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Capital (Liability) is used to create Assets for the business. (Liabilities are promises and commitments made by the business in course of the operations)- Term and Current Fixed Assets (Long Term) E.g. Land, Building, Machines, Vehicles etc. Current Assets (Short Term) e.g. Raw Materials, Sundry Debtors, Finished Goods etc.
Fixed Assets are those assets which are used to convert raw materials to finished goods and to provide the facilities for the operations of the business
Current assets are those assets which are created or consumed in the process of the conversion. Another way of definingrequired for day to day operations
Text book definition of Current Assets is those assets which can be converted to cash within one year. (More practical definitionwithin one operating cycle). These are assets required for the day to day operations and to sustain the operating levels of the business
An entrepreneur likes to hold Fixed Assets but lower the current assets in his business the higher is his business efficiency i.e. he is able to turn over his current assets at a greater pace and generate more profits due to the higher operating levels.
There are two interpretations of working capital under the balance sheet concept: a. Excess of current assets over current liabilities b. Gross or total current assets.
Cash
Bills RM
FG
WIP
Accounts Payable
Value Addition
Raw Materials
WIP
Cash
Finished Goods
Accounts Receivable
SALES
Working Capital Management Deals with the Current Assets and the Current Liabilities side of the Balance Sheet Basically Working Capital is a perpetual requirement of funds for short term uses to keep the business running
The size and nature of investment in current assets is a function of different factors such as type of products manufactured, the length of operating cycle, the sales level, inventory policies, unexpected demand and unanticipated delays in obtaining new inventories, credit policies and current assets.
1. 2. 3. 4. 5. 6.
Nature of the Industry Demand of Industry Cash requirements Nature of the Business Manufacturing time Volume of Sales
Factors contd.
7. 8. 9. 10. 11. 12. Terms of Purchase and Sales Inventory Turnover Business Turnover Business Cycle Current Assets requirements Production Cycle
Factors contd.
13. 14. 15. 16. 17. Credit control Inflation or Price level changes Profit planning and control Repayment ability Cash reserves
Factors contd.
18. 19. 20. 21. Operation efficiency Change in Technology Firms finance and dividend policy Attitude towards Risk
Thank you
Mukul Bhatia