Index

1. Introduction
2. Industry/ Sector Profile .
3. Company and Product Profile
4. Literature Survey.
5. Objectives and Scope of the project
6. Research Methodology
7. Data Analysis and Interpretation
8. Observations and findings Chapter 8
9. Conclusions Chapter 9
10. Suggestions/ Recommendations Chapter 10
References
Annexure Questionnaire

INTRODUCTION
WORKING CAPITAL MANAGEMENT
More businesses fail for lack of cash than for want of profit
Cash is the lifeline of a company, no matter how large or small the organization is. If this
lifeline deteriorates so does the company's ability to fund operations, reinvest and meet capital
requirements and payments. Understanding a company's cash flow health is essential to
making investment decisions. A good way to judge a company's cash flow prospects is to look
at its working capital Management.
Working capital management involves the relationship between a firm's
current assets and its current liabilities. Current Assets are resources, which are in cash or will
soon be converted into cash in "the ordinary course of business". Current Liabilities are
commitments which will soon require cash settlement in "the ordinary course of business".

The goal of working capital management is to ensure that a firm is able to

continue its operations and that it has sufficient ability to satisfy both maturing short-term debt
and upcoming operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash to pay current liabilities as they fall
due. This implies a clearly designed risk policy to determine the required liquidity level.
Why Firms Hold Cash
The finance profession recognises the three primary reasons offered by
economist John Maynard Keynes to explain why firms hold cash. The three reasons are for the
purpose of speculation, for the purpose of precaution, and for the purpose of making
transactions. All three of these reasons stem from the need for companies to possess liquidity

Rationale of the study

In these days working capital is most important in every company. This study helps the management
of the organization in taking decision regarding working capital and financial decisions. This study is
useful to the Net Guru Solutions, Towards their working capital management. A study of working
capital management is a major importance to internal & external analysis.
The study is mainly conducted to know the working capital management of the firm. The
working capital management is concerned with the firm current assets and liabilities. It is
important and integral part of financial management as short term survival to long term
success.

To analyze the ratio analysis of Net Guru Solutions.

To compare the balance sheet of Net Guru Solutions.

To compare the statement of changes in working capital of Net Guru Solutions.

Sector profile in brief

INDUSTRY/ SECTOR PROFILE

COMPANY AND PRODUCT PROFILE

ORGANIZATION PROFILE

NET GURU SOLUTIONS

Net Guru Solutions has a strong and experienced Management Team supported by an
experienced dynamic Middle Management Team and we currently have staff strength of more
than 5 Executives.
NET GURU SOLUTIONS pioneered BHOPALs first HI Tech COMPUTERISE and our
mantra is to use the synergy of People, Process and Technology to deliver exceptional value to
our clients.
Netgurusolution.com, is an online service provider to individual, group and organizations.
With our unique designing capability, we deliver successful solutions for Web Design and
Development in Content Management System (CMS), Online Research, IT Training, Search
Engine Optimization (SEO), Site Marketing, Brand Promotion. Link Building, Directory
Submission and HR Solutions in bhopal pune indore nagpur.We cluster sensory, conceptual,
and reactive prospects for most effective and productive output. Netgurusolution have a
simplified cyclic approach to implementing various process involved in complete management
of web development. From product planning, strategy formulation and implementing
processes in a step by step manner to achieve the final goal. Netgurusolution has its base in
Bhopal, Pune, Indore, Nagpur- India. Netgurusolution has spread its wings in Indore, Nagpur,
Raipur and Pune having a strong support base.

PHILOSOPHY
Netgurusolution was established with an aim to provide services that not only meet the
expectations, but also to reflect our philosophy of creating real values for our clients. We have
a holistic approach that goes beyond mere cost savings for our client
Netgurusolution provides search engine optimization plan that offers the best online branding
and comprehensive search engine positioning strategies which obtain high rankings and turn
your portal into a powerful business tool on Net. For indexing and listings both on page and
off page optimization service is offered to clients using our expertise and long experience. We
have a vast database of important resources needed for this purpose.
For successful SEO service, we emphasis more on1. Link and Directory Building
2.

