working capital management, types of working capital. Gross Working Capital, Net Working Capital

1. WORKING CAPITAL
MANAGEMENT

2. MEANING
 Capital required for business can be divided into
two parts:- 1.)Fixed Capital 2.)Working Capital
 Every business needs funds for two purposes :-
1.)For its establishment
2.)For its day to day operations
Long term funds are required to create production
facilities through purchase of fixed assets and
short term funds are required for purposes like
purchase of R.M, Payment of Wages etc. These
funds are known as WORKING CAPITAL

3. DEFINITION
• In the words of Shubin, “ Working Capital is
the amount of funds necessary to cover the
cost of operating of the enterprise.”

4. KINDS OF WORKING CAPITAL
WORKING CAPITAL
BASIS OF
CONCEPT
BASIS OF
TIME
Gross
Working
Capital
Net
Working
Capital
Permanent
/ Fixed
WC
Temporary
/ Variable
WC
Regular
WC
Reserve
WC
Special
WC
Seasonal
WC

5. GROSS WORKING
CAPITAL
• In a broad sense, the term Working Capital
refers to the Gross Working Capital and
represents the amount of funds invested in
Current Assets.
• Thus Gross Working Capital is the capital
invested in total current assets of the
enterprise.
• Current Assets are those assets which in the
ordinary course of business can be converted
into cash within a short period normally one
accounting year.

6. FEATURES OF CURRENT
ASSETS
• Short-lived: We just saw in the definitions of all
the major current assets that they are very short-
lived especially when we compare them with
their counterpart i.e. Fixed Assets.
• Fast Conversion Cycle of Current Asset: These
assets are quickly converted into other current
asset form in a cyclic manner. The current asset
cycle works as follows: e.g. Cash converted into
raw material, which again converts to finished
goods, further that converts into account
receivables and finally account receivables are
converted back into cash.

7. • Decisions are Recurring and Requires
Quickness: Since, the current assets are very short-
lived and are frequently converted into other
current assets, the decisions relating to such assets
also recurring in nature and requires quick decision
making.
Inter-linked: A manager cannot consider one
component individually and take decision on it.
These components are interlinked to each other as
seen in the current asset cycle. For example, if a
business is in need of cash, it will have to offer
discount to debtors for their faster realization
whereas if a business has too much of finished
goods inventory, it will try to sell it to debtors with
liberal credit terms

8. EXAMPLES
• Cash in hand and Bank Balances
• Bills Receivables
• Debtors
• Short term loans and advances
• Inventories of Stock
• Temporary investment of surplus funds
• Prepaid Expenses
• Accrued Income

9. NET WORKING CAPITAL
• Net Working Capital=Current Assets-Current
Liabilities
• Net Working Capital can be Positive or
Negative

10. PERMANENT WORKING
CAPITAL
1.It is the minimum working capital required for
producing predetermined production
2.Permanent working is the minimum investment
kept in the form of inventory of raw materials,
work in process, finished goods, stores & spare,
and book debts to facilitate uninterrupted
operation of a firm.
3.This investment is stable in the short run, it
certainly varies in the long run depending upon
the expansion programmers undertaken by a
firm. It may increase or decrease over a period of
time.

11. TEMPORARY WORKING
CAPITAL
• It is the additional current assets required for
temporary period, and it is above permanent
WC
• An amount over and above the permanent
level of working capital is temporary,
fluctuating or variable working capital.
• At times, additional working capital is
required to meet the unforeseen events like
floods, strikes, seasonal production and price
hike tendencies contingencies.