Working

WORKING

CAPITAL

MANAGEMENT

1

WORKING CAPITAL MANAGEMENT Working capital management is concerned with the problems that arise in managing the current assets, current liabilities and the interrelationships between them. GOAL: To manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. 2

CONCEPTS: GROSS WORKING CAPITAL – The current assets which represent the proportion of investment that circulates from one form to another in the ordinary conduct of business. NET WORKING CAPITAL – The portion of current assets financed with long term funds or current assets – current liabilities

3

PURPOSE: The NWC is necessary because the cash outflows and inflows do not coincide. The purpose of NWC is to measure the liquidity of the firm. DETERMINING FINANCING MIX: Financing mix is the choice of sources of financing of current assets. SOURCES OF ASSET FINANCE: 1. Short term sources (Current liabilities) 2. Long term sources (Share capital, long term 4

INSTRUMENTS OF SHORT TERM FINANCING Trade Credit Bill Discounting Inter Corporate Deposits Public deposits Commercial papers Factoring

5

APPROACHES TO DETERMINE FINANCING MIX:

1. Hedging approach 2. Conservative approach 3. Trade off between the above mentioned two approaches.

6

HEDGING APPROACH (MATCHING APPROACH): This is the process of matching maturities of debt with the maturities of financial needs.

According to Hedging approach, the permanent portion of funds required should be financed with long term funds and the seasonal portion with short term funds. Under this approach working capital = 0 since CA are not financed by long term funds (CA = CL). 7

CONSERVATIVE FINANCING APPROACH: This is a strategy by which the firm finances all funds requirement, with long term funds and uses short term funds for emergencies or unexpected outflows. TRADE OFF BETWEEN HEDGING AND CONSERVATIVE APPROACHES: One possible trade off could be equal to the average of the minimum and maximum monthly requirements of funds during the given period of time. This level of requirement of funds may be financed through long run sources and for any additional financing need,8

FACTORS DETERMINING AMOUNT OF WORKING CAPITAL Purchase Receive resources cash

Payment for resource purchase

Sell product on credit

Inventory Receivable conversion conversion period period Cash

Payables

period Conversion period 9

q The ‘length of the operating cycle’ is the most widely used method to determine working capital need. q The longer the production cycle, the larger is the working capital need or vice versa. q Manufacturing and trading enterprises require fairly large amount of working capital to support their production and sales activity. Service enterprises like hotels, restaurants etc., need less working capital. q During boom conditions need for working capital is more. q Growth industries and firms need more working capital. q Working capital requirement are to be determined on the basis of cash cost i.e excluding depreciation. 10

THANK YOU BHUPENDRA .IMRT