factors working capital
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8/6/2019 Factors Working Capital
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8/6/2019 Factors Working Capital
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Excess of current assets(CA) overcurrent liabilities(CL)
NWC=CA-CL Investment in working capitalfacilitates smooth day to day
operations of the business
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The assets that are converted in to cash
or cash equivalents within a period of one year are called as current assets
Example:cash,bank,B/R,Debtors,
finished goods inventory,Work in progress(Semi finished goods),Raw materials,Prepaid expenses
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Those payment obligations which ,whenarise are due for payment within one yearare called current liabilities
ExampleB/PCreditorsO/S Expenses
Advances received from customers
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Sufficient Investment incurrent assts increaseliquidity of business
Insufficient investment incurrent assets may make itdifficult for an organization tomeet it’s payment obligation
As compare to fixed assets,current assets provide little or
low return or profit
Therefore balanceneed to be
maintained betweenliquidity and
Profitability
Liquidity Profitability
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Factors affectingworking capital
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Manufacturing business
Trading business
Service Industry
More WorkingCapital
Less thanmanufacturing
business
Very less WorkingCapital
Raw material need tobe converted in to
finished goods beforeany sales is possible
There is no processingso
No distinctionbetween raw material
and finished goods
Do not maintain any
inventory or stock
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Scale of business
Small scalebusiness
Large scale
business
LessWorking
capital
MoreWorking
capital Becausequantum of debtors andinventory is
more in large
scale business
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Business cycle
More Workingcapital
Less Working
capital
Depression
Boom
t h
e
the sales as well as
production are likely
to be higher
The sales as well
as production willbe low.
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In peak season,higher level of
activity higher amount
of working capital isrequired.
lean season the level of activity
is lower
Lower Workingcapital
Peakseason
winters
Leanseason
Summer
s
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Production cycle is the time span betweenthe receipt of raw material and theirconversion into finished goods.
Finishedgoods
Rawmaterial
Factory
10 March
15 March
Production Cycle in above case is 5 days
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Duration and the length of production cycle,affects the amount of funds required for rawmaterials and expenses.
longerprocessing cycle
shorterprocessing cycle.
MoreWorkingcapital
LessWorkingcapital
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Different firms allow different credit terms to their customers.
These depend upon the level of competition that a firm faces as well as
the credit worthiness of their clientele.
A liberal credit policy results
in higher amount of debtors,increasing the requirement of
working capital.
A strict credit policy results
in Lower amount of debtors,increasing the requirement
of working capital.
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Firm may get credit from its suppliers.
A liberal credit policy
Less working capital.
A strict credit policy
More working capital.
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Higher efficiency Less working Capital
Requirement
higher inventory
turnover ratio
firm managing
its raw materials
efficiently
Firm is able to
manage with
a smaller
balance of raw
materials
higher debtor
turnover ratio
reducing the
amount tied up
in receivable.
. resulting in
lower debtors
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Raw materials are
available freely and
Continuously
lower stock levels are
maintained
Less Working Capital
InterruptedAvailability of
Raw material
higher stock
levels may be
required..
More Working
Capital
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Supplier of raw
materialBusiness man
When canI get Rawmaterial
It will takeat least 10
days
Lead timeThe time lag between the placement of order and
actual receipt of the materials
Lead time is 10 days
It willsupply raw
materialtomorrow
Lead time is 1 day
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Lead timeThe time lag between the placement of order and
actual receipt of the materials
Higher lead time
Higher stock levels
are maintained
More Working Capital
Lower lead time
lower stock levels are
maintained
Less Working Capital
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Growth potentialbe higher
Higher production and
sales target
More Working
Capital
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Higher level of competitiveness
Higher stocks of finished
goods to meet
urgent orders
from
customers.
More Working Capital
Competition may
force the firm to
extend liberal
credit terms
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Rising prices
More workingcapital requirement
Higher amounts are required tomaintain a constant volume of
production and sales
Rawmaterialcost isrising
L ab o u r c o s t i s r i s i n g