Amity Business School

Amity Business School

MBA Class of 2013, Semester II FINANCIAL MANAGEMENT Module V By Lakhwinder kaur Dhillon

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WORKING CAPITAL MANAGEMENT

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Working capital
INTRODUCTION

Working capital typically means the firms holding of current or short-term assets such as cash, receivables, inventory and marketable securities. These items are also referred to as circulating capital Corporate executives devote a considerable amount of attention to the management of working capital.

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Definition of Working Capital

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.

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circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another. example from cash to inventories, inventories to receivables, receivable to cash

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Concept of working capital There are two possible interpretations of working capital concept:

1.Balance sheet concept 2.Operating cycle concept

Balance sheet concept
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.

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Excess of current assets over current liabilities are called the net working capital or net current assets. Working capital is really that part of long term finance is locked in and used for supporting current activities. The balance sheet definition of working capital is meaningful only as an indication of the firms current solvency in repaying its creditors. When firms speak of shortage of working capital they in fact possibly imply scarcity of cash resources. In fund flow analysis an increase in working capital, as conventionally defined, represents employment or application of funds.

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Operating cycle concept

A companys operating cycle typically consists of three primary activities: Purchasing resources, Producing the product and Distributing (selling) the product.

These activities create funds flows that are both unsynchronized and uncertain.
Unsynchronized because cash disbursements (for example, payments for resource purchases) usually take place before cash receipts (for example collection of receivables). They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy.

Accounts Payable

Value Addition

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Raw Materials

WIP

Cash

THE WORKING CAPITAL CYCLE (OPERATING CYCLE)

Finished Goods

Accounts Receivable

SALES