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Meaning:Funds which are needed for shortterm purposes for the purchase of raw materials, payment of wages and other day to day expenses, etc. These funds are known as working capital.
Definition:
Working Capital is the amount of funds necessary to cover the cost of operating the enterprise Shubin
Contd
i) Gross Working Capital: is the capital invested in total current assets of the enterprise. ii) Net Working Capital: is the excess of current assets over current liabilities
Debtors
Work in Progress
Sales
Finished Goods
1) Gross Operating Cycle = RMCP+WIPCP+FGCP+RCP RMCP - Raw Material Conversion Period WIPCP - Work-in-Process Conversion Period FGCP - Finished Goods Conversion Period RCP - Receivables Conversion Period
2) Net Operating Cycle Period = Gross operating Cycle Period - Payable Deferal period
CLASSIFICATION/KINDS:
Kinds of Working Capital
On the Basis Of Time Permanent Working Capital Temporary Working Capital Special Working Capital
Contd
7. Rate of Stock Turnover 8. Credit Policy 9. Business Cycles 10.Rate of Growth of Business 11.Earning Capacity and Dividend Policy 12.Price Level Changes
Main activities in WCM :1. Estimating the working capital requirement 2. Financing of working capital needs
3. Analysis & Control of working capital
Estimating Working capital :Current Assets : i. Cash ii. Debtors (For months sales) iii. Stocks (For months sales) iv. Advance Payments v. Others Less : Current Liabilities :i. Creditors (For months sales) ii. Lag in payment of expenses Working Capital ( C.A-C.L) Add:- Provision for contingencies Net Working Capital Required
Methods to Forecast/Estimate of Working Capital Requirement: Percentage of Sales Method Regression Analysis Method
b/w Sales & Working Capital).
(Avg. relationship
Cash Forecasting Method Operating Cycle Method Projected Balance Sheet Method
Permanent or Fixed 1.Shares 2.Debentures 3.Public Deposits 4.Ploughing Back of Profits 5.Loans from Financial Institutions
Temporary or Variable 1.Commercial Banks 2.Indigenous Bankers 3.Trade Creditors 4.Installment Credit 5.Advances 6.Accounts ReceivablesCredit/Factoring 7.Accrued Expenses 8.Commercial Paper
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