Working Capital Concepts

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Business Capital is broadly divided into two groups: Fixed Capital and Business Capital is broadly divided into two groups: Fixed Capital and Working Capital. Fixed Capital refers to the funds invested in fixed assets Working Capital. Fixed Capital refers to the funds invested in fixed assets of a firm in the form of land, building, machinery etc. Working Capital of a firm in the form of land, building, machinery etc. Working Capital refers to the funds invested in the current assets of a firm such as raw refers to the funds invested in the current assets of a firm such as raw materials, work-in-pro

materials, work-in-progress, finished gress, finished goods, recegoods, receivables, casivables, cash etc. h etc. FromFrom the viewpoint of manufacturing process, working capital means that part of the viewpoint of manufacturing process, working capital means that part of cap

capitaital, l, whiwhich ch is is reqrequireuired d to to keekeep p the flow the flow of of proproducductiotion n smosmooth andoth and continuous.

continuous.

The main point of difference between the fixed capital and working capital The main point of difference between the fixed capital and working capital is that : Fixed assets are of long run duration and are not converted within is that : Fixed assets are of long run duration and are not converted within a period of one year, whereas the current assets are converted into cash a period of one year, whereas the current assets are converted into cash within a period of one year or less. Hence, the problem of fixed assets within a period of one year or less. Hence, the problem of fixed assets belongs to the field of capital budgeting, while the problems of current belongs to the field of capital budgeting, while the problems of current assets belong to the field

assets belong to the field of working capital management.of working capital management. Wo

Workinrking g CapCapitaital, l, bebeinging lifeblood lifeblood for for any any ententerperprisrise, e, its its mamanagnagemementent becomes a crutial exercise for the Financial Manager of a firm. The need becomes a crutial exercise for the Financial Manager of a firm. The need of working capital is directly linked to the growth of the firm. Working of working capital is directly linked to the growth of the firm. Working Capital is as essential as fixed assets in the successful operation of a Capital is as essential as fixed assets in the successful operation of a production unit.

production unit.

In the past, only the problems of the management of fixed capital were In the past, only the problems of the management of fixed capital were giv

given en impimportaortance nce in in the the exexercercise ise of of finafinancincial al manmanageagemenment. t. But But in in thethe pre

presesent nt scescenarnario, io, loolookinking g to to the the incincreareasinsing g impimportortancance e of of the the worworkinkingg cap

capitaital l in in any any bubusinsiness ess uniunit, t, the the exeexercisrcise e of of manmanageagemement nt of of worworkinkingg capital has become as much important for a financial manager as the capital has become as much important for a financial manager as the management of fixed capital.

management of fixed capital.

Some authors go the extent of saying that financial management means Some authors go the extent of saying that financial management means working capital management. Even if this extreme view is regarded as working capital management. Even if this extreme view is regarded as unacceptable, there is no doubt that a large part of a financial manager’s unacceptable, there is no doubt that a large part of a financial manager’s time and energy is used up in attending to the problems of working capital time and energy is used up in attending to the problems of working capital management.

management.

The exercise of working capital

The exercise of working capital managemenmanagement covers the following t covers the following points topoints to be considered:

be considered: 1.

1. EstEstimaimating tting the wohe workirking cang capitpital neal needseds 2.

2. ProProcurcuremement oent of worf workinking cag capitpitalal 3.

3. OptOptimuimum utilm utilisaisatiotion of workn of working caing capitpitalal

Before discussing about the management of working capital, first of all, Before discussing about the management of working capital, first of all, let’s have a brief idea about the concept of Working Capital.

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 CONCEPTS OF WORKING CAPITAL :CONCEPTS OF WORKING CAPITAL :

Working Capital, in the simple words, means the capital invested in the Working Capital, in the simple words, means the capital invested in the current assets.

current assets.

However it has been variously defined as : However it has been variously defined as :

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“Wororkiking ng CaCapipitatal l memeanans s ththe e cucurrrrenent t asassesets ts of of a a cocompmpanany y ththat at araree changed in the ordinary course of business from one form to another, as changed in the ordinary course of business from one form to another, as fo

for r exexamampleple, , frfrom om cacash sh to to ininveventntororieies, s, ininveventntororieies s to to rerececeivivabableles,s, receivables into cash.”

receivables into cash.”

“Working Capital is descriptive of that capital which is not fixed. But the “Working Capital is descriptive of that capital which is not fixed. But the more common use of working capital is to consider it as the difference more common use of working capital is to consider it as the difference between the book value of the current assets and current liabilities.”

between the book value of the current assets and current liabilities.”

Thus, there are two different opinions about the meaning of the term Thus, there are two different opinions about the meaning of the term working capital.

working capital. (1)

(1) AccAccordording ing to to one schoone school ol of of thothoughught, t, worworkinking g capcapitaital l reprepresresentents s allall cur

currenrent t assassets ets of of the the ComCompanpany. y. TheThey y belbelievieve e thathat t worworkinking g cacapitpitalal represents those assets, which change their form during the process of represents those assets, which change their form during the process of production.

production.

Working Capital = Total Current

Working Capital = Total Current AssetsAssets (2)

(2) AccorAccording to the other school of thoughtding to the other school of thought, working capita, working capital is l is the excesthe excesss of current assets over current liabilities.

of current assets over current liabilities.

Working Capital = Current Assets – Current Liabilities Working Capital = Current Assets – Current Liabilities Cur

Currenrent t assassets ets incincludlude e cascash, h, accaccounounts ts recreceiveivabable, le, notnotes es recreceiveivablable,e, advances on contracts, inventories etc. Current liabilities include accounts advances on contracts, inventories etc. Current liabilities include accounts payable, notes payable, accrued expenses, temporary loans etc. Under payable, notes payable, accrued expenses, temporary loans etc. Under this concept an attempt is made to measure net working capital of the this concept an attempt is made to measure net working capital of the Company.

Company.

To avoid the confusion involved in the interpretation of working capital, the To avoid the confusion involved in the interpretation of working capital, the total current assets are described as

total current assets are described as gross working capital gross working capital , while the, while the excess of total current assets over total current liabilities are described as excess of total current assets over total current liabilities are described as net working capital.

net working capital.

Thus, there are two concepts of working capital: Thus, there are two concepts of working capital: 1.

