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V Funds required for short term purposes or day to day expenses
are working capital.
V WC refers to part of firm͛s capital reqd. for financing short term
or current assets also known as revolving or short term capital
or circulating capital
Working Capital may be classified in two ways:-
V On the basis of concept
- gross working capital
- net working capital
V On the basis of time
- permanent or fixed WC
a) regular WC
b) reserve WC
- temporary or variable WC
a) seasonal WC
b) special WC
 
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V Vt refers to the firm͛s investment in current assets. Current
assets are the assets, which can be converted into cash within
an accounting year or within an operating cycle. You can
include here cash, short-term securities, debtors (accounts
receivable & book debts), bills receivable and stock.
j enables enterprise to provide correct amount of WC at the
right time.
j every management is interested in total current assets with
which it has to operate than the sources.
j gross concepts takes into considerations that every
increase in the funds would increase the working capital.
j gross concepts of WC is more useful in determining rate of
return on investments in WC.
V he net working capital refers to the difference between
current assets and current liabilities. Current liabilities are
those claims of outsider, which are expected to mature for
payment within an accounting year & include creditors, bills
payable & the outstanding expenses. Vn other words you can
say that this is the excess of current assets over current
liabilities.
V Vt is a qualitative concept which indicates firm͛s ability to
meet its operating expenses and short term liabilities.
V Vt indicates the margin of protection available to the short
term creditors.
V Vndicator of financial soundness of an enterprise.
V Net WC is referred to as working capital.


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  Vnventories represent raw materials and components,
work-in-progress and finished goods.
V 
   rade Debtors comprise credit sales to customers.
V a
   hese are those expenses, which have been
paid for goods and services whose benefits have yet to be received.
V Ô

 

 hey represent loans and advances given by
the firm to other firms for a short period of time.
V V
  hese assets comprise short-term surplus funds
invested in government securities, shares and short-terms bonds.
V à

 
 

 hese assets represent cash in hand and
at bank, which are used for meeting operational requirements. One
thing you can see here is that this current asset is purely liquid but
non-productive.
V u  à hese liabilities stem out of purchase of
raw materials on credit terms usually for a period of one to
two months.
V 
 

 hese include withdrawals in excess of
credit balance standing in the firm͛s current accounts with
banks
V u Ô
 uhort-terms borrowings by the firm
from banks and others form part of current liabilities as
short-term loans.
V a
  hese include provisions for taxation, proposed
dividends and contingencies.
V he operating cycle of the company consists of time period
between procurement of the inventory and the collection of
the cash from the receivables. he operating cycle is the
length of time between the company͛s outlay on raw
materials, wages, and other expenses and inflow of cash from
sale of goods. Operating cycle is an important concept in the
management of cash and management of working capital.
he operating cycles reveals the time that elapses between
outlay of cash and inflow of cash.
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aermanent working capital or fixed working capital: refer to
the minimum amount of investment in current assets
required throughout the year for carrying out the business. Vn
other words , it is the amount of working capital which
remains in the business permanently in one form or other.
he magnitude of working capital required will not be
constant, but will fluctuate. At any time, there is always a
minimum level of current assets which is constantly and
continuously required by a business unit to carry on its
operations. his minimum amount of current assets, which is
required on a continuous and uninterrupted basis is referred
to as fixed or permanent working capital.
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 gariable working capital or fluctuating working capital: refer to
the amount of working capital which goes on fluctuating or
changing from time to time with the change in the volume of
business activities.

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¬. utable over time. ¬. Fluctuating according to

2. Vnvestment can be seasonal demand.
predicted easily. 2. Vnvestment cannot be
3. Minimum investment in predicted easily.
various CA 3. Expected to take care for
4. Need for certain amount peak in business activity.
of irreducible level of CA 4. Need to meet seasonal
on a continuous & &other seasonal
uninterrupted basis. requirement.
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V pequirements financed V pequirements financed

