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7/28/2019 Lecture 1 Intro to WCM
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Mukul Bhatia
7/28/2019 Lecture 1 Intro to WCM
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Business needs Capital
Classification By Sources of Capital
A) Equity- Owned Funds
B) Loans
Borrowed Funds
- Classification by duration
A) Long Term
B) Short Term
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Capital (Liability) is used to create Assets for
the business. (Liabilities are promises andcommitments made by the business in courseof the operations)- Term and Current
Fixed Assets (Long Term)
E.g. Land, Building, Machines, Vehicles etc.
Current Assets (Short Term) e.g. Raw Materials, Sundry Debtors, Finished
Goods etc.
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Fixed Assets are those assets which are used
to convert raw materials to finished goodsand to provide the facilities for the operationsof the business
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Current assets are those assets which are
created or consumed in the process of theconversion. Another way of defining-required for day to day operations
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Text book definition of Current Assets is
those assets which can be converted to cashwithin one year. (More practical definition-within one operating cycle).
These are assets required for the day to dayoperations and to sustain the operating levels
of the business
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An entrepreneur likes to hold Fixed Assets
but lower the current assets in his businessthe higher is his business efficiency i.e. he isable to turn over his current assets at agreater pace and generate more profits due
to the higher operating levels.
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There are two possible interpretations ofworking capital concept:
1. Balance sheet concept
2. Operating cycle concept
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Balance Sheet Concept
There are two interpretations of working
capital under the balance sheet concept:
a. Excess of current assets over currentliabilities
b. Gross or total current assets.
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Cash
RM
WIPFG
Bills
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THE WORKING CAPITAL
CYCLE
(OPERATING CYCLE)
Accounts Payable
Cash
Raw
MaterialsW I P
Finished
Goods
Value Addition
Accounts
ReceivableSALES
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Structure of the Balance Sheet-
Liabilities Assets
Term Liabilities Fixed Assets
Current Liabilities Current Assets
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Working Capital Management Deals with the
Current Assets and the Current Liabilities sideof the Balance Sheet
Basically Working Capital is a perpetualrequirement of funds for short term uses to
keep the business running
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The size and nature of investment in current
assets is a function of different factors suchas type of products manufactured, the lengthof operating cycle, the sales level, inventorypolicies, unexpected demand andunanticipated delays in obtaining newinventories, credit policies and current assets.
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Factors affecting working capital 1. Nature of the Industry 2. Demand of Industry 3. Cash requirements 4. Nature of the Business 5. Manufacturing time 6. Volume of Sales
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Factors contd. 7. Terms of Purchase and Sales 8. Inventory Turnover 9. Business Turnover 10. Business Cycle 11. Current Assets requirements 12. Production Cycle
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Factors contd. 13. Credit control 14. Inflation or Price level changes 15. Profit planning and control 16. Repayment ability 17. Cash reserves
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Factors contd.
18. Operation efficiency 19. Change in Technology 20. Firms finance and dividend policy 21. Attitude towards Risk
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Thank you
Mukul Bhatia