Unit
clinii 05
it :i Working
i
h Capital
Management
in iying
Working capital
be classifiedundertwo main categories
Capitalrequired
for a business can
fixedcapital
working capital
longtermfundsforitsestablishment shorttermfunds
fordaily operations
to createproductionfacilities by forpurchaseof raw materials way
purchaseoffixedassets payment daytodayexpenses
investment in such assets represents fundsrequiredforfinancingshortterm
reulatingcapitalm eanscurrenta ssets
ofa
mpanythata rechangedintheordinary thatpartof a firmscapitalwhich is currentassets
use of a business
fromoneform to
otherEg cashtoinventories receivables blocked on apermanentor
fixedbasis These
fundskeepverolvingfastand are
cashetc
constantly converted intocash
AlsocalledRevolving or CirculatingCap
Thus working capital is theamountoffunds necessary to cover thecostof
operating the enterprise It has thefollowingcharacteristics
convertibletocash
liquidity easily
for periodoftime thantenrisky noriskduetotechnologica
investment incurrenta ssets less
an risky changes tenphysicalr isk
shorttermuse accountingsystemnot
special accounting systemnotrequired sqpp
changesd uetoproductionlevelchanges
instability
9ʰpu n ñ pl tyeTe athe'poicytj9ii atj9uently
shorttermcapitalalwaysrequiredby
firm
permanence
hose
anti asmakmpi.tneatin
p.fi
nhso
circularmovement a iscaifeia'Euiting
shortterm requirement usedtopurchasecurrentassets
Importance ofWorkingsufficient
capital
to
c ashflow meets hortt erm obligations avoidliquidityproblems
liquiditymaintenance
Riskminimisation preventspenalties strainedsupplierrelationships bytimelyp ayment
ion efficientmanagement
Profitabilityenhancement improvy atnit
9jayhaiiishecit.iq
yt
, Supportsgrowth
fundsforexpansion growthwithoutdependencyoninternaldebt
creditworthiness improvement creditrating borrowingterms
improves
Operationalcontinuity
sustainsdailyoperationsbyfundingessentialb usinessactivities
BusinessReputation timely of buildstrust
settlement dues
enables p roductsatcompetitive
s elling toloweroperationalcosts
pricesdue
competitive Advantage
TypesofWorking Capital
Grossworking capital firms investment into currentassets that can beconverted
of
Types working
c apital
intocash during an accountingyear such as cash bank balance shortterm
of
Basis concept
of
Basis time
investments debtors billsreceivable inventory shortterm loans advances
iiiii I Networking capital difference between currentassets andcurrentliabilit
wo is
apitalwiinticapital
orthe excessoftotalcurrent assets over totalcurrent liabilities
Permanent
working capital alsocalled as Regularworking capital It refers tothe
minimumamount which permanentlyremains blocked andcannotbe converted in to
cashsuch as minimum amount blocked in raw material finished product
debtors etc
Temporaryworkingcapital also referredto as variable working capital it
refers totheamount overandabove thepermanentworking capital ie differen
betweentotal
workingcapitalless permanentworkingcapital
SeasonalWorking capital it refers to the capitalrequiredto meetseasonaldema
It can bearranged through shortterm loans
it refers to the partofcapital required meeting
SpecificWorking capital
for
unforseen contingencies such as strike
flood war slump etc
Concepts
of Working Capital
There are two concepts
ofworking capital
, Balance Sheet Concept
Operating cycle or circularflow concept
A Balance Sheet Concept
There are two interpretations ofworking capitalunderthebalancesheetconcep
GrossWorkingcapital
NetWorkingCapital
Inthebroadsense thetermworkingcapital referstogrossworkingcapitaland
theamountoffunds invested in currentassets Thus grossworking
represents
ilyyear is Ene
accounting
yt
mnva
capitalis the capital invested in totalcurrentassetsofthe enterprise
In a narrowsense the term workingcapital refers to the new workingcapita
Networkingcapitalis theexcessofcurrentassetsovercurrent liabilities It may
bepositive or negative Whencurrentassetsexceed currentliabilities the
workingcapital is positive and negative working capitalresultswhen the
E i i ie i i current liabilities are more than the current assets
NetWorking capital CurrentAssets Current liabilities
Thegrossworkingcapitalconcept is financial or goingconcernconceptwhereas
Networking capital is an accounting conceptofworkingcapital The 2 conceptsof
working capital are not exclusive have their own merits
B Operating Cycle or CircularFlow concept
working capitalrefers to thatpart of a firms capitalwhich is required for
financing shortterm orcurrentassets such as cash marketable securities debtor
andinventories Funds thusinvested again in
forother currentassets
exchange
Factors determining working capital
Nature or characterofbusiness theworking capitalrequirementsof a firmdepe
upon thenatureofthe business Publicutility undertakingsgenerallyrequire sma