Selection of the right keywords

We have an excellent record in search engine optimization with a large number of clients in
Educational Sector, Hospitality Industry and other related services ranking top place in Google
and Yahoo. We have top team of experienced SEO Sr's that devise and implement strategy for
highly successful campaigns.
Our main objective of site Marketing is to divert the right visitor traffic to your web site.
Search Engine marketing is resource intensive by its nature. Methodologies employed are
highly effective and search engine friendly. We offer a comprehensive site marketing plan to
our clients with close focusing on the objectives and aims of the clients need and the
characteristics of the portal. In order to generate the right kind of traffic for greater
productivity, we have a highly research oriented approach and consultation and guidance to
clients, is part of the package. The right type of site marketing campaign is the key to success
in online marketing warfare. Utilizing all market channels, proper branding exercise,
implementing market research with correct methodology, aggressive site promotion
techniques, and content creation along with keyword analysis.Netgurusolution is a web

development company in India our head office is situated in Bhopal and the other web
development and marketing branches are in pune, indore,nagpur,malaysia,dehli and raipur.Our
Web hosting in Bhopal Pune Indore Nagpur is also a cheapest and low price web hosting in
india.our SEO service stand us on full fragment of public web trafficking on first position then
other seo companies in india.We are working as freelance web development company also
with big brand names our partners are our certificate to our success in our field of web
development and designing. Our web training and IT training divisions are the world's top
most divisions for producing skilled manpower for upcoming word's need.Netguru job in
India is the HR section of our company which filter us from other HR service or Job Providers
because we are providing free HR service to our customers i.e. we can't charge money to
employers for HR service in INDIA.
EDUCATIONAL CONSULTANT
NET GURU SOLUTIONS, a leading educational consultant, provides you with the right
choices to set you on a rewarding future by obtaining world-class qualifications. Net Guru
Solutions is an Indian based educational consultant, which provides professional consulting
services to students in India who like to pursue further education abroad. Choose from
exciting Diploma, Bachelor Degree & Master Degree courses in Information Technology,
Business Administration, Hotel Management, International Trade, Computer Science,
Engineering, Biosciences, Clinical, Non Clinical, Textile Technology, Fashion Design, Art &
Design

and

many

more.

Net Guru Solutions is an Indian based educational consultant which provides professional
consulting services to students in India who like to pursue further education in other countries.
Having the best consulting team with their prior knowledge in working with foreign
universities and also the requirements of Indian students, can correlate and give proper advice
on the exact location and course to be taken up. Being a total solution based and a flawless
educational consultant, Net Guru Solutions can surely show a right way to a bright future. We
have a reputation of being the best educational consultant in India. This is so amongst
students, parents and indeed, the Universities. We are reputed to if one wants to climb up
corporate ladder.

The most attractive features of securing a degree from one of the most technologically
advanced nations such as UK, Canada or Australia is quality of program.

Most Universities are required to meet certain minimum standards of educational

quality. In UK e.g. universities that are accredited are regularly monitored by
accrediting agencies.

Interactions with students from diverse backgrounds will prepare you for career in
organization that has international links.

Almost as important as the academic advantages are chances it offers to experience life
abroad.

On an academic platform you will be drawn to participate in discussions on the

political happenings in Europe or share insights on the new technological revolution.

The student will develop the spirit of comradeship.

International education will not only help you to have thorough understanding of
subject but also develop analytical abilities and problem-solving skills.

Finally an experience abroad entails an amount of independence, as one must now rely
on oneself.
JOB CONSULTANT

Nothing can be more constant than change; hence we do our bit to instigate it. In an everchanging global market, it is vital to evolve, move ahead and move on. Accordingly as a
career and professional networking portal that strategically brings together professionals and
inter-dependent professional communities, it is essential that our strategies are not based on
assumptions but involves a lot of intuitiveness, comprehension and insight. Especially since
we are dealing with people and their aspirations for a better life and a better future, be it as an
individual jobseeker or a large conglomerate that envisions exponential expansions. And as a
faction of NET GURU SOLUTIONS. that is fundamentally Also focused on connecting

people and opportunities in the best possible way in the best possible way; we don't just care
about your pursuit but ensure that we do something to bring it to fruition.
WHY CHOOSE US

We offer Quality Advice on Quality Higher Education.

We are the Official representatives.

Hundreds of students helped each year to gain entry to programmes in UK.

advice on wide range of topics from Undergraduate & postgraduate programmes

application procedures, visas, scholarships and many other topics.

On the spot admissions by University staff members from the UK visiting our offices

Interviews and On spot admissions by University delegates.

STUDENT EDUCATION COUNSELING

SERVICES OFFERED

Admission

Career Counseling

Bank Loan Assistance

Choosing the right course in right university

Information on courses, colleges, universities.