1. Gross Gross WorkWorking Cing Capitaapital i.e. l i.e. Total Total CurreCurrent asnt assetssets 2.

2. Net WoNet Working Crking Capitaapital i.e. Curl i.e. Current asrent assets – sets – CurrenCurrent liabt liabilitiesilities

Gross working capital concept focuses attention on two aspects of current Gross working capital concept focuses attention on two aspects of current

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a.

a. What is tWhat is the optihe optimum lemum level of invel of investvestment in cment in current aurrent assetsssets?? b.

b. How How shoushould cld current urrent asseassets bts be fie financenanced?d? Ne

Net t woworkrkining g cacapipitatal l is is a a ququalalitaitativtive e coconcncepept. t. It It indindicicatates es ththe e liliququididityity position of the firm and suggests the extent to which the working capital position of the firm and suggests the extent to which the working capital needs may be financed by permanent sources of funds. It indicates how needs may be financed by permanent sources of funds. It indicates how much current assets are covered by current liabilities. The net working much current assets are covered by current liabilities. The net working capital concept also covers the question of judicious mix of long-term and capital concept also covers the question of judicious mix of long-term and short-term funds for financing the

short-term funds for financing the current assets.current assets.

Both gross and net working capital concepts are equally important for the Both gross and net working capital concepts are equally important for the efficient management of working capital.

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 FEATURES OF WORKING CAPITAL :FEATURES OF WORKING CAPITAL :

The features of the working capital distinguishing it from the fixed capital The features of the working capital distinguishing it from the fixed capital are as follows:

are as follows:

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Short Term needs

Working capital is used to

Working capital is used to acquire current assets, which get convertedacquire current assets, which get converted into cash in a short period. The duration of working capital depends on into cash in a short period. The duration of working capital depends on the length of production process, the time that elapses in the sale and the length of production process, the time that elapses in the sale and the waiting period of the cash receipt.

the waiting period of the cash receipt.

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Circular Movement

Working capital is constantly converted into cash, which again turns Working capital is constantly converted into cash, which again turns into working capital. This process of conversion goes on continuously. into working capital. This process of conversion goes on continuously. It moves in a circular

It moves in a circular way. That is why working capital way. That is why working capital is also describedis also described as circulating capital.

as circulating capital.

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An element of permanency

Though working capital is a short-term capital, it is required always and Though working capital is a short-term capital, it is required always and forever. It is required to run

forever. It is required to run the production activity of the firm smoothlythe production activity of the firm smoothly and uninterruptedly. So long as the production continues, the firm will and uninterruptedly. So long as the production continues, the firm will constantly remain in need of working

constantly remain in need of working capital.capital.

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Fluctuating

Tho

Though ugh the the reqrequireuiremement nt of of worworkinking g cacapitpital al is is felt felt perpermanmanentently, ly, itsits re

reququirirememenent t flflucuctutuatates es momore re wiwidedely ly ththan an ththe e fifixexed d cacapipitatal. l. ThThee requirement working capital varies directly with the level of production. requirement working capital varies directly with the level of production. The portion of working capital that changes with production, sale, price The portion of working capital that changes with production, sale, price etc. is called variable working capital.

etc. is called variable working capital.

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Liquidity

Working capital is more liquid than fixed capital. It can be converted Working capital is more liquid than fixed capital. It can be converted into cash within a short period and without much loss. A firm in need of into cash within a short period and without much loss. A firm in need of cash can get it through the conversion of its working capital by insisting cash can get it through the conversion of its working capital by insisting on quick recovery of its bills receivable and by expediting sales of its on quick recovery of its bills receivable and by expediting sales of its products. It is due to this trait of working capital that the firms with a products. It is due to this trait of working capital that the firms with a larger amount of working capital

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Less Risky

Investment in the working capital is less risky as it is a short-term Investment in the working capital is less risky as it is a short-term investment. Working capital involves more of physical risk only

investment. Working capital involves more of physical risk only and thatand that also is limited. It involves financial or economic risk to a much less

also is limited. It involves financial or economic risk to a much less extent because variations of the product prices

extent because variations of the product prices are less severeare less severe generally. It is also free from technological changes as it gets generally. It is also free from technological changes as it gets converted into cash again and again.

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 NEED FOR WORKING CAPITAL :NEED FOR WORKING CAPITAL :

The need of working capital to run the day to day business of a firm can The need of working capital to run the day to day business of a firm can not be ignored. We will hardly find a business firm, which does not require not be ignored. We will hardly find a business firm, which does not require any amount of working capital.

any amount of working capital.

The firm has to maintain an adequate level of current assets to generate The firm has to maintain an adequate level of current assets to generate sales. The current assets are required, as the sales generated by the firm sales. The current assets are required, as the sales generated by the firm do not convert into cash immediately. There is always an operating cycle do not convert into cash immediately. There is always an operating cycle involved in conversion of sales into

involved in conversion of sales into cash.cash.

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Operating Cycle:

Operating Cycle is the time duration required to convert sales, after the Operating Cycle is the time duration required to convert sales, after the co

convnverersision on of of reresosoururceces s intinto o ininveventntororieies, s, ininto to cacashsh. . It It is is ththe e timtimee interval between the cash collections from sale of the product and cash interval between the cash collections from sale of the product and cash payments for resources acquired by the firm. It also refers to the time payments for resources acquired by the firm. It also refers to the time interval over which the working capital should be obtained in order to interval over which the working capital should be obtained in order to carry out the firm’s operations. The operating cycle of a manufacturing carry out the firm’s operations. The operating cycle of a manufacturing company involves three phases:

company involves three phases:

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• Acquisition of resources such as raw materials, labour, power Acquisition of resources such as raw materials, labour, power

and fuel etc. and fuel etc.

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• Manufacture of the product which includes conversion of rawManufacture of the product which includes conversion of raw

material into work-in-progress into finishes goods material into work-in-progress into finishes goods

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• Sale of the product either for cash or on credit. Credit salesSale of the product either for cash or on credit. Credit sales

create account receivable for collection create account receivable for collection

Collection of

Collection of Purchase of RawPurchase of Raw

receivables Material receivables Material Work-in-Progress Work-in-Progress Sales Sales Figure

Figure 1 1 Operating Operating CycleCycle

Cash Cash Finished Finished Goods Goods Accounts Accounts Receivable Receivable s s Raw Raw Material Material

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These phases of operating cycle affect the firm’s cash flows : both cash These phases of operating cycle affect the firm’s cash flows : both cash infl

inflows and ows and cascash h out out floflows. ws. HowHoweveever r thethese se cascash h floflows ws are are neineithether r synchronised nor certain. They are not synchronised because most of synchronised nor certain. They are not synchronised because most of the time the cash outflows occurs before cash inflows. Cash inflows are the time the cash outflows occurs before cash inflows. Cash inflows are not

not cercertain becautain because se salsale e and and colcolleclectiotions, ns, whiwhich ch givgives es risrise e to to cascashh inflow

inflows s are difficult to are difficult to forecforecast accurateast accurately. Cash ly. Cash outfloutflows, on ows, on the other the other hand, are relatively certain. The firm is therefore, required to invest in hand, are relatively certain. The firm is therefore, required to invest in current assets for a

current assets for a smooth, uninterrupted functioning.smooth, uninterrupted functioning. The firm’s requi

The firm’s requiremrement for ent for worworkinking g capcapitalital, , is is thuthus, s, depdependends s on on itsits operating cycle. For that purpose it needs to forecast the length of its operating cycle. For that purpose it needs to forecast the length of its operating cycle.

operating cycle.