from long term funds. from short term funds.
V Maintains solvency of business.
V Helps in creating & maintaining goodwill.
V Helps in arranging loans from banks & others on easy and
favorable terms.
V Enables a concern to avail cash discount and hence reduce
cost.
V Ensures regular supply of raw materials.
V pegular payment of salaries, wages & other day to day
commitment.
V Exploitation of favorable market condition.
V Enables a concern to face business crisis.
Disadvantages of redundant or excessive WC:-
V Excessive WC means idle funds which earn no profit for the
business & hence, business cannot earn a proper rate of return on
its investments.
V When there is redundant WC, it may lead to unnecessary
purchasing & accumulation of inventories causing more chance of
theft, waste & losses.
V Excessive WC implies excessive debtors & defective credit policy
which may cause higher incidences of bad-debts.
V Vt may result in overall inefficiency in org.
V When there is excessive WC, relationships with banks &other
financial institutions may not be maintained due to low rate of
returns on investments, the value of share may also fall.
V m
    
he working capital requirements of an enterprise are basically
related to the conduct of the business. aublic utility undertakings
like Electricity, Water supply, pailways, etc. need very limited
working capital because they offer cash sales only and supply
services, not products and as such no funds are ties up in
inventories and receivables. But at the same time have to invest
fewer amounts in fixed assets. he manufacturing concerns on the
other hand require sizable working capital along with fixed
investments, as they have to build up the inventories.

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Credit sales granted by the concerns too its customers as well
as credit terms granted by the suppliers also affect the working
capital. Vf the credit terms of the purchases are more
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he length of manufacturing cycle influences the quantum
of working capital needed. Manufacturing process always
involves a time lag between the time when raw materials are
fed into the production line and finished goods are finally
turned out by it. he length of the period of manufacture in
turn depends o the nature of product as well as production
technology used by a concern. uhorter the manufacturing
cycle; lesser the working capital required.

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Cyclical changes in the economy also influence quantum
of working capital. Vn a period of boom i.e., when the
business ism prosperous, there is s need of larger amount of
working capital due to increases in sales, rise in price etc and
vice-a-versa during period of depression
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V WC = CA-CL
V Need to follow the following four step procedure:
V Estimation of cash cost of the various CA required by the firm.
V Estimation of spontaneous CL of the firms.
V Compute net working capital by subtracting the estimate CL
(step 2) from CA(step ¬)
V Add some percentage of net working capital if there is any
contingency or safety working capital required, to get the
required WC
V Once the estimation or determination of the current assets is
over then the next step in working capital management is
financing of current assets.

here are three financing policies

V uhort term financing
V Long term financing
V upontaneous financing
V „enerally current assets should be financed by only
short term financial sources. short term finance is
obtained for a period of less than one year.
V he sources of short term finance are
ñ Loans from banks
ñ aublic deposits
ñ Commercial papers
ñ Factoring of receivables
ñ Bills discounting
ñ petention of profits etc.
V Net current assets or permanent current assets or
working capital are supposed to be financed by long
term sources of finance.
V Long term finance is raised for a period of more than
five years.
V Long term finance sources include, ordinary share
capital, preference share capital, debentures, long
term loans from banks and surpluses(include
retained earnings)
V Vt refers to the automatic sources of short term
funds arising in the normal course of a business. he
source include trade credit(suppliers) and
outstanding expenses.
V upontaneous sources of finance is available at no
cost.
uources of additional working capital include the
following
V Existing cash reserves
V arofits (when you secure it as cash)
V aayables (credit from suppliers)
V New equity or loans from shareholder
V Bank overdrafts line of credit
V Long term loans
here are 3 approaches
V Matching or hedging approach
V Conservative approach
V Aggressive approach
V he firm can adopt a financial plan which matches the
expected life of assets with the expected life of the source of
funds raised to finance assets. When the firms follow the
matching approach (known as hedging approach), long term
financing will be used to finance the fixed assets and
permanent current assets and short term financing to finance
temporary or variable current assets.

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V he financing policy of the firm is said to be conservative
when it depends more on long term funds for financing
needs. Under a conservative plan, the firm finances its
permanent assets and also a part of temporary current
assets with long term financing.
V A firm may be aggressive in financing its assets. An aggressive
policy is said to be followed by the firm when its uses more
short term financing than warranted by the matching plan.
Under an aggressive policy, the firm finances a part of its
permanent current assets with short term financing.

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