Application Processing, References & SOP

Pre Visa Counseling & Documentation

Pre departure orientation / briefing

Airport pickup and hostel accommodation

Lodging Visa Application & Follow up statusr />

FREE STUDENT CAREER COUNSELING

Which Career? The Team guides you through the maze of questions to find solutions best
suited to your profile and / or constraints ensuring you choose the best career Pathway.

COURSE SELECTION

Personal guidance to help choose courses that perfectly fit your career or Personal Goals.
UNIVERSITY SELECTION

Assistance is given to those, that would best suit your Personal, Academic and Financial
Profile/Constraints, non-Commercially and not limited to the Universities they represent.

ADMISSION FORMALITIES
Special attention to your application and highlighting the areas essential for a well-presented,
error free application. The Team assists with References and the 'all-important' Statement of
Purpose. They assess your English and where appropriate, recommend waiver of IELTS /
TOFEL. The Universities admission tutors consider these recommendations. They follow up
with the chosen Universities and ensure Positive and Quick Response.

VISA FORMALITIES
This includes applications, financial statements, interviews & everything else! Foreign
exchange formalities, pre-departure briefing and training for settling into your new host
country. Accommodation and travel arrangements, post arrival problem solving and assisting
your

parents

to

ensure

that

you

are

well

settled

at

university.

PLACEMENT SERVICES
We are developing a world-class, networked placement service for our students. For those
looking for hassle free process of taking admission to universities in U.K., We could be the
guiding force in providing complete information to the best of your satisfaction to help you
reach for the top in your career through excellence in educationOur experience of over 2

decades in the Travel Business , has enabled us to develop a strong internal processes and
tools like CRM, Knowledge Management, Corporate Intranet etc to effectively service the
increasing demands of our clients.

LITERATURE SURVEY
CONCEPTS OF WORKING CAPITAL:
There are two concepts of working capital:
(I) Gross Working Capital.
(ii) Net Working Capital.

In the broad sense, the term working capital refers to the gross working capital
and represents the amount of funds invested in current assets. Current assets are those assets,
which in the ordinary course of business can be converted into cash within a short period of
normally one accounting year.
In a narrow sense, the term working capital refers to the net working capital.
Net working capital is the excess of current assets over current liabilities.

Working Capital = Current Assets - Current

Liabilities
Net working capital may be positive or negative. When the current assets exceed
the current liabilities the working capital is positive and the negative working capital results
when the current liabilities are more than the current assets. Current liabilities are those
liabilities which are intend to be paid in the ordinary course of business within a short period
or normally one accounting year out of the current assets or the income of the business.
The gross working capital concept is financial or going concern concept whereas net
working capital is an accounting concept of working capital. These two concepts of working
capital are not exclusive, rather both have their own merits.
Gross concept is very suitable to the company form of organization
where there is divorce between ownership, management and control. The net concept of
working capital may be suitable only for proprietary form of organizations such as sole-trader
or partnership firms. However, it may be made clear that as per the general practice net
working capital is referred to simply as working capital.

TYPES OF WORKING CAPITAL:

Working Capital may be classified in two ways:
(a) On the basis of concept.
(b) On the basis of time.
(a) On the basis of concept, working capital
1. Gross working capital.
2. Net working capital.
(b) On the basis of time, working capital can be further classified into
1. Permanent or fixed working capital.
2. Temporary or variable working capital.
Permanent working capital:
Permanent or fixed working capital is the minimum amount, which is required to
ensure effective utilization of fixed facilities and for maintaining the circulation of current
assets. There is always a minimum
Level of current assets, which is continuously required by the enterprise to carry out its
normal business operations. For example, every firm has to maintain a minimum level of raw
materials, work-in-process, finished goods and cash balance. This minimum level of current
assets is called fixed working capital.
Temporary working capital:
Any amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. This portion of the required working capital
is needed to meet fluctuations in demand consequent upon changes in production and sales as
a result of seasonal changes.