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cycle?

The length of the operating cycle can be determined by addition of the The length of the operating cycle can be determined by addition of the inventory conversion period and debtor’s conversion period.

inventory conversion period and debtor’s conversion period.

The inventory conversion period is the total time needed for producing The inventory conversion period is the total time needed for producing and selling the product. The debtor’s conversion period is the time and selling the product. The debtor’s conversion period is the time required to collect the outstanding amount from the customers. The required to collect the outstanding amount from the customers. The total of inventory conversion period and debtor’s conversion period is total of inventory conversion period and debtor’s conversion period is referred to as

referred to as gross operating cyclegross operating cycle..

There are certain expenses, the payment of which can be temporarily There are certain expenses, the payment of which can be temporarily postponed. Such types of expenses are the

postponed. Such types of expenses are the spontaneous sources of spontaneous sources of working capital

working capital for a firm to finance its investment in current assets.for a firm to finance its investment in current assets. The period during which the firm can temporarily defer the payment of The period during which the firm can temporarily defer the payment of such expenses is called as

such expenses is called as payables deferral period payables deferral period and the differenceand the difference between the gross operating cycle and the payables deferral period is between the gross operating cycle and the payables deferral period is referred to as

referred to as net operating cycle.net operating cycle.

Based on the forecast of the operating cycle of a firm, its requirement for Based on the forecast of the operating cycle of a firm, its requirement for working capital can be estimated.

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 TYPES OF WORKING CAPITAL :TYPES OF WORKING CAPITAL : Basically two types of working

Basically two types of working capital are needed in the capital are needed in the business:business: 1.

1. PerPermanmanent ent WoWorkirking ng CapCapitaitall 2.

2. VarVariabiable le WoWorkirking ng CapCapitaitall

These two types of working capital can also be classified as under : These two types of working capital can also be classified as under :

Let’s discuss each of the types in brief: Let’s discuss each of the types in brief:

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Capital

Capital ::

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This s is is the the miminimnimum um levlevel el of of curcurrenrent t assassetsets, , whiwhich ch is is cocontinntinuouuouslysly required by the firm to carry on its business operations. It is permanent required by the firm to carry on its business operations. It is permanent in the same way as the firm’s fixed assets are. Depending upon the in the same way as the firm’s fixed assets are. Depending upon the changes in the production and sales, the need for working capital, over changes in the production and sales, the need for working capital, over and above the permanent working capital, will

and above the permanent working capital, will fluctuate.fluctuate.

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Initial Working Capital :

In the initial period of its operation, a firm must need enough money In the initial period of its operation, a firm must need enough money to pay certain expenses before the business yields cash receipt. In to pay certain expenses before the business yields cash receipt. In

Working Capital Working Capital Permanent Variable Permanent Variable Initial Initial Working Working Capital Capital Regular Regular Working Working Capital Capital Seasonal Seasonal Working Working Capital Capital Special Special Working Working Capital Capital

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creditditors ors immimmediediateately. ly. TheTherefrefor or the the ownowners ers thethemsmselvelves es hahave ve toto provide necessary funds in the initial period, which may be known provide necessary funds in the initial period, which may be known as initial working capital.

as initial working capital.

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Regular Working Capital

::

The firm is always required to keep certain funds with it to continue The firm is always required to keep certain funds with it to continue the regular business operations, which is called as

the regular business operations, which is called as Regular WorkingRegular Working Capital. It is required to maintain regular stock of raw materials and Capital. It is required to maintain regular stock of raw materials and work-in-progress and also of the finishes goods, which must be work-in-progress and also of the finishes goods, which must be maintained permanently at a definite level. Regular working capital maintained permanently at a definite level. Regular working capital is the excess of current assets over current liabilities. It ensures is the excess of current assets over current liabilities. It ensures smooth operation of business.

smooth operation of business.

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Variable Working Capital :

This is the working capital which, keeps on changing with the change in This is the working capital which, keeps on changing with the change in the producti

the production and on and sales activsales activities. It ities. It is the is the extra workinextra working g capitcapital, over al, over and above the permanent working capital, that is needed to support the and above the permanent working capital, that is needed to support the changing production and sales activities. This type of working capital is changing production and sales activities. This type of working capital is also called as fluctuating or variable working capital.

also called as fluctuating or variable working capital.

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Capital :

Some business operations require additional working capital during Some business operations require additional working capital during a particular season. For example, the groundnut oil producers may a particular season. For example, the groundnut oil producers may have to purchase groundnut in a particular season and have to have to purchase groundnut in a particular season and have to em

emplploy oy adaddidititiononal al lalabobour ur fofor r ththat at pupurprposose. e. ThThesese e mamay y rereququireire additional funds for a temporary period, which may be called as additional funds for a temporary period, which may be called as seasonal working capital.

seasonal working capital.

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Capital :

In all enterprises, some unforeseen events do occur like sudden In all enterprises, some unforeseen events do occur like sudden in

incrcreaease se in in dedemmanand, d, dodownwnwaward rd momovevemement nt of of prpricices es of of raraww materials, strike or natural calamities, when extra funds are needed materials, strike or natural calamities, when extra funds are needed to tide over such situation. Such type of extra funds is called as to tide over such situation. Such type of extra funds is called as Special working capital.

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Both the kinds of working capital – permanent and temporary – are Both the kinds of working capital – permanent and temporary – are necessary to facilitate the production and sales through the operating necessary to facilitate the production and sales through the operating cycle.

cycle. However, the temHowever, the temporary working cporary working capital is created by apital is created by the firm tothe firm to meet the liquidity requirements that will last only temporarily.

meet the liquidity requirements that will last only temporarily.

