Working Capital Management

                                 WORKING  CAPITAL  MANAGEMENT

Definition :

Gerestenberg—“ Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another,as from cash to inventories, inventories  to receivables and receivables to cash.”

Components  of Working Capital 

Current  Assets = Stock of raw material , Work in process , Finished goods , spares and consumable stores , sundry debtors , bills  receivable , cash balance , bank  balance ,prepaid expenses , accrued  income , advance payments , short term investments , marketable investments .

Current  Liabilities = Sundry creditors , Bank Overdraft , bills payable , outstanding expenses , proposed dividend , provision for tax , income received in advance .

Types    of    Working Capital

A)    a)Gross Working Capital  = Total Current  Assets

b)Net Working Capital = Total Current  Assets  –  Total Current  Liabilities

B)    a)Positive Working Capital    — when  CA  >  CL

b)Negative Working Capital  — when  CA  <  CL

c)Zero Working Capital         — when  CA  =  CL

C)    a)Permanent Working Capital— stays continuously /permanently in business

Types  1)Initial Working Capital – inception/beginning of  business

2) Regular Working Capital – Minimum W Cap for  normal

business

b)Variable  Working Capital— varying   WCap

Types 1) Seasonal Working Capital  – according to season,

2) Special Working Capital – unforeseen  events like strike, large contracts  &

3) Peak Working Capital – Highest  WCap  required during  operations.

D)    Balance Sheet  Working Capital  – asper  Balance  Sheet  at  the  year end.

E)    Cash Working Capital—operational inflows & outflows of cash

Factors  determining  Working Capital

a)      Nature of business

b)     Size of business

c)      Production period

d)     Stocking requirements for raw material & Finished goods

e)      Credit  available  from suppliers of goods and  services

f)       Credit  to be given to customers

g)      Production  policies

h)     Inventories Turnover

i)        Inflation

j)       Technology—labour oriented/technology oriented

k)     Taxation Policies—High tax rates=more W Cap.

l)        Expanding business=more business

W. Cap.Management involves

-Cash  Mgt.

-Receivables  Mgt.

-Inventory Mgt.

-Creditors Mgt.

Aim  of  W. Cap.Management=Reducing  investment in W.Cap. + Reducing Operating  Cycle Duration

Maximum Permissible  Bank Finance (MPBF)

RBI  appointed  Tandon  Committee  and  Chore  Committee recommended  that   business enterprises  should  improve  their  liquidity  position and  strive  to  achieve  Current  Ratio of 2:1.

Calculation of MPBF

a)      Low Risk Category of Borrowers—       MPBF  = 0.75 (CA-CL)

b)     Medium Risk Category of Borrowers—MPBF  = 0.75CA    – CL

c)      High Risk Category of Borrowers—      MPBF  = 0.75(CA-CCA) – CL

CCA= Core Current  Assets

Core  Current  Assets  mean   minimum  permanent  level  of  current  assets to  be  maintained by  an enterprise  so  long as  it  is  a  going  concern . Such  core  current  assets  assure   uninterrupted production.  Core  current  Assets  should  be  financed  from  long term  funds / owned  funds.