Presentation on Working Capital

Samreen Bangi (7)

Wasim Dalvi (12)

Shweta Gujar (17)

Tabish Parkar (36)

Reshma Shaikh (48)

Reshma Singh (54)

Presented By:-

Working capital means current assets such as cash, accounts receivables and inventory etc.

Working capital or circulating capital indicates circular flow of funds is the day-to-day or routine activities of business

The management of working capital is more important than the management of fixed assets

The fate of most of the businesses very largely depends upon the manner in which their working capital is managed.

Working Capital - Introduction

Gerstenberg – “Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another ,as for example , from cash to inventories , inventories to receivable, receivables into cash.”

DEFINITION

According to one school of thought, working capital represents all current assets of the Company. They believe that working capital represents those assets, which change their form during the process of production.

  Working Capital = Total Current Assets

 According to the other school of thought,

working capital is the excess of current assets over current liabilities.

  Working Capital = Current Assets – Current Liabilities

Concept of working capital

CURRENT ASSETSInventorySundry DebtorsCash and Bank BalancesLoans and advancesCURRENT LIABILITIESSundry creditorsShort term loansOutstanding expenses

CONSTITUENTS OF WORKING CAPITAL

Type of Working Capital

On basis of concept

Requirement

Gross Wc

Net WcTemporary Permanent

Measurement

Positive Negative

Operating Cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash

Operating Cycle Concept

A company’s operating cycle typically consists of three primary activities:Purchasing resourcesProducing the product andDistributing (selling) the productThese activities results in inflow and out flow of

funds that are both unsynchronized and uncertain.

Unsynchronized because cash disbursements (for example, payments for resource purchases) usually take place before cash receipts (for example collection of receivables).

They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy.

THE WORKING CAPITAL CYCLE

(OPERATING CYCLE)

Accounts Payable

Cash

RawMaterials

W I P

Finished Goods

Value Addition

AccountsReceivable

SALES

Ratios associated with WCM

Stock Turnover Ratio (Times)

COGS AVERAGE STOCK

Stock Turnover Ratio (Days) Average Stock x 365 COGS

Receivables Turnover Ratio (Times)

Net Credit SalesAverage Accounts

Receivable

Average Receivables Period (Days)

Avg A/C Receivable x 365 Net Credit Sales

Payables Turnover Ratio (Times)

Net Credit PurchasesAverage Accounts

Receivable

Average Payables Period (Days)

Avg A/C Receivable x 365 Net Credit Sales

Current Ratio Current AssetsCurrent Liabilities

Quick Ratio CA – StockCurrent Liabilities

Working Capital Turnover Ratio

Net SalesNet Working Capital

Particulars Amount

Material 48000

Labour 36000

Factory Over Head 24000

Total Cost 108000

Add: Profit 12000

Sales 120000

Raw Material is stock for two months before it is issued to factory.

Production cycle takes one month.

FG are in stock for 1 ½ months

Debtors are allowed 3 months credit, creditors give 2 months credit

Expenses are outstanding for 1 month

Company maintains a cash balance of 20000

Particulars Amount

Current Assets

Stock:

Raw Material: 48000 x 2/12 8000

WIP: Material: 48000 x 1/12 = 4000

Labour : 36000 x 1/12*50% = 1500

OH : 24000 x 1/12*50% = 1000

6500

Finished Goods : 108000 x 1.5/12 13500

Debtors : 120000 x 3/12 30000

Cash / Bank 20000

Total A 78000

Particulars Amount

Current Liabilities

Creditors : 48000 x 2/12 8000

O/S Expenses (36000+24000)* 1/12

5000

Total B 13000

Total A – Total B: Estimated WC 65000

Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY, when it comes to managing working capital

Time & Money Concepts in Working Capital Cycle

You can get money to move faster around the cycle or reduce the amount of money tied up. Then, business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales.

TIME IS MONEY

If you Then ......

Collect receivables (debtors) faster

You release cash from the cycle

Collect receivables (debtors) slower

Your receivables soak up cash

Get better credit (in terms of duration or amount) from suppliers

You increase your cash resources

Shift inventory (stocks) faster

You free up cash

Move inventory (stocks) slower

You consume more cash

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate or shortage of working capital. Both excess as well as shortage of working capital situations are bad for any business. However, out of the two, inadequacy or shortage of working capital is more dangerous from the point of view of the firm.

Disadvantages or Dangers of Inadequate or Short Working Capital

õ Can’t pay off its short-term liabilities in time. õ  Economies of scale are not possible.õ  Difficult for the firm to exploit favourable market situations õ  Day-to-day liquidity worsens

Disadvantages of Redundant or Excess Working Capital

õ Idle funds, non-profitable for business, poor ROIõ Unnecessary purchasing & accumulation of inventories over required level õ  Excessive debtors and defective credit policy, higher incidence of B/D.õ Overall inefficiency in the organization (Profitability)õ When there is excessive working capital, Credit worthiness suffers õ  Due to low rate of return on investments, the market value of shares may fall

The size and nature of investment in current assets is a function of different factors such as type of products manufactured, the length of operating cycle, the sales level, inventory policies, unexpected demand and unanticipated delays in obtaining new inventories, credit policies and current assets.

Working Capital Investment

Nature of the Industry & Business Demand of IndustryVolume of SalesTerms of Purchase and SalesInventory TurnoverCurrent Assets requirementsProduction Cycle Inflation or Price level changesProfit planning and controlOperation efficiency Attitude towards Risk

FACTORS DETERMINING WORKING CAPITAL

Difference between permanent & temporary working capital

Amount Variable Working Capitalof WorkingCapital

Permanent Working Capital

Time

Variable Working CapitalAmount of WorkingCapital

Permanent Working Capital

Time

Working Capital Management

Working capital management is concerned with making sure we have exactly the right amount of money and lines of credit available to the business at all times

Working Capital is the money used to make goods and attract sales

The less Working Capital used to attract sales, the higher is likely to be the return on investment

Working Capital = Current Assets − Current Liabilities

Working Capital Management

Cash Management

Receivables Management

Inventory Management

Cash Management•Identify the cash balance which allows for the business to meet day to day expenses•reduces cash holding costs

Receivables Management•Money which is owed to a company by a customer for products and services provided on credit•Identify the appropriate credit policy

Inventory Management•Identify the level of inventory which allows for uninterrupted production•Reduces the investment in raw materials, minimizes reordering costs and hence increases cash flow