The difference between the permanent and variable working capital The difference between the permanent and variable working capital may be represented in the following

may be represented in the following two diagrams:two diagrams:

Temporary or fluctuating Temporary or fluctuating Permanen Permanentt Time Time Figure

Figure 2 2 Permanent Permanent and and temporary temporary working working capital capital

Temporary or fluctuating Temporary or fluctuating Permanent Permanent Time Time Figure

Figure 3 3 Permanent Permanent and and temporary temporary working working capital capital

AA mm oo uu nn tt oo ff ww oo rrkk iinn gg ccaa pp iittaa ll(( RR ss.. )) AA mm oo uu nn tt oo ff ww oo rrkk iinn gg ccaa pp iittaa ll(( RR ss.. ))

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 DETERMINANTS OF WORKING CAPITAL :DETERMINANTS OF WORKING CAPITAL : The

There re are no are no set rules set rules or or forformumulatlate e to to detdetermermine ine the workithe working ng capcapitaitall requirements of a firm. There are ‘n’ numbers of factors influencing the requirements of a firm. There are ‘n’ numbers of factors influencing the working capital requirements of a firm, which can be briefed as under:

working capital requirements of a firm, which can be briefed as under:

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Nature of business :

Working capital requirement of a firm is basically influenced by the Working capital requirement of a firm is basically influenced by the nature of its business. Trading and financial firms require large amount nature of its business. Trading and financial firms require large amount of working capital. In contrast, the manufacturing firms require less of working capital. In contrast, the manufacturing firms require less amount of working capital and large

amount of working capital and large amount of fixed assets.amount of fixed assets.

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Conditions

Conditions ::

The sales and demand conditions of a firm also affect its working The sales and demand conditions of a firm also affect its working cap

capitaital l pospositioition. n. It It is is difdifficficult ult to to prepreciscisely ely detdetermermine ine the the relrelatiationsonshiphip between volume of sales and working capital needs. Sales depend on between volume of sales and working capital needs. Sales depend on the demand conditions. Most of the firms experience seasonal and the demand conditions. Most of the firms experience seasonal and cyc

cycliclical al flucfluctuatuatiotions ns in in the the demdemand and of of thetheir ir proproducducts ts and and serservicvices.es. The

These se busbusineiness ss varvariatiationions s affaffect ect the the worworkinking g capcapitaital l reqrequiruiremeement,nt, particularly the temporary working capital requirement of

particularly the temporary working capital requirement of the firm.the firm.

When there is an upward swing in the economy, the sales will increase When there is an upward swing in the economy, the sales will increase and untimely the firm’s investment in inventories and debtors will also and untimely the firm’s investment in inventories and debtors will also increase. On the other hand, when there is a decline in the economy, increase. On the other hand, when there is a decline in the economy, the sales will fall and ultimately, the level of inventories and debtors will the sales will fall and ultimately, the level of inventories and debtors will also fall. Under recessionary conditions firms try to reduce their also fall. Under recessionary conditions firms try to reduce their short-term borrowings. term borrowings.

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Manufacturing Policy :

The manufacturing cycle of the firm also affects the requirement of the The manufacturing cycle of the firm also affects the requirement of the working capital. The manufacturing cycle comprises the purchase and working capital. The manufacturing cycle comprises the purchase and use of

use of raw materraw material ial and produand productiction on of of finfinishished ed googoods. ds. LonLonger ger thethe ma

manunufafactctururining g cycycclele, , lalargrger er wiwill ll be be ththe e fifirmrm’s ’s woworkrkining g cacapipitatall requirements and vice versa. An extended manufacturing time span requirements and vice versa. An extended manufacturing time span me

meanans s a a lalargrger er tietie-u-up p of of fufundnds s in in ininveventntororieies. s. ThThusus, , if if ththerere e araree alternative technologies for manufacturing a product, the technological alternative technologies for manufacturing a product, the technological process with the shortest manufacturing cycle may be chosen.

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Further, the requirement of working capital also depends on whether Further, the requirement of working capital also depends on whether the firm has adopted steady production policy or variable production the firm has adopted steady production policy or variable production policy.

policy.

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Credit Policy :

In the present day cir

In the present day circumstances, almost all units have to sell cumstances, almost all units have to sell goods ongoods on cre

creditdit. . The The natnature ure of of crecredit dit polpolicy icy is is an an impimportortant ant conconsidsideraeratiotion n inin deciding the amount of working capital requirement. The larger the deciding the amount of working capital requirement. The larger the volume of credit sales, the greater will be the requirement of working volume of credit sales, the greater will be the requirement of working capital. Also the longer the period of collection of payment, the greater capital. Also the longer the period of collection of payment, the greater will be the requirement of working capital.

will be the requirement of working capital. Generally, the credit policy of Generally, the credit policy of an individual firm depends on the norms of the industry to which the an individual firm depends on the norms of the industry to which the firm belongs.

firm belongs.

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Availability of Credit :

The

The avaavailailabilbility ity of of crecredit dit frofrom m banbanks ks and and finafinancincial al insinstitutitutiontions s alsalsoo influences the working capital requirement of a firm. The availability of influences the working capital requirement of a firm. The availability of credit to a firm depends upon the creditworthiness of the firm in the credit to a firm depends upon the creditworthiness of the firm in the money market. If a firm has good credit standing in the market, it can money market. If a firm has good credit standing in the market, it can get credi

get credit t easeasily on ily on favfavoraorable terms and ble terms and hehence it nce it wilwill l reqrequiruire e leslesss working capital.

working capital.

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Operating Efficiency :

The operating efficiency of the firm relates to the optimum utilisation of The operating efficiency of the firm relates to the optimum utilisation of resources at minimum costs. If the firm is efficient in controlling its resources at minimum costs. If the firm is efficient in controlling its operating costs and utilizing its current assets, than it helps in keeping operating costs and utilizing its current assets, than it helps in keeping the working capital at a lower level. The use of working capital is the working capital at a lower level. The use of working capital is im

imprprovoved ed anand d papace ce of of cacash sh coconvnverersision on cycyclcle e is is acaccecelerleratated ed wiwithth operating efficiency.

operating efficiency.

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Price Level Changes :

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The e prpricice e lelevevel l chchanangeges s alalso so afaffefect ct ththe e lelevevel l of of woworkrkining g cacapipitatal.l. Gen

Generaerally, lly, risrising ing priprice ce levlevels els wilwill l reqrequiruire e a a firm to firm to maimaintantain in highigher her amount of working capital. However, the effect of rising prices may be amount of working capital. However, the effect of rising prices may be diff

differeerent nt for for difdifferferent ent comcompanpaniesies, , as as thothougugh h the the gengeneraeral l pricprice e levlevelel increases, the individual prices may move differently. Therefor some increases, the individual prices may move differently. Therefor some firms may require more working capital, while other may require less firms may require more working capital, while other may require less working capital in case of price rise.

