By Sameeksha Agarwal

Contents
Introduction
Objectives Concept Findings Recommendations

Introduction
Effective financial management is the outcome,

among other things, of proper management of investment of funds in business. Funds can be invested for permanent or long-term purposes such as acquisition of fixed assets, diversification and expansion of business, renovation or modernisation of plants & machinery, and research & development.
Working capital is the name given to the difference

between the current assets and current liabilities. Working capital is alternatively known as "Net Current Assets" or Net Working Capital".

Objectives
To learn the effective management of working capital.
To study the different components of working capital

and its impact on the performance of the firm.

To study how Citi Bank finances working capital

requirements of the firms.

CONCEPTS OF WORKING CAPITAL

Gross concept According to this concept; working capital refers to the firms investment in current assets. The amount of current liabilities is not deducted from the total of current assets. This concept views Working Capital and aggregate of Current Assets as two interchangeable terms. Net Working Capital The net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors dues, bills payable, bank overdraft and outstanding expenses. Net working capital can be positive or negative. A negative net working capital occurs when current liabilities are in excess of current assets.

Need for WC
A manufacturing firm needs to maintain additional liquidity to meet

the expenditure on several items, like raw material, fuel, power, wages, salaries etc. in the process of manufacturing the goods.
Even if a business concern does not manufacture goods on its own,

rather it purchases it from manufacturer or wholesaler, working capital in the form of cash is required to meet its routine requirement to finance the transactions which a firm carries out in its ordinary course of business. This is called transactions motive of requiring cash balances.
Precautionary motive refers to the need of keeping cash balances in

reserve for random and unforeseen circumstances e.g. strike, failure of important customers, cancellation of order etc.

 Speculative motive refers to the desire of a firm to take

advantage of opportunities which present themselves at unexpected moments and which are typically outside the normal course of business. Compensation motive to hold cash balances is for compensating the banks for providing certain services to business firms like clearance of cheque, supply of credit information, transfer of funds etc.

KINDS OF WORKING CAPITAL

PERMANENT WORKING CAPITAL This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. It represents the current assets required on a continuing basis over the entire year. TEMPORARY OR VARIABLE WORKING CAPITAL The amount of such working capital keeps on fluctuating from time to time on the basis of business activities. In other words, it represents additional current assets required at different times during the operating year.

Figure 1: Fixed working capital remaining constant overtime

Figure 2: Fixed working capital increasing over time

COMPONENTS OF WORKING CAPITAL

Cash to meet expenses as and when they occur. Accounts Receivables or sundry trade debtors Inventory of:
Raw materials, stores, supplies and spares,

Work-in-process, and
Finished goods

Advance payments towards expenses or purchases, and

other short-term advances which are recoverable. Temporary investment of surplus funds which could be converted into cash whenever needed.

 Goods purchased on credit Expenses incurred in the course of the business of the

organisation (e.g., wages or salaries, rent, electricity bills, interest etc.) which are not yet paid for. Temporary or short term borrowings from banks, financial institutions or other parties Advances received from parties against goods to be sold or delivered, or as short term deposits. Other current liabilities such as tax and dividends payable.

IMPORTANCE

OF WORKING MANAGEMENT

CAPITAL

Growth may be stunted. It may become difficult for the firm to

undertake profitable projects due to non-availability of funds. Implementation of operating plans may become difficult and consequently the firm's profit goals may not be achieved. Operating inefficiencies may creep in due to difficulties in meeting even day to day commitments. Fixed assets may not be efficiently utilised due to lack of working funds, thus lowering the rate of return on investments in the process. Attractive credit opportunities may have to be lost due to paucity of working capital. The firm loses its reputation when it is not in a position to honor its short-term obligations. As a result, the firm is likely to face tight credit terms.

DETERMINANTS OF WORKING CAPITAL NEEDS

Nature and Size of Business Manufacturing Cycle Business Fluctuations Production Policy Credit Terms Growth and Expansion Activities Price Level Changes

APPROACHES TO MANAGING WORKING CAPITAL

The Conventional Approach

This approach implies managing the individual components of working capital (i.e. inventory, receivables, payables, etc) efficiently and economically so that there are neither idle funds nor scarcity of funds.

 The Operating Cycle Approach

This approach views working capital as a function of volume of operating expenses. Under this approach working capital is determined by the duration of operating cycle and the operating expenses needed completing the cycle.

the the the for

The duration of the operating cycle is the number of day involved in the various stages, commencing with acquisition of raw materials to the realisation of proceeds from debtors. The credit period allowed by creditors will have to be set off in the process. The optimum level of working capital will be the requirement of operating expenses for an operating cycle, calculated on the basis of operating expenses required for a year.

Working capital assessment in CITI BANK

Sr.no A Working capital assessment Particulars Projected sales for the year 2010-11 25% of sales Less:- 5% of gross sales margin Permissible bank finance 25% of sales Less: - projected net working capital Bank finance Bank borrowings shown in the projections Of the company Limit applied for Limit recommended for sanction (Rs.in lakhs) 115.09 28.77 5.75 23.02 28.77 15.21 15.21 15.00 10.00 10.00

RECOMMENDATIONS
While assessing the project, the profit element should be

considered with the risk element collectively. Financing of working capital should be avoided to a long loss making firm, even though regular customer. Some times the clients business looks promising and real to his words then certain relaxation should be provided as far as policies are considered. Sectoral analysis should be considered before providing the working capital finance to any firm, trends should be considered. Statement of financial transactions should be review at regular interval to minimize losses due to irregular payments and defaulters.

THANK YOU