Working Capital Cycle:

Cash flows in a cycle into, around and out of a business. It is the business's
life blood and every manager's primary task is to help keep it flowing and to use the cash flow
to generate profits. If a business is operating profitably, then it should, in theory, generate cash
surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and
expire.
The faster a business expands, the more cash it will need for working capital and
investment. The cheapest and best sources of cash exist as working capital right within
business. Good management of working capital will generate cash will help improve profits
and reduce risks. Bear in mind that the cost of providing credit to customers and holding
stocks can represent a substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory
(stocks and work-in-progress) and Receivables arising from credit terms extended to
customers and as reflected in day sales outstanding (DSO - DSO provides a rough guide to the
number of days that a company takes to collect payment after making a sale). The main
sources of cash are Payables arising from trade terms adopted in supply chain management
(your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has
two dimensions. TIME ......... and MONEY. When it comes to managing working capital TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies
due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory
levels relative to sales), the 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.

If you ...

Collect receivables (debtors) faster

Collect receivables (debtors) slower

Get better credit (in terms of duration

or amount) from suppliers

Then ...
You release cash from the cycle
Your receivables soak up cash
You increase your cash
resources

Shift inventory (stocks) faster

You free up cash

Move inventory (stocks) slower

You consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant,
vehicles etc. If you do pay cash, remember that this is now longer available for working
capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans,
equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash
outflows and, like water flowing down a plug hole, they remove liquidity from the business.

IMPORTANCE OF WORKING CAPITAL:

Working capital is the lifeblood and nerve centre of business. Just as
circulation of blood is essential in the human body for maintaining life, working capital is very
essential to maintain the smooth running of a business. No business can run successfully
without an adequate amount of working capital. The main advantages of maintaining adequate
amount of working capital are as follows:
1. Solvency of the business: Adequate working capital helps in maintaining solvency of the
business by providing uninterrupted flow of production.
2.

Goodwill: sufficient working capital enables a business concern to make prompt

payments and hence helps in creating and maintaining goodwill.

3.

Easy loans: A concern hacking adequate working capital, high solvency and good credit
standing can arrange loans from banks and others on easy and favorable terms.

4. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts
on the purchases and hence it reduces costs.
5. Regular payment of salaries: wages and other day-to-day commitments company which
has ample working capital can make regular payment of salaries, wages and other dayto-day commitments which raises the morale of its employees, increases their efficiency,
reduces wastages and costs and enhances production and profits.
6.

Regular supply of raw materials: Sufficient working capital ensures regular supply of
raw materials and continuous production.

7. Ability to face Crisis: Adequate working capital enables a concern to face business crisis
in emergencies such as depression because during such periods, generally, there is much
pressure on working capital.

8.

Quick and Regular return on Investments: Every Investor wants a quick and regular
return on investments. Sufficient of working capital enables a concern to pay quick and
regular dividends to its investors, as there may not be much pressure to plough back
profits. This gains the confidence of its investors and creates a favourable market to raise
additional funds in the future.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

Every business concern should have adequate working capital to run its
business operations. It should have neither redundant or excessive working capital nor
inadequate nor shortage of working capital. Both excessive as well as short working capital
positions are bad for any business.

1.

Excessive working capital means idle funds which earn no profits for the business and

hence the business cannot earn a proper rate of return on its investments.
2.

When there is redundant working capital, it may lead to unnecessary purchasing and

accumulation of inventories causing more chances of theft, waste and losses.

3. Excessive working capital implies excessive debtors and defective credit Policy which
may cause higher incidence of bad debts.
4. It may result into overall inefficiency in the organisation.
5. When there is an excessive working capital relation with the banks and other financial
institutions may not be maintained.
6.

Due to low rate of return on investments the value of shares may also fall.

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

1) A concern, which has inadequate working capital, cannot pay its short-term liabilities
in time.

Thus it will loose its reputation and shall not be able to get good credit

facilities.
2) The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies,
increases costs and reduces the profits of the business.
3) It becomes impossible to utilise efficiently the fixed assets due to non-availability of
liquid funds.
4) The rate of return on investments also fall with the shortage of working capital.

CAPITAL MANAGEMENT APPROACHES TO WORKING

The objective of working capital management is to maintain the optimum

balance of each of the working capital components. This includes making sure that funds are
held as cash in bank deposits for as long as and in the largest amounts possible, thereby
maximizing the interest earned. However, such cash may more appropriately be "invested" in
other assets or in reducing other liabilities.
Though Working capital management takes place on two levels, component
level and analysis level, the approach to WCM depends upon

1. Natures or Character of Business

2. Size of Business/Scale of Operations
3. Production Policy
4. Manufacturing Process
5. Working Capital Cycle

6. Rate of Stock turnover

7. Credit Policy
8. Rate of Growth of Business
9. Earning Capacity and Dividend Policy
10. Price Level Changes
MANAGEMENT OF CASH
Cash Management is one of the key areas of working capital management.
Cash, the most liquid asset is of vital importance to the daily operation of business firms.
Crucial for the solvency of the business it is referred to as the life blood of business. Firm
needs cash to meet the needs of daily transactions, to take advantage of unexpected investment
opportunities. While cash serves these functions, it is an idle resource with an opportunity
cost. The liquidity provided by the holding cash is at the expense of profits that could accrue
from alternative investment opportunities. Hence, the firm should plan and control cash
carefully.