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Plans :

The growth and expansion plans to be undertaken by a firm also affect The growth and expansion plans to be undertaken by a firm also affect its requirements

its requirements of working caof working capital. pital. Hence the Hence the planning of the planning of the workingworking capital requirements and its procurements must go hand in hand with capital requirements and its procurements must go hand in hand with th

the e plplanannining ng of of ththe e grgrowowth th anand d exexpapansnsioion n of of ththe e fifirmrm. . EvEven en ththee expansion of the sales also increases the requirements of working expansion of the sales also increases the requirements of working capital.

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

 OPTIMUM WORKING CAPITAL :OPTIMUM WORKING CAPITAL :

A firm has to maintain an adequate level of working capital to run its A firm has to maintain an adequate level of working capital to run its operations smoothly and effectively. It should be adequate in the sense operations smoothly and effectively. It should be adequate in the sense that it shall not be more than the requirements nor it shall be less than the that it shall not be more than the requirements nor it shall be less than the requirements. Both the excessive as well as inadequate working capital requirements. Both the excessive as well as inadequate working capital positions are dangerous from the firm’s point

positions are dangerous from the firm’s point view.view.

We know that the current liabilities are met out of the current assets. So We know that the current liabilities are met out of the current assets. So the level of current assets shall be sufficient enough to meet the current the level of current assets shall be sufficient enough to meet the current liabilities. Excessive working capital refers to the position where when the liabilities. Excessive working capital refers to the position where when the lev

level el of of curcurrenrent t assassets ets is is mucmuch h highigher her to to memeet et curcurrenrent t lialiabilbilitieities. s. TheThe exc

excessessive ive capcapital ital has has oppopportuortunity nity coscost t for for the the firmfirm, , as as this this exexcescessivsivee capital remains idle in the firm, which earns no profit for the firm. If these capital remains idle in the firm, which earns no profit for the firm. If these funds shall be invested in some profitable project,

funds shall be invested in some profitable project, it adds the profitability it adds the profitability of of the Company.

the Company.

On the other hand, inadequate working capital refers to the position where On the other hand, inadequate working capital refers to the position where the current assets are not sufficient enough to meet the current liabilities. the current assets are not sufficient enough to meet the current liabilities. Such type of position may be harmful to the firm as it may interrupt the Such type of position may be harmful to the firm as it may interrupt the pr

prododucuctition on anand d sasaleles s of of ththe e CoCompmpanany, y, whwhicich h ulultitimamatetely ly afaffefectcts s ththee profitability of the Com

profitability of the Company. pany. Moreover if the liquMoreover if the liquidity position of the idity position of the firm isfirm is no

not t adadeqequauate te enenouough gh to to memeet et its its cucurrerrent nt liliababililititiesies, , it it mamay y afaffefect ct itsits credibility in the market.

credibility in the market.

Therefore an enlightened management should maintain the right amount Therefore an enlightened management should maintain the right amount of working capital on a continuos basis. Only then the

of working capital on a continuos basis. Only then the proper functioning of proper functioning of business operations can be ensured. The amount of the working capital business operations can be ensured. The amount of the working capital sh

shalall l be be mamainintatainined ed at at susuch ch lelevevel, l, whwhicich h is is adadeqequauate te fofor r it it to to rurun n ititss bus

busineiness ss opeoperatrationions, s, neineithether r excexcessessive ive nor nor inainadeqdequatuate. e. ThThis is levlevel el of of working capital is called as the

working capital is called as the “Optimum Working Capital”.“Optimum Working Capital”.

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Liquidity v/s Profitability:

The level of working capital affects the degree of risk and profitability The level of working capital affects the degree of risk and profitability both. Hence the level of working capital should be so fixed that, on the both. Hence the level of working capital should be so fixed that, on the one hand, its financial soundness is maintained and on the other hand, one hand, its financial soundness is maintained and on the other hand, its profitability is optimised.

its profitability is optimised.

At this point it is necessary to be clear about the meaning of solvency At this point it is necessary to be clear about the meaning of solvency or insolvency of the firm. Solvency means a situation in which a firm or insolvency of the firm. Solvency means a situation in which a firm can easily repay its debts as and when they mature. On the other can easily repay its debts as and when they mature. On the other hand, insolvency is a situation in which a firm is not able to repay its hand, insolvency is a situation in which a firm is not able to repay its debts as and when they become due for

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The term risk implies the profitability that a firm will become technically The term risk implies the profitability that a firm will become technically insolvent, so that it will not be able to meet its obligations as and when insolvent, so that it will not be able to meet its obligations as and when they become due for payment.

they become due for payment.

Nature of trade-off: Nature of trade-off:

If profitability is to be increased, the firm must increase its risk. If the If profitability is to be increased, the firm must increase its risk. If the firm wants to decrease risk, its profitability will also decrease. If a firm firm wants to decrease risk, its profitability will also decrease. If a firm wants to maintain insolvency, it must maintain a higher level of li

wants to maintain insolvency, it must maintain a higher level of li quidity.quidity. That is, it must hold a larger amount of current assets such as cash, That is, it must hold a larger amount of current assets such as cash, receivables, stock of goods etc., so that there would be no problem in receivables, stock of goods etc., so that there would be no problem in repaying the debts as and when they due for payment. However, if a repaying the debts as and when they due for payment. However, if a fir

firm m hoholdlds s momore re amamouount nt of of cucurrrrenent t asassesetsts, , ththe e prprosospepectcts s of of prprofofitit decline due to the fact that most of its funds are locked up in idle decline due to the fact that most of its funds are locked up in idle current assets, which earn no profit.

current assets, which earn no profit.

On the other hand, if a firm wants s to increase its profitability, it must On the other hand, if a firm wants s to increase its profitability, it must be prepared to increase its risk of insolvency, as it would have to be prepared to increase its risk of insolvency, as it would have to reduce its investment in current assets. However a smaller amount of reduce its investment in current assets. However a smaller amount of liquidity increases risk of insolvency and, at the same time, it increases liquidity increases risk of insolvency and, at the same time, it increases profitability also.

profitability also.