clinii 05
it :i Working
i
h Capital
Management
in iying
Working capital
be classifiedundertwo main categories
Capitalrequired
for a business can
fixedcapital
working capital
longtermfundsforitsestablishment shorttermfunds
fordaily operations
to createproductionfacilities by forpurchaseof raw materials way
purchaseoffixedassets payment daytodayexpenses
investment in such assets represents fundsrequiredforfinancingshortterm
reulatingcapitalm eanscurrenta ssets
ofa
mpanythata rechangedintheordinary thatpartof a firmscapitalwhich is currentassets
use of a business
fromoneform to
otherEg cashtoinventories receivables blocked on apermanentor
fixedbasis These
fundskeepverolvingfastand are
cashetc
constantly converted intocash
AlsocalledRevolving or CirculatingCap
Thus working capital is theamountoffunds necessary to cover thecostof
operating the enterprise It has thefollowingcharacteristics
convertibletocash
liquidity easily
for periodoftime thantenrisky noriskduetotechnologica
investment incurrenta ssets less
an risky changes tenphysicalr isk
shorttermuse accountingsystemnot
special accounting systemnotrequired sqpp
changesd uetoproductionlevelchanges
instability
9ʰpu n ñ pl tyeTe athe'poicytj9ii atj9uently
shorttermcapitalalwaysrequiredby
firm
permanence
hose
anti asmakmpi.tneatin
p.fi
nhso
circularmovement a iscaifeia'Euiting
shortterm requirement usedtopurchasecurrentassets
Importance ofWorkingsufficient
capital
to
c ashflow meets hortt erm obligations avoidliquidityproblems
liquiditymaintenance
Riskminimisation preventspenalties strainedsupplierrelationships bytimelyp ayment
ion efficientmanagement
Profitabilityenhancement improvy atnit
9jayhaiiishecit.iq
yt
, Supportsgrowth
fundsforexpansion growthwithoutdependencyoninternaldebt
creditworthiness improvement creditrating borrowingterms
improves
Operationalcontinuity
sustainsdailyoperationsbyfundingessentialb usinessactivities
BusinessReputation timely of buildstrust
settlement dues
enables p roductsatcompetitive
s elling toloweroperationalcosts
pricesdue
competitive Advantage
TypesofWorking Capital
Grossworking capital firms investment into currentassets that can beconverted
of
Types working
c apital
intocash during an accountingyear such as cash bank balance shortterm
of
Basis concept
of
Basis time
investments debtors billsreceivable inventory shortterm loans advances
iiiii I Networking capital difference between currentassets andcurrentliabilit
wo is
apitalwiinticapital
orthe excessoftotalcurrent assets over totalcurrent liabilities
Permanent
working capital alsocalled as Regularworking capital It refers tothe
minimumamount which permanentlyremains blocked andcannotbe converted in to
cashsuch as minimum amount blocked in raw material finished product
debtors etc
Temporaryworkingcapital also referredto as variable working capital it
refers totheamount overandabove thepermanentworking capital ie differen
betweentotal
workingcapitalless permanentworkingcapital
SeasonalWorking capital it refers to the capitalrequiredto meetseasonaldema
It can bearranged through shortterm loans
it refers to the partofcapital required meeting
SpecificWorking capital
for
unforseen contingencies such as strike
flood war slump etc
Concepts
of Working Capital
There are two concepts
ofworking capital
, Balance Sheet Concept
Operating cycle or circularflow concept
A Balance Sheet Concept
There are two interpretations ofworking capitalunderthebalancesheetconcep
GrossWorkingcapital
NetWorkingCapital
Inthebroadsense thetermworkingcapital referstogrossworkingcapitaland
theamountoffunds invested in currentassets Thus grossworking
represents
ilyyear is Ene
accounting
yt
mnva
capitalis the capital invested in totalcurrentassetsofthe enterprise
In a narrowsense the term workingcapital refers to the new workingcapita
Networkingcapitalis theexcessofcurrentassetsovercurrent liabilities It may
bepositive or negative Whencurrentassetsexceed currentliabilities the
workingcapital is positive and negative working capitalresultswhen the
E i i ie i i current liabilities are more than the current assets
NetWorking capital CurrentAssets Current liabilities
Thegrossworkingcapitalconcept is financial or goingconcernconceptwhereas
Networking capital is an accounting conceptofworkingcapital The 2 conceptsof
working capital are not exclusive have their own merits
B Operating Cycle or CircularFlow concept
working capitalrefers to thatpart of a firms capitalwhich is required for
financing shortterm orcurrentassets such as cash marketable securities debtor
andinventories Funds thusinvested again in
forother currentassets
exchange
Factors determining working capital
Nature or characterofbusiness theworking capitalrequirementsof a firmdepe
upon thenatureofthe business Publicutility undertakingsgenerallyrequire sma