OBJECTIVES:
*1

Bringing the companys cash resources within control as quickly and efficiently as

possible.
*2

Achieving the optimum conservation and utilization of the funds.

Accomplishing the first goal requires, establishing accurate, timely

forecasting and reporting system, improving cash collections and disbursements and
decreasing the cost of moving funds among affiliates. The second objective is achieved by
minimizing the required level of cash balances, making money available when and where it is
needed and increasing the risk-adjusted return on those funds that can be invested.
Cash management deals with the following:
1. Cash inflows and outflows
2. Cash flows within the firm

3. Cash balances held by the firm at a point of time

Cash Management needs strategies to deal with following various facets of cash:
CASH PLANNING
It is a technique to plan and control the use of cash. A projected cash flow
statement may be prepared, based on the present business operations and anticipated future
activities. The cash inflows from various sources may be anticipated and cash outflows will
determine the possible uses of cash.
CASH FORECASTS & BUDGETING
A cash budget is the most important device for the control of receipts and payment of
cash. A cash budget is an estimate of cash receipts and disbursements during a future period of
time. It is a forecast of expected cash intake and outlay.
Normally a cash budget consists of
1. Cash collections
2. Cash payments
3. Cash balances

OPTIMUM CASH BALANCE

A firm has to maintain a minimum amount of cash for settling the dues in
time. By preparing Cash Budget we determine the optimum cash balance. If a firm maintains
less cash balance then its liquidity position will be weak. If a higher cash balance is
maintained then an opportunity to earn is lost.

INVESTMENT OF SURPLUS FUNDS

There are, sometimes, surplus funds with the companies, which are required
after sometime. These funds can be employed in liquid and risk free securities to earn some
income. There are number of avenues where these funds can be invested.

*3

Unit 1964 Scheme

*4

Ready forwards

*5

Investment in Marketable Securities

*6

Bald Financing

*7

Negotiable Certificate of Deposit

WORKING CAPITAL MANAGEMENT

Working capital may be regarded as the most important factor of a business, its
effective provision and utilization can do much to ensure the success of a business.
While the efficient management may not only lead to loss of projects but also to the
ultimate shown fall of what other wise would be considered as promising concern. A
study on working capital is of major importance, because of its close relationship with
current day-today operations of a business.
The term working capital stands for that form of capital which is required for the
financially of working or current need of the company it is usually invested in raw
material work in progress, finished goods, accounts receivable and salable securities.
Management of working capital usually involves planning and controlling current
assets, namely cash and marketable securities, assets receivable and inventories and also
administration of current liabilities. Working capital or current assets management its one
of the most important aspect of the over all financial management. Its is concerned with

the problem that arises in attempting to mange the current assets. The current liabilities
and the inter relationships that exist between them. Current assets are the assets which can
be converted into cash with in an Accounting year and includes cash short term securities,
debtors, bill receivable and inventories current liabilities are those claims of out side
which are expected to mature for payment with in an Accounting year and includes
creditors bill payable and outstanding expenses.

The goal of working capital management is to mange the firms current assets and
current liabilities in such a way enough to cover its current liabilities in order to ensure
that they are obtained and used in the best possible way.

Meaning of Working Capital

Capital required for a Business can classified under two main categories.
1. Fixed Capital
2. Working Capital
Working capital is the amount of funds necessary to cover the cost of operating of
enterprises.
Every business needs funds for two purpose for its establishment and to carry out its
day-to-day operations. Long-term funds are required to create production facilities
through purchases of fixed assets such as plant, machinery, land building, furniture etc.
Investment in these assets represented that part of firms capital, which is blocked on a
permanent or fixed basis and is called fixed capital. Funds are also needed for short-term
purpose for the purchase of raw material, payment of wages and other day-to-day
expenses. These funds are known as working capital funds thus, invested current assets

keep revolving fast and are being constantly converted into cash and this cash flows out
again in exchange for other current assets. Hence it is also known as revolving or
circulating capital as short-term capital. Circulating capital means current assets of a
company that are changed in the ordinary course of business from to another for example:
From cash to inventories to receivables, and receivables to cash.