The firm should maintain the its current assets at such level that on the The firm should maintain the its current assets at such level that on the one hand its profitability increases and on the other hand its risk of one hand its profitability increases and on the other hand its risk of insolvency decreases. There should be a balance between profitability insolvency decreases. There should be a balance between profitability and risk. The level, at which there is a trade-off between the risk and and risk. The level, at which there is a trade-off between the risk and return, is the optimum level of working capital for a fir

return, is the optimum level of working capital for a fir m.m. The followin

The following figure will g figure will clear the idea about the clear the idea about the Risk – Risk – Return TradeReturn Trade--off of a firm:

off of a firm:

Optimum Working Capital Optimum Working Capital

Return / Profitability Return / Profitability RR iiss kk // LL iiqq uu iidd iittyy

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

 MANAGEMENT OF WORKING CAPITAL :MANAGEMENT OF WORKING CAPITAL :

Working Capital management refers to the administration of all aspects of Working Capital management refers to the administration of all aspects of cur

currenrent t assassets ets namnamely ely cascash, h, mamarkerketabtable le secsecuriuritiesties, , debdebtortors s and and stostockck (in

(inveventntororieies) s) anand d cucurrrrenent t liliababiliilititieses. . ThThe e finfinanancicial al mamananageger r shshououldld determine levels and composition of current assets. He must see that right determine levels and composition of current assets. He must see that right sources are tapped to finance current assets and that current liabilities are sources are tapped to finance current assets and that current liabilities are paid in time.

paid in time.

Working capital management is critical for all firms, but particularly for Working capital management is critical for all firms, but particularly for small firms. A small firm may not have much investment in fixed assets, small firms. A small firm may not have much investment in fixed assets, but it has to invest in current assets. Further, the role of current liabilities in but it has to invest in current assets. Further, the role of current liabilities in financing the current assets is far more significant in case of small firms, financing the current assets is far more significant in case of small firms, as, unlike large firms they, face difficulties in raising long-term finances. as, unlike large firms they, face difficulties in raising long-term finances. The main problems of the management of working capital are as stated The main problems of the management of working capital are as stated below:

below: a.

a. to detto deterermimine a ne a prpropoper amoer amoununt t of worof workiking capng capitital to al to be helbe held d in thein the business i.e. estimating the working capital needs

business i.e. estimating the working capital needs b.

b. to take decto take decisiision on the on on the sosourcurces of workies of working caping capital i.e. protal i.e. procurcuremeement of nt of working capital

working capital c.

c. to ensuto ensure that the workre that the working caping capitaital l is efficis efficieniently utiltly utiliseised i.e. optimd i.e. optimum of um of utilisation of working capital

utilisation of working capital Bef

Before ore we we coconsinsider der thethese se proprobleblems ms letlets s firsfirst t ununderderstastand nd somsome e of of thethe principles of working

principles of working capital management:capital management:



 Principles of Working Capital Management :Principles of Working Capital Management :

The financial manager must keep in mind the following principles of The financial manager must keep in mind the following principles of working capital

working capital management:management:

→

Principle of Optimisation :

The level of working capital must be so kept that the rate of return The level of working capital must be so kept that the rate of return on

on invinvestestmenment t is is optoptimiimisedsed. . In In othother er worwords, ds, the the worworkinking g cacapitapitall should be maintained at an optimum level. This is

should be maintained at an optimum level. This is the point at whichthe point at which the increase in cost due to decline in working capital is equal to the the increase in cost due to decline in working capital is equal to the increase in the gain associated with it.

increase in the gain associated with it.

According to the principle of optimisation, the magnitude of working According to the principle of optimisation, the magnitude of working capital should be such that each rupee invested adds to its net capital should be such that each rupee invested adds to its net value. In other words Capital

value. In other words Capital should be invested in each componentshould be invested in each component of working capital as long as the equity position of firm increases.” of working capital as long as the equity position of firm increases.”

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→

Principle of Risk Variation :

This principle is based on the assumption that the rate of return on This principle is based on the assumption that the rate of return on investment is linked with degree of risk in the business. The greater investment is linked with degree of risk in the business. The greater on investment is linked with the degree of risk in the business on investment is linked with the degree of risk in the business assumes, the greater is the opportunity for gain or loss.

assumes, the greater is the opportunity for gain or loss.

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Capital :

Each source of working capital has different cost of capital. The Each source of working capital has different cost of capital. The degree of risk also differs from one source to another. The type of degree of risk also differs from one source to another. The type of capital used to finance working capital directly affects the amount of capital used to finance working capital directly affects the amount of risk that a firm assumes as well as the opportunity for gain or loss risk that a firm assumes as well as the opportunity for gain or loss and cost of capital. A

and cost of capital. A firm should raise capital in such a firm should raise capital in such a manner thatmanner that a balance is maintained between risk and profi

a balance is maintained between risk and profit.t.

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Payment :

This principle states that the working capital should be so raised This principle states that the working capital should be so raised from different sources that the firm is

from different sources that the firm is able to repay them on maturityable to repay them on maturity out of its inflows of fun

out of its inflows of funds. ds. Otherwise the firm wouOtherwise the firm would fail to repay onld fail to repay on maturity and ultimately, it would find itself into liquidation though it is maturity and ultimately, it would find itself into liquidation though it is earning huge profits. This implies that the firm’s ability to repay its earning huge profits. This implies that the firm’s ability to repay its short-term debts depends not on its earnings but on the flow of short-term debts depends not on its earnings but on the flow of cash into it.

cash into it.

These are some of the principles of working capital, which a financial These are some of the principles of working capital, which a financial manager should keep in mind while managing working capital. Now manager should keep in mind while managing working capital. Now let’s discuss how to manage working capital.

let’s discuss how to manage working capital.

⇒

⇒ Estimating Working Capital needs :Estimating Working Capital needs :

The first step in managing working capital is to estimate about the The first step in managing working capital is to estimate about the working capital needs. The most appropriate method for calculating working capital needs. The most appropriate method for calculating working capital needs of a firm is the concept of operating cycle. working capital needs of a firm is the concept of operating cycle. In estimating working capital needs, different people adopt different In estimating working capital needs, different people adopt different approaches. Some authors suggest that the working capital should approaches. Some authors suggest that the working capital should be

be grgreaeateter r ththan an ththe e mimininimmum um rereququirirememenents ts of of ththe e fifirmrm. . ThThee ma

mananagegemement nt shshouould ld fefeel el sasafefetyty. . It It wowoululd d be be abable le to to memeet et itsits obligations even in adverse circumstances. However, the excessive obligations even in adverse circumstances. However, the excessive capital may lead to waste and

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On the other hand, many authors suggest that the working capital On the other hand, many authors suggest that the working capital should be lower than the requirement so that no idle funds shall be should be lower than the requirement so that no idle funds shall be invested in the current assets and it ultimately leads to increase in invested in the current assets and it ultimately leads to increase in profitability of the Company. However, in such case the firm always profitability of the Company. However, in such case the firm always have risk of technical insolvency as it may not meet its obligations have risk of technical insolvency as it may not meet its obligations as and when they falls

as and when they falls due for payment.due for payment.

