WORKING CAPITAL MANAGEMENT
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
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
j) Technology—labour oriented/technology oriented
k) Taxation Policies—High tax rates=more W Cap.
l) Expanding business=more business
W. Cap.Management involves
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.
|Less: Raw Material|