Excess

of current assets(CA) over current liabilities(CL) NWC=CA-CL Investment in working capital facilitates smooth day to day operations of the business

The assets that are converted in to cash or cash equivalents within a period of one year are called as current assets Example: cash, bank, B/R, Debtors, finished goods inventory, Work in progress(Semi finished goods), Raw materials, Prepaid expenses

Those payment obligations which ,when arise are due for payment within one year are called current liabilities Example B/P Creditors O/S Expenses Advances received from customers

Sufficient Investment in current assts increase liquidity of business

Insufficient investment in current assets may make it difficult for an organization to meet its payment obligation

As compare to fixed assets ,current assets provide little or low return or profit Therefore balance need to be maintained between liquidity and Profitability

Liquidity

Profitabilit y

Factors affecting working capital

Manufacturing

business

More Working Capital

Raw material need to be converted in to finished goods before any sales is possible

Trading

business

Less than manufacturing business

There is no processing so No distinction between raw material and finished goods

Service

Industry
Do not maintain any inventory or stock

Very less Working Capital

Scale of business
Small scale business Less Working capital

Large scale business

More Working capital

Because quantum of debtors and inventory is more in large scale business

Business cycle
Depression Less Working capital Boom More Working capital The sales as well as production will be low.

the sales as well as production are likely to be higher

the

 In

peak season, higher level of activity

higher amount of working capital is required.

lean season the level of activity is lower Lower Working capital

Peak season winters

Lean season Summer s

Production cycle is the time span between the receipt of raw material and their conversion into finished goods.
Raw material 10 March 15 March Factory Production Cycle in above case is 5 days Finished goods

Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses.
longer processing cycle More Working capital

shorter processing cycle.

Less Working capital

Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces as well as the credit worthiness of their clientele.

A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.

A strict credit policy results in Lower amount of debtors, increasing the requirement of working capital.

Firm may get credit from its suppliers.

A strict credit policy More working capital.

A liberal credit policy Less working capital.

Higher efficiency

Less working Capital Requirement higher debtor turnover ratio

higher inventory turnover ratio

firm managing its raw materials efficiently

reducing the amount tied up in receivable.

Firm is able to manage with a smaller balance of raw materials

. resulting in lower debtors

Raw materials are available freely and Continuously

Interrupted Availability of Raw material

lower stock levels are maintained

higher stock levels may be required..

Less Working Capital

More Working Capital

Lead time
The time lag between the placement of order and actual receipt of the materials When can I get Raw material

It will take at least 10 days It will supply raw material tomorrow Supplier of raw material Business man

Lead time is 1 day Lead time is 10 days

Lead time
The time lag between the placement of order and actual receipt of the materials Higher lead time Lower lead time

Higher stock levels are maintained

lower stock levels are maintained

More Working Capital

Less Working Capital

Growth potential be higher

Higher production and sales target

More Working Capital

Higher level of competitiveness

Competition may force the firm to extend liberal credit terms

Higher stocks of finished goods to meet urgent orders from customers.

More Working Capital

Labou r co s t is risi ng

Raw material cost is rising

Rising prices

Higher amounts are required to maintain a constant volume of production and sales

More working capital requirement