Working Capital

Management
Kiran Thapa

Working Capital Terminology

Gross working capital : Total of all current

assets
Net working capital: total current assets total
current liabilities
Net operating working capital : Operating
current assets Operating current liabilities
Current ratio
Quick ratio
Cash budget
Working capital policy
Working capital management

Importance of working capital

Time devotion
Direct relationship with sales
Important to small firms
More attention

Types of working capital

Permanent working capital

Variable working capital

Concept of zero working capital

The practice of matching current assets with current

liabilities.

Current assets = Current liabilities equals to zero

Current assets: Inventories and receivable

Current liabilities: Payables

Working Capital Policy

Aggressive policy
Maintain low amount of current assets
Uses high amount of short term financing
Uses low amount of long term financing
Results:
High Return
High Risk

Conservative policy

Conservative policy
Maintain high amount of current assets
Uses low amount of short term financing
Uses high amount of long term financing
Results:
Low Return
Low Risk
Average or moderate policy
Maintain between aggressive and conservative
policy.

Factors affecting working capital

Nature of business
Cash conversion cycle
Business cycle
Changes in technology
Supply conditions
Seasonal operations
Competitive conditions
Credit policy

Cash management
Should maintain optimum level
Reasons:
Transaction motive
Compensating balance
Precautionary motive
Speculative motive

Advantages of holding adequate

cash

Receive trade discount.

Strong current and acid test ratio

Take advantages from favorable business opportunities

Overcome the emergencies

Cash management techniques

Cash flow synchronization

Speed up Receipts
Control disbursements

Inventory management

Inventory is stock of goods

Types: Raw materials, work in process, and finished

goods.

Maintain optimum level which maximizes the value of

the firm.

Techniques of Inventory
management
How much to order? Economic Order Quantity
When to order? Reorder Level

Accounts receivables

Practice of selling on credit

Also known as credit or book debt

Should maintain optimum level that should maximize

the value of the firm

Cost of accounts receivables

Financing costs
Bad debt costs
Cash discount
Collection costs

Monitoring accounts receivable

DSO
Aging schedule

Analyzing credit policy

Calculate the after tax profit of each policy i.e.

new policy and old policy
Select the policy with high after tax profit.

Any queries?

?
Thank You