PRESENTATION

ON
WORKING
CAPITAL
 WORKING CAPITAL
Working Capital refers to that part of the firm’s
capital, which is required for financing short-term or
current assets such as 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.
 OBJECTIVES OF WORKING CAPITAL
1. The management wants maximum productivity and profits in the
employment of capital. This is possible by striving to maintain a
correct ratio between working capital and fixed capital.

2. The management has another objective and that is to maintain a

smooth and rapid flow of funds in order to enhance the efficiency
of working capital or profitability of the firm.

3. If cash receipts and cash outlay synchronize, there is no need to

maintain a cash reserve. In business; it would be a miracle to have
perfect coincidence and co-ordination between receipts and
payments. Hence, firms must have sufficient cash reserve to meet
all normal as well as abnormal cash needs.
TYPES OF WORKING CAPITAL

WORKING CAPITAL

BASIS OF BASIS OF
CONCEPT TIME

Gross Net Permanent Temporary

Working Working / Fixed / Variable
Capital Capital WC WC

Seasonal Special
WC WC
 GROSS WORKING CAPITAL
Gross working capital require that a firm have
adequate investment in current assets and proper
management of theses asset.
It should be neither excessive nor inadequate asset.
If there are surplus funds they should be immediately
invested, and if the funds become low and the
requirement is greater the financial manager should be
able to get the required finance so that the commitments
of the firm can be made short notice.
 NET WORKING CAPITAL
 It is the difference between current asset and current
liabilities. When current asset are higher than current liability
NWC will be positive, but if current liabilities exceed current
assets NWC.
 The current asset should as a rule maintain a ratio of 2:1 with
current liabilities.
 NWC explain the management of financing of working capital
through the financing of long-term and short term funds.
 NWC= Current Assets – Current Liabilities
 CA= cash + marketable securities + accounting receivables +
notes and Bills Receivables + Inventories
 CL = Accounts Payable + Notes and Bills + Outstanding
Expenses + Short Term Loans.
 DIFFERENCE BETWEEN
CAPITAL AND GROSS WORKING CAPITAL
Net Working Capital
1. NWC is the concept of qualitative
nature.
2. It is indicating the firm’s ability to meet
its operating expenses and current
liability.
3. It expressed as current asset minus
current liability.
4. It is concept very popular in accounting
system.
5. Net concept suitable for sole trader
and partnership firms.
6. It is very useful to find out true the
financial position of a company.
7. Increase in bank loan cannot increase
working capital. Retained profits, sale of
fixed assets will increase net working
capital.
NET WORKING
Gross Working Capital
1. GWC is the concept of quantitative
nature.
2. It is pointing out the total amount
available for financing the current
assets.
3. It indicating the total sum of current
assets.
4. It is a concept very popular in financial
management.
5. Gross concept suitable for companies.
6. It cannot reveal the true financial
position of a company.
7. Every increase in borrowing will
increase the gross working capital.
Under net concept, no change in
 PERMANENT OR REGULAR
WORKING CAPITAL
Permanent working capital is the minimum level
of current assets which is continuously required by a firm
for carrying out its business activities and that cannot be
converted into cash in normal course of business.
Permanent working capital is either constant or it
increase with the size of the business or its scale of
operations.

Charactertics:
 Continue to exist for a longer period of time is
the business activities.
 Constantly changes in the business from one asset
to another.
 Grows the size or volume of business operation.
 TEMPORARY OR VARIABLE
WORKING CAPITAL
Any amount over and above the permanent level of
working capital is temporary working capital. It keeps on
fluctuating from time to time as per the changes in
production and sales activities.

Charactertics:
 It is an extra working capital needed to changing
production and sales activities.
 It is created to meet liquidity requirements.

 It fluctuates according to the level of operations.

 Temporary working capital is fluctuating during
the operating period.
 It is needed for shorter period.

Two types of temporary working capital

• Seasonal working capital.

• Specific working capital.

 SEASONAL WORKING CAPITAL

The capital required to meet the seasonal

demands of the enterprise is called seasonal working
capital.
For example, a manufacture of woolen textiles,
refrigerators or coolers may need extra funds to carry on
production and to accumulate stock before the sales
operations.
Seasonal working capital being of short-term
nature, it has to be financed from short-term sources like
bank loan etc.
 SPECIFIC WORKING CAPITAL
Specific working capital is that part of working
capital which is required to meet unforeseen
contingencies like slump, strike, flood, war etc.
Additional working capital is to be arranged to
meet special exigencies such as launching of extensive
marketing campaign, purchase of goods for stock in view
of future increase in price etc.
 FACTORS GOVERNING WORKING
CAPITAL
1. General Type of Business:
A trading Company requires large working capital. Industrial
concerns may require relatively lower working capital. A banking
company, of course requires maximum amount of working capital.
Basic and key industries, public utilities, businesses dealing in
staple products, e.g., necessaries, require low working capital
because they have a steady demand and continuous cash-inflow
enough for current liabilities.

2. Size of the Business Unit:

The amount of working capital depends directly upon the volume
of business. The greater the size of a business unit, the larger will
be the requirements of working capital.
3. Terms of Purchase and Terms of Sale:
Use of trade credit may lead to lower working capital, while cash
purchases will demand large working capital. Similarly, credit sales will
require larger working capital, while cash sales will require lower
working capital.

4. Turnover of Inventories:
If inventories are large and their turn-over is slow we shall require
larger capital but if inventories are small and their turnover is quick we
shall require lower working capital.

5. Process of Manufacture:
Long period, complex and round about process of production will
require larger working capital, while simple, short period process of
production will require lower working capital.
6. Importance of Labour:
Capital intensive industries, i.e., mechanised and automated industries,
will require lower working capital, while labour intensive industries such
as small-scale and cottage industries will require larger working capital.

7. Proportion of Raw Material to Total Costs:

If our raw materials are costly, we shall have larger working capital while
if raw materials are cheaper and constitute a small part of the total cost
of production, we shall require lower working capital.

8. Cash Requirements:
If a corporation has demand for larger cash needs, we shall have larger
working capital, e.g., at the time of dividend payment, taxation, interest
charges, wages and salaries, we require enough cash. There is a close
connection between the dividend policy and the working capital. If a
company has shortage of working capital, it may have to skip payment
of cash dividends or reduce the dividend rate or issue stock dividends.
9. Seasonal Variations:
During the busy season, a business requires larger working capital
while during the slack season a company requires lower working
capital. In sugar industry the season is December to April; while in the
woolen industry the season is the winter season. Usually the seasonal
or variable needs of working capital are financed by temporary
borrowing.

10. Banking Connections:

If the corporation has good banking connections and bank credit
facilities, it may have minimum margin of regular working capital over
current liabilities. But in the absence of the availability of bank
finance, it should have relatively larger amount of net working capital.
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