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Types of Working Capital, Accountancy and Financial management Video Lecture | Accountancy and Financial Management - B Com
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44 videos|75 docs|18 tests
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FAQs on Types of Working Capital, Accountancy and Financial management Video Lecture - Accountancy and Financial Management - B Com
| 1. What are the types of working capital? |  |
Ans. The types of working capital are:
1. Gross working capital: It refers to the total amount of funds invested in current assets by a company. It includes cash, inventory, accounts receivable, and other current assets.
2. Net working capital: It is the difference between current assets and current liabilities. It indicates the liquidity position of a company and its ability to meet short-term obligations.
3. Permanent working capital: It is the minimum level of working capital required by a company to carry out its day-to-day operations. It is determined by the nature and scale of business activities.
4. Variable working capital: It represents the fluctuating portion of working capital that varies with the level of production and sales. It is used to meet temporary or seasonal changes in the business.
5. Temporary working capital: It is the additional working capital required to meet short-term or temporary increases in business activities. It is usually borrowed or acquired through short-term financing options.
| 2. What is the role of accountancy in managing working capital? | |
Ans. Accountancy plays a crucial role in managing working capital by:
1. Recording and analyzing financial transactions: Accountancy helps in maintaining accurate records of all financial transactions related to working capital, such as cash inflows and outflows, inventory purchases, and accounts receivable. These records provide insights into the company's working capital position.
2. Budgeting and forecasting: Accountants prepare budgets and forecasts based on historical data and future projections. This helps in estimating the funds required for working capital and planning accordingly.
3. Monitoring liquidity: Accountancy helps in monitoring the liquidity position of a company by analyzing current assets and liabilities. It ensures that there is enough cash and other liquid assets available to meet short-term obligations.
4. Controlling expenses: Accountants play a role in controlling expenses related to working capital, such as inventory holding costs, accounts payable, and credit terms. They analyze cost structures and identify areas for cost reduction or optimization.
5. Financial reporting: Accountancy provides regular financial reports, such as balance sheets, income statements, and cash flow statements, which reflect the working capital position of a company. These reports help in assessing the financial health and performance of the business.
| 3. How can financial management impact working capital? | |
Ans. Financial management can impact working capital in the following ways:
1. Capital budgeting: Financial management decisions regarding capital budgeting, such as investment in fixed assets or expansion projects, can significantly affect working capital requirements. Larger investments may result in increased working capital needs.
2. Funding decisions: Financial management determines the appropriate mix of debt and equity financing for a company. The choice of financing sources can impact the availability and cost of working capital. For example, relying heavily on short-term debt may increase the risk of liquidity constraints.
3. Cash flow management: Financial management focuses on managing cash flows effectively. By optimizing cash inflows and outflows, it ensures sufficient liquidity for day-to-day operations and working capital needs.
4. Working capital policies: Financial management establishes working capital policies that define the level of investment in current assets, credit terms, and inventory management. These policies aim to balance profitability and liquidity by optimizing working capital.
5. Risk management: Financial management assesses and manages various risks associated with working capital, such as credit risk, market risk, and liquidity risk. By implementing appropriate risk management strategies, it ensures the availability of working capital during uncertain or challenging times.
| 4. What are the key components of working capital management? | |
Ans. The key components of working capital management include:
1. Cash management: Managing cash inflows and outflows to ensure sufficient liquidity for day-to-day operations. It involves maintaining optimum cash balances, collecting receivables, and managing cash flow cycles.
2. Inventory management: Balancing the inventory levels to meet customer demand while minimizing holding costs. It includes proper inventory valuation, forecasting, ordering, and monitoring stock levels.
3. Accounts receivable management: Efficiently managing accounts receivable to optimize cash inflows. This involves setting credit terms, monitoring customer payments, and implementing collection strategies.
4. Accounts payable management: Managing accounts payable effectively to optimize cash outflows. It includes negotiating favorable payment terms with suppliers, taking advantage of discounts, and managing payment schedules.
5. Short-term financing: Arranging short-term financing options, such as bank overdrafts, lines of credit, or trade credit, to meet temporary working capital needs. This ensures smooth operations during cash flow gaps.
| 5. How does efficient working capital management contribute to a company's financial performance? | |
Ans. Efficient working capital management contributes to a company's financial performance in the following ways:
1. Improved liquidity: Efficient working capital management ensures that a company has sufficient liquidity to meet its short-term obligations. This reduces the risk of default and improves the overall financial health of the business.
2. Cost savings: By optimizing inventory levels, managing accounts receivable and payable effectively, and minimizing cash holding costs, working capital management helps in reducing unnecessary expenses. This leads to cost savings and improved profitability.
3. Enhanced cash flow: Effective working capital management improves cash flow by reducing the cash conversion cycle. It accelerates cash inflows from customers and delays cash outflows to suppliers and creditors, resulting in improved cash flow and financial flexibility.
4. Better creditworthiness: Efficient working capital management enhances a company's creditworthiness and reputation in the market. It enables the company to maintain good relationships with suppliers, negotiate favorable credit terms, and access credit facilities when needed.
5. Growth opportunities: Proper management of working capital ensures that the company has the necessary resources to pursue growth opportunities. It provides the financial stability and flexibility to invest in new projects, expand operations, and capitalize on market opportunities.