CONSTITUTENTS OF CURRENT ASSETS

1. Cash in hand and bank balance
2. Bills Receivable
3. Sundry debtors( less provision for doubtful debts)
4. Short term loans and advances
5. Inventories of stock as:
a. Raw Material
b. Work in Progress
c. Stores and spaces
d. Finished goods.
6. Temporary investments of surplus funds
7. Prepaid expenses
8. Accrued incomes

Net Working Capital is the excess of Current assets over current liabilities.
Net Working Capital = Current assets-Current Liabilities, Net Working capital may be
+ve or ve. When the Current assets exceed the Current liabilities the Working capital is
+ve and the ve Working capital results when the Current Liabilities are more than the
Current Assets , Current Liabilities are those liabilities which are intended to the paid in
the ordinary course of business with in a short period of normally one accounting year out
of the Current Assets or the income of the business.
CONSTITUTENTS OF CURRENT LIABILITIES
1. Bills Payable
2. Sundry creditors or Accounts/payable
3. Accrued or O/S Expenses
4. Short terms loans, Advances and deposits
5. BOD
6. Dividend payable
7. Provision for taxation, if it does not amount to appropriation of profits.
CLASSIFICATION OF WORKING CAPITAL:
Working capital may be classified into two ways:
i.

On the basis of concepts.

ii.

On the basis of time.

The basis of concepts, Working Capital is classified as gross Working Capital and net
Working Capital.
On the basis of time:
1. Permanent or fixed Working Capital
2. Temporary or variable Working Capital

Permanent or fixed Working Capital: It is the minimum amount, which is required to

ensure effective utilization of fixed facilities and for maintaining the circulation of Current
Assets there is always a minimum level of Current Assets, which continuously required by the
enterprise to carry out its normal business operation.
As the business grants the requirement of permanent we also increases due to increase
in Current Assets

from cash to inventories from inventories to

receivables and from

receivables to cash and so on.

Temporary or Variable Working Capital: It is the amount of Working Capital, which

is required to meet the seasonal demands, and some special emergencies, variable Working
capital can further be classified seasonal Working Capital and special Working Capital. The
capital required to meet the seasonal needs of the enterprise is called seasonal Working
Capital special Working Capital is that part of Working Capital which is required to meet the
special exigencies such as launching of extensive marketing campaigns for conduction
research etc.,

IMPORTANCE OF ADEQUATE WORKING CAPITAL:

WC is the life blood, just as circulation of blood is essential in the human for
maintaining life, WC is very essential to maintain to smooth running of a business no business
can run successfully wit out an adequate of WC . The main advantages of maintaining
adequate amount of WC are as follows:
1. Solving of the business: Adequate WC helps in maintaining solvency of the
business by providing uninterrupted flow of production.
2. Goodwill: Sufficient WC enables a business concern to make prompt payment and

hence in creating and maintaining goodwill.

3. Easy loans: A concern having a WC, high solvency and good credit standing can
arrange the loans from banks and other on easy and favorable term.
4. Cash discount: Adequate WC also enables a concern to avail cash discounts on the
purchase and hence it reduced cost.
5. Regular supply of raw material: Sufficient WC ensures regular supply of raw
material and continuous production.
6. Regular payments of salaries, wages and other day-to-day commitments:
Company which has ample WC can make regular payments of salaries, wages and
after day-to-day commitments which raises the morale of its employees, increases
their efficiency, reduces wastage and cost and enhances production and profit.
7. Exploitation of favorable market condition: Only concern with adequate WC an
exploit favorable market conditions such as purchasing its requirements in bulk
when the prices are lower and by holding it inventories for higher prices.
8. Ability to face crisis: A WC enables a concern to face business crisis in
emergencies such as depression because during such periods, generally, there is
much prices use on WC.
9. Quick and regular return on investment: Every investor wants a quick and
regular return on his investments sufficiency of WC enables a concern to pay quick
and regular dividends to its investors as then may no be much pressure to plough
back projects. This gains the confidence of its investors and creates a favorable
market to raise additional funds in the future.
10. High morale: Adequacy pf WC creates an environment of society confidence,
and high morale and creates efficiency in a business.
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 short working capital position a bad for

