PPT - Working capital | Accountancy and Financial Management - B Com PDF Download

 Page 1


A P L A P O L L O T U B E S L T D .
Working Capital
Page 2


A P L A P O L L O T U B E S L T D .
Working Capital
Introduction
? Working Capital  is a financial metric which 
represents operating liquidity available to a business.
? The goal of working capital management is to ensure 
that the firm is able to continue its operations and 
that it has sufficient cash flow to satisfy both 
maturing short-term debt and upcoming operational 
expenses.
Page 3


A P L A P O L L O T U B E S L T D .
Working Capital
Introduction
? Working Capital  is a financial metric which 
represents operating liquidity available to a business.
? The goal of working capital management is to ensure 
that the firm is able to continue its operations and 
that it has sufficient cash flow to satisfy both 
maturing short-term debt and upcoming operational 
expenses.
Components of Working Capital
The working capital cycle is made up of four core 
components:
? Cash & Cash equivalent.
? Creditors/accounts payable.
? Inventory/stock in hand.
? Debtors/accounts receivables.
Page 4


A P L A P O L L O T U B E S L T D .
Working Capital
Introduction
? Working Capital  is a financial metric which 
represents operating liquidity available to a business.
? The goal of working capital management is to ensure 
that the firm is able to continue its operations and 
that it has sufficient cash flow to satisfy both 
maturing short-term debt and upcoming operational 
expenses.
Components of Working Capital
The working capital cycle is made up of four core 
components:
? Cash & Cash equivalent.
? Creditors/accounts payable.
? Inventory/stock in hand.
? Debtors/accounts receivables.
Importance of Working Capital
? It is important we work out the right level of working capital 
you will need. If the working capital is too:
? High - Business has surplus funds which are not earning a return; and 
? Low - May indicate that your business is facing financial difficulties.
? To Forecast the optimum working capital requirement the 
following formula may be used:
? (Estimated cost of good sold x Operating cycle) + Desired cash 
balance.
? Operating Cycle, O = R + W + F + D – C
? Where, O = Duration of operating cycle.
R = Raw Material storage period.
W= Work-in-process period.
F = Finished Good Storage period.
D = Debtors collection period.
C = Creditors payment period.
Page 5


A P L A P O L L O T U B E S L T D .
Working Capital
Introduction
? Working Capital  is a financial metric which 
represents operating liquidity available to a business.
? The goal of working capital management is to ensure 
that the firm is able to continue its operations and 
that it has sufficient cash flow to satisfy both 
maturing short-term debt and upcoming operational 
expenses.
Components of Working Capital
The working capital cycle is made up of four core 
components:
? Cash & Cash equivalent.
? Creditors/accounts payable.
? Inventory/stock in hand.
? Debtors/accounts receivables.
Importance of Working Capital
? It is important we work out the right level of working capital 
you will need. If the working capital is too:
? High - Business has surplus funds which are not earning a return; and 
? Low - May indicate that your business is facing financial difficulties.
? To Forecast the optimum working capital requirement the 
following formula may be used:
? (Estimated cost of good sold x Operating cycle) + Desired cash 
balance.
? Operating Cycle, O = R + W + F + D – C
? Where, O = Duration of operating cycle.
R = Raw Material storage period.
W= Work-in-process period.
F = Finished Good Storage period.
D = Debtors collection period.
C = Creditors payment period.
Working Capital Financing
? Fund Based: 
? Cash Credit 
? Overdraft
? Bills Discounting
? Working Capital Demand Loan
? Non Fund Based:
? Letter of Credit 
? Bank Guarantee
? Structured Product:
? Factoring
? Commercial Paper
? Securitization of receivables
? Buyers/Supplier credit.