So the question is what the proper amount of working capital is. It is So the question is what the proper amount of working capital is. It is no

not t aan n ababsosolulute te aammouountnt. . It It ddepepeendnds s uuppon on ththe e nneeeedds s aandnd circumstances available in the firm.

circumstances available in the firm.

There are various approaches which have been applied in practice There are various approaches which have been applied in practice for estimating the working capital needs of a firm. Let’s discuss for estimating the working capital needs of a firm. Let’s discuss some of them in brief.

some of them in brief.

•

Conservative Approach:

The

The conconserservatvative ive appapproaroach ch stastates tes thathat t the the proproporportiotion n of of current assets to current liabilities should be kept at 2:1. Is current assets to current liabilities should be kept at 2:1. Is this proportion is to be kept the firm would be able to meet its this proportion is to be kept the firm would be able to meet its obligations on time and hence its financial solvency would obligations on time and hence its financial solvency would not be in trou

not be in trouble. ble. However, the limHowever, the limitation of this approacitation of this approach ish is th

that at it it susuggggesests ts ononly ly ququanantititatativtive e memeasasurure. e. It It dodoes es nonott suggest as to what type of assets are to be included in suggest as to what type of assets are to be included in current assets. If the current assets contain stock, which is current assets. If the current assets contain stock, which is outdated or receivable which are not collectable, than the outdated or receivable which are not collectable, than the amount of current assets has no meaning. Further, in the amount of current assets has no meaning. Further, in the pr

presesenent t scscenenarario io no no fifirm rm mamainintatains ins ththis is raratitio, o, as as it’it’s s totooo difficult for them to maintain such a high level of current difficult for them to maintain such a high level of current assets.

assets.

•

Objective Test:

Some objective tests are suggested for determining the level Some objective tests are suggested for determining the level of working capital of a firm. On the basis of answer to the of working capital of a firm. On the basis of answer to the following questions, it can be determined whether the l

following questions, it can be determined whether the l evel of evel of working capital is adequate or not:

working capital is adequate or not: 1.

1. WheWhethether the Compr the Company is ablany is able to e to makmake cash pure cash purchachasesses and can avail of cash

and can avail of cash discounts.discounts. 2.

2. WheWhethether the Compr the Company has enany has enougough credih credit wortht worthineiness toss to get finance from Banks easily as

get finance from Banks easily as and when needed?and when needed? 3.

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•

Modern Approach :

Apart from the conventional methods for estimating the need Apart from the conventional methods for estimating the need for working capital, the foll

for working capital, the following two methods are used in theowing two methods are used in the modern enterprises for the purpose:

modern enterprises for the purpose: 1.

1. RatRatio of Cuio of Currerrent Assnt Assets to Fets to Fixeixed Assd Assetsets 2.

2. CurCurrenrent Ast Asset set holholdinding pg perioeriodd

Let’s have a brief idea about each of them. Let’s have a brief idea about each of them.

1.

1. Ratio Ratio of Curof Current Arent Assets tssets to Fixed Ao Fixed Assetsssets

The

The finfinancancial ial manmanageager r shshoulould d detdetermermine ine the the optoptimuimumm level of current assets so that the wealth of shareholders level of current assets so that the wealth of shareholders is maximised. In a business enterprise both fixed and is maximised. In a business enterprise both fixed and current assets are needed to support a particular level of current assets are needed to support a particular level of output. However, to support the same level of output, the output. However, to support the same level of output, the firm can have different levels of working capital. The level firm can have different levels of working capital. The level of current assets can be measuring the current assets to of current assets can be measuring the current assets to fixed assets i.e. by measuring the ratio of current assets fixed assets i.e. by measuring the ratio of current assets to fixed assets.

to fixed assets.

Dividing current assets by fixed assets gives the ratio of Dividing current assets by fixed assets gives the ratio of Current Assets to Fixed Assets.

Current Assets to Fixed Assets.

From the viewpoint of this ratio, there are three types of From the viewpoint of this ratio, there are three types of approaches:

approaches: A.

A. CoConsenservarvativtive e apapproproachach

Many firms maintain a high ratio of current assets to Many firms maintain a high ratio of current assets to fixed assets so that they may not have any difficulty fixed assets so that they may not have any difficulty even in crisis. It suggests greater liquidity and lower even in crisis. It suggests greater liquidity and lower risk. Risk adverse firms mainly adopt this

risk. Risk adverse firms mainly adopt this approach.approach. B.

B. AggAggresressivsive e appapproaroachch Man

Many y firfirms ms maimaintantain in low low ratratio io of of curcurrenrent t asassetsets s toto fixed assets, so that their

fixed assets, so that their funds may not block idle andfunds may not block idle and th

they ey cacan n be be usused ed fofor r sosome me prprofofititabable le pupurprposose. e. ItIt involves higher risks and smaller liquidity.

involves higher risks and smaller liquidity. C.

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Most of the firms maintain their current level between Most of the firms maintain their current level between these two extreme levels. This is an average capital these two extreme levels. This is an average capital ap

apprproaoachch. . ThThis is ininvovolvlves es momodederarate te liliququididitity y anandd moderate risk.

moderate risk.

AAAAAA AAAAAA

Figure

Figure 5 5 Alternative Alternative Current Current Asset Asset ApproachesApproaches

2.

2. CurreCurrent Asnt Assets sets holdiholding peng periodriod

In this method the working capital requirements are to be In this method the working capital requirements are to be es

estimtimatated ed on on ththe e babasisis s of of avavereragage e hoholdldining g pepeririod od of of current assets and relating them to costs based on the current assets and relating them to costs based on the firm’s experience in the previous years. This method is firm’s experience in the previous years. This method is essentially based on the operating cycle concept.

essentially based on the operating cycle concept.