any business. However, out of the two, it is the inadequate of working capital, which is more
dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL:
1. Excess working capital means ideal funds which earn no profits for the business and
hence the business cannot earn a proper rate of return on its investments.
2. When there is a redundant working capital it may lead to unnecessary purchasing and
accumulation of inventories causing more change of theft, waste and losses.
3. Excessive working capital impulse excessive debtors and defectives credit policy,
which causes high incidence of bad debts.
4. It may result into overall inefficiency in the organization.
5. Due to low of return on investment, the values of shares may fall.
6. The redundant working capital gives raise to speculative transaction.

DISADVANTAGES OR DANGEROUS OF INADEQUATE WORKING CAPITAL:

1. A concern which has inadequate working capital cannot pay it short-term liabilities in
time. Thus, it will lose its reputation and shall not be able to get good credit facilities.
2. It cannot buy its requirements in bulk and cannot avail of discounts etc.,
3. It becomes difficult for the firms to exploit due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies,
increased cost and reduces the profit of business.
5. It becomes impossible to utilize efficiently the fixed assets due to non availability of
liquid funds.
6. The rate of return of investments also falls with the short of working capital.
Factors Determining Working Capital Requirements

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2.
3.
4.
5.
6.
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8.
9.
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13.

Nature or character of Business

Size of Business/ sale of Operations
Production policy
Manufacturing process/Length of the Production cycle
Seasonal Variations
Working Capital Cycle
Stock Turnover ratio
Credit policy
Business Cycle
Rate of Growth of Business
Earning Capacity and Dividend Policy
Price Level Changes
Other Factors

OPERATING CYCLE
The profit earned by the firm depends upon magnitude if the scales among things
successful scales program is in other words necessary for earning profits by one business
enterprises. However sales do not convert into cash instantly there is invariably time lag
between sale of goods and receipt of cash. There is, therefore a working capital in the
form of current assets to deal with the problem arising out of the lack of immediate
realization of cash against goods sold. Therefore sufficient capital is necessary to sustain
sales activity. Technically there is referred to as the operating cycle and cash cycle. It is
defined as a continuing flow from cash suppliers, to Inventory, to accounts receivables and
back into cash. It consists of 3 phases:
1. Conversion of cash into Inventory.
2. Conversion of Inventory into Receivables
3. Conversion of Receivables into cash.
PERMANENET AND VARIABLE WORKING CAPITAL:

The magnitude of working capital required is not always the same and increases and
decreases over time. However there is always a minimum level of current assets, which is
continuously required by the firm to carry on this business operation this minimum level of
current is referred to as permanent for fixed working capital. It is permanent in the same way
as the firm fixed assets are.
Depending up on the changes in production and sales the need for working capital,
over and above permanent working capital will fluctuate . For example extra inventory of
finished goods will have to be maintained to support peak period of sale and investment.
In receivables any also increase during such periods. The extra working capital needed
to support the changing production and sales activity is called fluctuation or variable or
temporary working capital.

Both kind of working capital-permanent ad temporary are necessary to facilitate

production and sales through operating cycle, but temporary working capital is created by the
firm to meet liquidity requirements that will last only temporarily.
Permanent working capital is stable over time while temporary working capital is
fluctuating. However a permanent working capital the time need not be horizontal of the firm.
Requirements for permanent capital are increasing over period for a growing firm, the
difference between permanent and temporary working capital depicted below.

DRAW BACK OF EXCESSIVE WORKING CAPITAL:

1. It result in unnecessary accumulation of inventories thus Echinacea of inventory
mishandling, waste, theft and losses increases

2. It is indication of defective credit policy and slack collection period consequently

higher incidence of bad debts results, which adversely effects profits.
3. Excessive working capital makes management complacent which degenerates in, to
managerial inefficiency.
INADEQUATE WORKING CAPITAL:
1. Stagnates growth. It becomes difficult for the firm to undertake profitable projects for
non-availability of working capital funds.
2. It become difficult to implement operating plans achieve the firm profit target.
3. Operating inefficiency creep in which it becomes difficult even to meet day-to-day
commitments.
4. Fixed assets are not efficiently utilized for the lack of working capital funds. Thus
firms profitability would Detroit.
5. Paucity of working capital funds renders the firm unable to avail attractive credit
opportunities.