CREDIT POLICY
'redit policy of a concern means how firm deal with
their debtors and creditors.
'oncern purchase on credit and sells its products(service
on cash require less working capital.
!f the concern buy its requirements for cash and allow
credit to its customers will require more working capital
since huge fund will be tied up in debtors or receivables.
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BUSINESS CYCLE
)usiness cycle refers to alternate expansion and contraction
in general business activity.
during boom there is need for more working capital due to
increase in sale" rise in prices" optimistic expansion of
business etc.
*uring depression the business contracts" sales decline"
difficulties are faced in collection from debtors and will
have large amount of working capital lying idle.
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RATE OF GROWTH OF BUSINESS
Working capital requirement increases with the
growth and expansion of business activities.
!t may conclude that for normal expansion in the
volume of business" we may have retained profit to
meet working capital needs but in fast growingconcerns require large amount of working capital.
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EARNING CAPACITY AND DIVIDEND POLICY
+ firm that maintain a steady high rate of cash
dividend irrespective of its generation of profits need
more working capital.
!f the firm that retains larger part of its profit and
does not pay so high rate of cash dividend theworking capital requirement will be less.
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PRICE LEVEL CHANGES
The effect of rising prices may be different for
different firms.
,ome firms may be affected much while some other
may not be effected at all.
-ise in price level will require the firm to maintain
larger amount of working capital as more amount is
required to maintain the same current assets.
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OTHER FACTORS
Operatin e!"ien"# I$p%rt p%&i"#
A''et 'tr"treBanin *a"i&itie'
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Approaches to determ!e
a! approprate F!a!c!"#m$ T+ere are t+ree ,a'i" appr%a"+e' t%
eter$ine an appr%priate .nan"in$i/0
Hein appr%a"+1 a&'% "a&&e t+e
$at"+in appr%a"+1 C%n'er2ati2e appr%a"+1 Are''i2e appr%a"+3
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Hed"!" Approach% &atch!"Approach
A""%rin t% t+i' appr%a"+1 t+e $atrit# %* t+e '%r"e' %* t+e *n' '+%&$at"+ t+e natre %* t+e a''et' t% ,e .nan"e3 F%r t+e prp%'e %* ana'i'1t+e "rrent a''et' "an ,e ,r%a "&a''i.e int% t4% "&a''e'-
o t+%'e 4+i"+ are re5ire in a "ertain a$%nt *%r a i2en &e2e& %* %perati%nan1 +en"e1 % n%t 2ar# %2er ti$e3
o t+%'e 4+i"+ 6"tate %2er ti$e3
T+e Hein appr%a"+ 'e't' t+at &%n ter$ *n' '+%& ,e 'e t%.nan"e t+e ./e p%rti%n %* "rrent a''et' re5ire$ent' in a $anner 'i$i&art% t+e .nan"in %* ./e a''et'3
T+e pre te$p%rar# re5ire$ent'1 t+at i'1 t+e 'ea'%na& 2ariati%n' %2er ana,%2e t+e per$anent .nan"in nee' '+%& ,e appr%priate .nan"e 4it+'+%rt ter$ *n'3
T+i' appr%a"+1 t+ere*%re1 i2ie' t+e re5ire$ent' %* t%ta& *n' int%per$anent an 'ea'%na& "%$p%nent'1 ea"+ ,ein .nan"e ,# a i7erent'%r"e3
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&atch!" approach to asset
'!a!c!"
Fi/e A''et'
Per$anent Crrent A''et'
T%ta& A''et'
F&"tatin Crrent A''et'
Ti$e
8
S+%rt-ter$De,t
L%n-ter$De,t 9E5it#Capita&
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Co!ser(at(e Approach
T+i' appr%a"+ 'e't' t+at t+ee'ti$ate re5ire$ent %* t%ta& *n''+%& ,e $et *r%$ &%n ter$'%r"e': t+e 'e %* '+%rt ter$ *n''+%& ,e re'tri"te t% %ne$eren"# 'itati%n' %r 4+en t+ere
i' an ne/pe"te %t6%4 %* *n'3
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Co!ser(at(e approach to asset
'!a!c!"
Fi/e A''et'
Per$anent Crrent A''et'
T%ta& A''et'
F&"tatin Crrent A''et'
Ti$e
8
S+%rt-ter$De,t
L%n-ter$De,t 9E5it#"apita&
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A""ress(e approach
A 4%rin "apita& p%&i"# i' "a&&e an are''i2e p%&i"# i* t+e.r$ e"ie' t% .nan"e a part %* t+e per$anent 4%rin"apita& ,# '+%rt ter$ '%r"e'3 T+e are''i2e p%&i"# 'ee' t%$ini$i;e e/"e'' &i5iit# 4+i&e $eetin t+e '+%rt ter$re5ire$ent'3 T+e .r$ $a# a""ept e2en reater ri' %*
in'%&2en"# in %rer t% 'a2e "%'t %* &%n ter$ .nan"in ant+' in %rer t% earn reater retrn3
T+e trae-%7 ,et4een ri' an pr%.ta,i&it# epen' &are%n t+e .nan"ia& $anaer
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A""ress(e approach to asset
'!a!c!"
Fi/e A''et'
Per$anent Crrent A''et'
T%ta& A''et'
F&"tatin Crrent A''et'
Ti$e
8
S+%rt-ter$De,t
L%n-ter$De,t 9E5it#"apita&
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CONCLUSION
T+ere are $an# *a"t%r' 4+i"+ in6en"e t+e
a$%nt %* in2e't$ent i' t% ,e $ae %n
4%rin "apita&3
T+e *a"t%r' are t% ,e "%n'iere 4+i&e ./in
t+e $ini$$ 4%rin "apita& re5ire$ent
4+i"+ i' n a2%ia,&e *%r t+e "%n"t %*
r%tine %perati%n' %* a ,'ine''3
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THAN) YOU*+