Text Transcript from Video
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today we are going to learn types of
working capital
working capital is divided into various
types like balance sheet view and
operating cycle view balance sheet view
divides working capital into gross
working capital and net working capital
and the operating cycle view divides the
working capital into permanent and
temporary working capital permanent
working capital is further divided into
seasonal and special working capital
whereas temporary working capital is
divided into regular and reserve working
capital
balance sheet view of working capital
gross working capital current assets in
the balance sheet of a company are known
as gross working capital current assets
are those short-term assets which can be
converted into cash within a period of
one year the gray area in the management
of current assets or gross working
capital is its unpredictability that is
it is very difficult to ascertain the
exact time of conversion of such assets
why is such a nature problematic it is
because the liabilities occur at their
time and do not wait for our current
asset to realize this mismatch or the
gap creates a need for arranging working
capital financing
networking capital networking capital is
a very frequently used term there are
two ways to understand networking
capital first one says it is simply the
difference between current assets and
the current liabilities on the balance
sheet of a business the other
understanding discloses little deeper or
hidden meaning of the term as per that
and WC is that part of current assets
which are indirectly financed by
long-term assets compared to gross
working capital net working capital is
considered more relevant for effective
working capital financing and management
operating cycle view permanent or fixed
working capital dealing with current
asset and fixed assets is totally
different determining the financing
requirement in the case of fixed assets
is simply the cost of the asset same is
not true for current assets because the
value of current assets is constantly
changing and it is difficult to
accurately forecast that value at any
point of time to simplify the complexity
to some extent on the basis of past
trend and experience we can find a level
below which current asset has never gone
the current assets below this level are
called permanent or fixed working
capital see the example below in the
example 2500 is the permanent working
capital below which the net working
capital has not gone
regular working capital it is the
permanent working capital which is
normally required in the normal course
of business for the working capital
cycle to flow smoothly reserve working
capital it is the working capital
available over and above the regular
working capital it is kept for
contingencies which may arise due to
unexpected situations
temporary or variable working capital
temporary working capital is easy to
understand after getting hold over the
permanent working capital in simple
terms it is the difference between net
working capital and permanent working
capital the main characteristic which
can be made out of the example is
fluctuation the temporary working
capital therefore cannot be forecasted
in the interest of measurability this
can be further bifurcated as below which
can create at least some base to
forecast seasonal working capital
seasonal working capital is that
temporary increase in working capital
which is caused due to some relevant
season for the business it is applicable
to businesses having the impact of
seasons for example the manufacturer of
sweaters for whom relevant season is the
winter's normally their working capital
requirement would increase in that
season due to higher sales in that
period and then go down as the
collection from debtors is more than
sales special working capital special
working capital is that rise in the
temporary working capital which occurs
due to a special event which otherwise
normally does not take place it has no
basis to forecast and has rare
occurrence normally for example a
country where Olympic Games are held all
the business require extra working
capital due to a sudden rise in business
activity
it was all about the types of working
capital it needs to be managed with
several working capital technique so as
to have the effective working capital
management thank you please subscribe
like and share our video
and click on the bell icon to get update
on new videos
today we are going to learn types of
working capital
working capital is divided into various
types like balance sheet view and
operating cycle view balance sheet view
divides working capital into gross
working capital and net working capital
and the operating cycle view divides the
working capital into permanent and
temporary working capital permanent
working capital is further divided into
seasonal and special working capital
whereas temporary working capital is
divided into regular and reserve working
capital
balance sheet view of working capital
gross working capital current assets in
the balance sheet of a company are known
as gross working capital current assets
are those short-term assets which can be
converted into cash within a period of
one year the gray area in the management
of current assets or gross working
capital is its unpredictability that is
it is very difficult to ascertain the
exact time of conversion of such assets
why is such a nature problematic it is
because the liabilities occur at their
time and do not wait for our current
asset to realize this mismatch or the
gap creates a need for arranging working
capital financing
networking capital networking capital is
a very frequently used term there are
two ways to understand networking
capital first one says it is simply the
difference between current assets and
the current liabilities on the balance
sheet of a business the other
understanding discloses little deeper or
hidden meaning of the term as per that
and WC is that part of current assets
which are indirectly financed by
long-term assets compared to gross
working capital net working capital is
considered more relevant for effective
working capital financing and management
operating cycle view permanent or fixed
working capital dealing with current
asset and fixed assets is totally
different determining the financing
requirement in the case of fixed assets
is simply the cost of the asset same is
not true for current assets because the
value of current assets is constantly
changing and it is difficult to
accurately forecast that value at any
point of time to simplify the complexity
to some extent on the basis of past
trend and experience we can find a level
below which current asset has never gone
the current assets below this level are
called permanent or fixed working
capital see the example below in the
example 2500 is the permanent working
capital below which the net working
capital has not gone
regular working capital it is the
permanent working capital which is
normally required in the normal course
of business for the working capital
cycle to flow smoothly reserve working
capital it is the working capital
available over and above the regular
working capital it is kept for
contingencies which may arise due to
unexpected situations
temporary or variable working capital
temporary working capital is easy to
understand after getting hold over the
permanent working capital in simple
terms it is the difference between net
working capital and permanent working
capital the main characteristic which
can be made out of the example is
fluctuation the temporary working
capital therefore cannot be forecasted
in the interest of measurability this
can be further bifurcated as below which
can create at least some base to
forecast seasonal working capital
seasonal working capital is that
temporary increase in working capital
which is caused due to some relevant
season for the business it is applicable
to businesses having the impact of
seasons for example the manufacturer of
sweaters for whom relevant season is the
winter's normally their working capital
requirement would increase in that
season due to higher sales in that
period and then go down as the
collection from debtors is more than
sales special working capital special
working capital is that rise in the
temporary working capital which occurs
due to a special event which otherwise
normally does not take place it has no
basis to forecast and has rare
occurrence normally for example a
country where Olympic Games are held all
the business require extra working
capital due to a sudden rise in business
activity
it was all about the types of working
capital it needs to be managed with
several working capital technique so as
to have the effective working capital
management thank you please subscribe
like and share our video
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Nov 22, 2024 Last updated |
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