A modified version of this method is also used by various A modified version of this method is also used by various firms

firms, , in in which the which the currecurrent nt assetassets s are carefully estimaare carefully estimatedted and at the same time the current liabilities are also to be and at the same time the current liabilities are also to be est

estimaimatedted. . The The difdifferferencence e betbetweeween n two two givgives es a a rouroughgh idea about the net working capital requirements of the idea about the net working capital requirements of the firm.

firm.

Let’s have a brief idea about how various components of Let’s have a brief idea about how various components of current assets and current liabilities are to be estimated current assets and current liabilities are to be estimated for estimating the working capital

for estimating the working capital requirements:requirements: 1.

1. StStocock of Rk of Raw Maw Matatereriaials =ls = No

No. . of of UnUnitits s PrPrododucuced ed * * PePer r UnUnit it CoCost st of of raraww m

maatteeririaalls s * * AAvveerraagge e hhoollddiinng g ppeerrioiod d oof f rraaww materials

materials 2.

2. WWorork k in in PrProgogreress ss ==

ii.. MMaatteerriaialls s : N: Noo. . oof Uf Unniitts s PPrroodduucceed d * * PPeer Ur Unniitt Cost of raw materials * Average Cost of raw materials * Average

A.

A. CoConsnserervavatitive Apve Apprproaoachch B.

B. AvAvereragage Ape Apprproaoachch C.

C. AgAggrgresessisive Ave Apppproroacachh

Output Output LL ee vvee lloo ff CC uu rrrree nn tt AA ssss ee ttss

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iiii.. LLaabboouur r : : NNoo. . oof f PPrroodduucceed d * * PPeer r UUnniit t CCoosstt of Labour * Average of period of of Labour * Average of period of labour in process

labour in process ii

iii.i. OOveverhrheeaad: d: NoNo. o. of Pf Prorodducuceed * d * PPeer Ur Uninit Ct Cosostt of Overheads* Average of period of Overheads* Average of period of Overheads in process

of Overheads in process

Generally, the WIP is to be taken as half a month’s Generally, the WIP is to be taken as half a month’s ra

raw w mamateteririal al cocost st anand d onone e momontnth’s h’s lalabobour ur anandd variable cost.

variable cost. 3.

3. FiFininishshed ed GoGoodods =s =

No. of Units Produced * Per Unit Total Cost No. of Units Produced * Per Unit Total Cost 4.

4. SuSundndry ry DeDebtbtorors =s =

No. of Units Sold * Period of credit

No. of Units Sold * Period of credit given to debtorsgiven to debtors * Total Cost of Production

* Total Cost of Production Pr

Profofit it iis s nnot ot to to bbe e ccononssidideerered d fofor r cacalclcululatatining g ththee outstanding debtors. On the same way only the sales outstanding debtors. On the same way only the sales which are made on credit are to be considered. Thus the which are made on credit are to be considered. Thus the ca

cash sh sasales les arare e to to be be dededuductcted ed bebefofore re esestimtimatatining g ththee debtors.

debtors. 5.

5. SuSundndry ry CrCrededitoitors =rs = No

No. . of of UnUnitits s PrPrododucuced ed * * PePer r ununit it cocost st of of raraww materials * Credit period allowed by the suppliers materials * Credit period allowed by the suppliers 6.

6. OutOutstastandinding Wng Wageages and s and OveOverherheads =ads =

No. of Units Produced * Per unit cost of Wages No. of Units Produced * Per unit cost of Wages and Overheads * Time leg in payment of Wages and Overheads * Time leg in payment of Wages and Overheads

and Overheads

After estimating the components of current assets and After estimating the components of current assets and cu

currerrent nt liliababiliilitities es a a StStatatememenent t ShShowowing ing ththe e WoWorkrkiningg Capital Requirement is to be

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Statement Showing Requirement of Working Capital Statement Showing Requirement of Working Capital

P

Paarrttiiccuullaarrs s RRss.. RRss.. Current Assets :

Current Assets : 1.

1. StStocock of k of RaRaw Maw Mateteririalalss 2.

2. StoStock ck of of WorWork ik in pn progrogresress :s : Material

Material Cost Cost --- ---Wages ---Wages ---Overheads ---Overheads ---3.

3. StoStock ock of Fif Finisnished hed GooGoods (ds (at coat cost ost of f production)

production) 4

4.. DDeebbttoorrss 5.

5. MiMininimumum Cam Cash rsh reqequiuireredd 6.

6. AdAdvavancnce e PaPaymymenentsts

Total Current Assets (A) Total Current Assets (A)

--- ---Current Liabilities : Current Liabilities : 1.

1. CrCrededitoitors fors for purr purchchasaseses 2.

2. OutOutstastandinding wang wages ages and ovnd overherheadeadss 3.

3. AdvAdvancance rece receiveived froed from cusm customtomersers Total Current Liabilities (B) Total Current Liabilities (B)

- --- ---Total Working Capital

Total Working Capital RequirementRequirement (A – B)

(A – B) --- ---These are some of the methods that are used in estimating the These are some of the methods that are used in estimating the working capital requirements. After estimating the working capital working capital requirements. After estimating the working capital req

requiruiremeementsnts, , the the secsecond ond stestep p for for finfinancancial ial manmanageager r is is to to thithinknk about the procurement of working capital.

about the procurement of working capital. Let’s see

Let’s see how a how a finanfinancial managecial manager r decidecides about des about the procuremthe procurementent of working capital.

of working capital.

⇒

⇒ Procurement (financing) of Working Capital:Procurement (financing) of Working Capital:

The second step in managing the Working Capital is to take into The second step in managing the Working Capital is to take into consideration the various sources from which a working capital can consideration the various sources from which a working capital can be

be prprococurured ed anand d to to dedecicide de ababouout t ththe e bebest st susuitaitablble e sosoururce ce fofor r procurement of Working Capital.

procurement of Working Capital.

Generally, it is believed that funds for acquiring the Fixed Assets Generally, it is believed that funds for acquiring the Fixed Assets should be raised from long term sources and short-term sources should be raised from long term sources and short-term sources sho

should be uld be utilutiliseised d for for rairaisinsing g worworkinking g capcapitaital. l. But But in in the recenthe recentt mo

Working Capital Concepts

CONTENTS

CONTENTS

Short Term needs

Short Term needs

Circular Movement

Circular Movement

An element of permanency

An element of permanency

Fluctuating

Fluctuating

Liquidity

Liquidity

Less Risky

Less Risky

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Operating Cycle:

Operating Cycle:

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Capital

Capital ::

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Initial Working Capital :

Initial Working Capital :

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Regular Working Capital

Regular Working Capital

::

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Variable Working Capital :