1. Working Capital-funds required for short term purposes or day to day expenses are working capital. WC refers to part of firms capital reqd.for financing short term or current assets also known as revolving or short term capital or circulating capital.

Importance of WC: For the purchase of raw materials, components and spares. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc. To provide credit facilities to customers etc.

NEED FOR WORKING CAPITAL Quick payments to suppliers Cash discount Easy availabilities of bank loans Increase in the productivity of fixed assets Meeting unseen contingenciesCOMPONENTS Current Assets-These are those assets which change their form within a short period of time, generally within one year.It includes: Debtors, B/R, Cash & Bank balance, Prepaid expenses etc. Current Liabilities-These are those liabilities which are payable within a short period of time, generally within one year.It includes: Creditors, B/P, Bank o/d, Short term loan, Proposed dividend etc.FACTORS DETERMINING WORKING CAPITAL1. Nature of business2. Size of business3. Production process4. Requirement of cash5. Banking relations6. Business growth and expansion7. Profit margin8. Seasonal nature of businessAdvantages of working capital It helps the business concern in maintaining the goodwill. It can arrange loans from banks and others on easy and favorable terms. It enables a concern to face business crisis in emergencies such as depression. It creates an environment of security, confidence, and over all efficiency in a business. It helps in maintaining solvency of the business.Disadvantages of working capital Rate of return on investments also fall with the shortage of working capital. Excess working capital may result into over all inefficiency in organization. Excess working capital means idle funds which earn no profits. Inadequate working capital cannot pay its short term liabilities in time.Disadvantages of working capital Rate of return on investments also fall with the shortage of working capital. Excess working capital may result into over all inefficiency in organization. Excess working capital means idle funds which earn no profits. Inadequate working capital cannot pay its short term liabilities in time.

2. Capital Budgeting -as the firms formal process for the acquisition and investment of capital. It involves firms decisions to invest its current funds for addition, disposition, modification and replacement of fixed assets.Capital budgeting is long term planning for making and financing proposed capital outlays

Significance of capital budgeting The success and failure of business mainly depends on how the available resources are being utilised. Main tool of financial management All types of capital budgeting decisions are exposed to risk and uncertainty. They are irreversible in nature. Capital rationing gives sufficient scope for the financial manager to evaluate different proposals and only viable project must be taken up for investments. Capital budgeting offers effective control on cost of capital expenditure projects. It helps the management to avoid over investment and under investments. Capital budgeting process involves the following1. Project generation: Generating the proposals for investment is the first step. The investment proposal may fall into one of the following categories: Proposals to add new product to the product line, proposals to expand production capacity in existing lines proposals to reduce the costs of the output of the existing products without altering the scale of operation. Sales campaining, trade fairs people in the industry, R and D institutes, conferences and seminars will offer wide variety of innovations on capital assets for investment. 2. Project Evaluation: it involves two steps Estimation of benefits and costs: the benefits and costs are measured in terms of cash flows. The estimation of the cash inflows and cash outflows mainly depends on future uncertainities. The risk associated with each project must be carefully analysed and sufficeint provision must be made for covering the different types of risks. Selection of an appropriate criteria to judge the desirability of the project: It must be consistent with the firms objective of maximising its market value. The technique of time value of money may come as a handy tool in evaluation such proposals.3. Project Selection: No standard administrative procedure can be laid down for approving the investment proposal. The screening and selection procedures are different from firm to firm. 4. Project Evaluation: Once the proposal for capital expenditure is finalised, it is the duty of the finance manager to explore the different alternatives available for acquiring the funds. He has to prepare capital budget. Sufficient care must be taken to reduce the average cost of funds. He has to prepare periodical reports and must seek prior permission from the top management. Systematic procedure should be developed to review the performance of projects during their lifetime and after completion. Factors influencing capital budgeting Availability of funds Structure of capital Taxation policy Government policy Lending policies of financial institutions Immediate need of the project Earnings Capital return Economical value of the project Working capital Accounting practice Trend of earnings

3. Capital Structure-is the mix of financial securities used to finance the firm. The value of a firm is defined to be the sum of the value of the firms debt and the firms equity.

Factors influencing to capital structure Business Risk Company Tax exposure Financial Flexibility Management Style Growth Rate Market Condition Cost of Fixed Assets Size of Business Organization Nature of business Organization Elasticity of Capital StructurePlanning the Capital Structure Important Considerations Return: ability to generate maximum returns to the shareholders, i.e. maximize EPS and market price per share. Cost: minimizes the cost of capital (WACC). Debt is cheaper than equity due to tax shield on interest & no benefit on dividends. Risk: insolvency risk associated with high debt component. Control: avoid dilution of management control, hence debt preferred to new equity shares. Flexible: altering capital structure without much costs & delays, to raise funds whenever required. Capacity: ability to generate profits to pay interest and principal.