Ptesented by

Roll no-

Working Capital refers to that part of the firms capital, which

is required for financing short-term or current assets such a
cash marketable securities, debtors and inventories.
Funds thus, invested in current assets keep revolving fast and
are constantly converted into cash and this cash flow out again
in exchange for other current assets.
Working Capital is also known as revolving or circulating
capital or short-term capital.

circulating capital means current assets of a company

that are changed in the ordinary course of business from
one form to another, as for example, from cash to
inventories, inventories to receivables, receivable to
cash

 As

profits earned depend upon magnitude of

sales and they do not convert into cash
instantly, thus there is a need for working
capital in the form of CA so as to deal with the
problem arising from lack of immediate
realization of cash against goods sold.
This is referred to as Operating or Cash
Cycle .
It is defined as The continuing flow from cash
to suppliers, to inventory , to accounts
receivable & back into cash .

 The

firm has to maintain cash balance to pay

the bills as they come due.
In addition, the company must invest in
inventories to fill customer orders promptly.
And finally, the company invests in accounts
receivable to extend credit to customers.
Operating cycle is equal to the length of
inventory and receivable conversion periods.

 Gross

Working Capital
Net working Capital

 Total

Current assets
Where Current assets are the assets that
can be converted into cash within an
accounting year & include cash , debtors
etc.
Referred as Economics Concept since
assets are employed to derive a rate of
return.

CA CL
It indicates liquidity position of a firm.
It suggests the extent to which working capital needs may
be financed.
Current Assets ( less )Current Liabilities
Current Assets

Inventories
Raw Materials
Work-in-Progress
Finished Goods
Trade Receivables
Prepayments
Bank/Cash

Current Liabilities
Trade Payables
Accruals
Taxation/Dividends
Short-Term Borrowings

Having sufficient funds available to meet all

foreseen and unforeseen obligations

10

 CURRENT

ASSETS

Inventory
Sundry Debtors
Cash and Bank Balances
Loans and advances
CURRENT LIABILITIES
Sundry creditors
Short term loans
Provisions

1. Nature of Business Different Industries have different Working

Capital requirements.

Manufacturing and Trading Companies will have

a high proportion of Current Assets in the form
of inventory of Raw Materials, Work-inProgress, accounts Receivable, Cash and
Accounts Payable as Current Liability.

But in case of public utilities may have limited

need for working capital because they only have
cash sales, & supply services, not products and
no funds will be tied up in debtors & stock.

2. Growth and Expansion

As the company grows, it is logical to expect that
a larger amount of working capital is required.
3. Degree of Competition in the Market
When the degree of competition in the market
for finished goods in an industry is high, then
companies belonging to the industry may have to
resort to an increased credit period to its
customers to push their products. These practices
are likely to result in a high proportion of
accounts receivable.

4. Technology & manufacturing process

Longer

the manufacturing cycle, larger will be the

firms working capital requirements.
Exa- Manufacturing cycle in case of boiler- More
working capital needed depending on its size,
(may range between Six to Twenty-four months.
Exa- Manufacturing cycle in case of detergent
powder, soaps, chocolate etc- less working capital.

Interdependence Among Components of Working capital

Finished
Goods

Sundry
Debtors or
Accounts
Receivables

Work in
Progress

Selling and
Distribution, General
Administration and
Financial costs

Wages, Salaries
and Manufacturing
costs
Raw
Materials,
Components
Stores etc.

Cash

The Operating Cycle

Sundry
Creditors or
Accounts
Payable

Operating Cycle Concept

Company start with cash, go through the successive
segments of the operating cycle to get cash.
Operating cycle is the time duration required to convert
sales, after the conversion of resources in to inventories, in
to cash.

Raw material storage period

Conversion period
Finished goods storage period

Average collection period

 Gross

operating cycle- The duration above is

known as gross operating cycle.

The

gross operating cycle = Raw material

Storage period + Conversion Period + Finished
goods storage period + Average collection
period

NOTE-

If there is no receivables the cycle is

reduced.

 Net

operating cycle- When the average

payment period is deducted from the gross
operating cycle is known as net operating
cycle

The Net operating cycle = Raw material

Storage period + Conversion Period +
Finished goods storage period + Average
collection period Average Payment Period

Time
Permanent
Temporary or Variable

DOLLAR AMOUNT

The amount of current assets required to

meet a firms long-term minimum needs.

Permanent current assets

TIME

The amount of current assets that varies with

seasonal requirements.

DOLLAR AMOUNT

Temporary current assets

Permanent current assets

TIME

 We

need working capital for the smooth

functioning.
Magnitude of current assets varies with the
changes in the operating cycle
There will always be a minimum level of
current assets (i.e. permanent or fixed current
assets)
Depending upon the production and sales the
need for the working capital over and above
the fixed level will fluctuate.

larger investment in current assets would

mean a low rate of return on investment for
the firm, as excess investment in current
assets will not earn enough return.

On

the other hand a smaller investment in

current assets would mean interrupted
production & sales.

Both excessive as well as inadequate working capital

positions are harmful for the company
Excessive working capital
Unnecessary inventory accumulation.
Shows a defective credit policy and high collection
period.
leads to marginal inefficiency of the management.

 Stagnates

growth
Difficult to implement operating plans.
Reduction in operating efficiency.
Fixed assets cannot be utilised efficiently.
Banks will hesitate in extending credit.
Affects the goodwill of the firm.

 For

more information Log on to

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