Factors Affect factors affecting working capitaling Working Capital

7/23/2019 Factors Affect factors affecting working capitaling Working Capital

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FACTORS DETERMINING WORKING CAPITAL

REQUIREMENT

NATURE OR CHARACTER OF BUSINESS

SIZE OF BUSINESS/SCALE OF OPERATIONS

PRODUCTION POLICY

MANUFACTURING PROCESS/LENGTH OF PRODUCTION CYCLE

SEASONAL VARIATION

WORKING CAPITAL CYCLE

RATE OF STOCK TURNOVER

CREDIT POLICY

BUSINESS CYCLE

RATE OF GROWTH OF BUSINESS

EARNING CAPACITY AND DIVIDEND POLICY

PRICE LEVEL CHANGES

OTHER FACTORS


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NATURE OR CHARACTER OF BUSINESS

Public undertaking need very limited working capital

since they offer cash sales only.

Trading and finance firm require less investment in

fixed capital and will have more investment in

working capital. Manufacturing undertaking require sizable working

capital between these two extremes


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SIZE OF BUSINESS/SCALE OF OPERATIONS

Working capital requirement is directly influenced by size

of business.

reater the size larger will be the requirement of working

capital.

!n some cases even small concern may need more working

capital due to high overhead charges" inefficient use of

available resources and other economic disadvantage of

small size.


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PRODUCTION POLICY

The production could be kept either steady by

accumulating inventories during slack periods with a view

to meet high demand during the peak season.

The production could be curtailed during the slack season

and increase during the peak season.

!f the policy is to keep production steady by accumulating

inventories it will require higher working capital.


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MANUFACTURING PROCESS/LENGTH OF

PRODUCTION CYCLE

!n manufacturing business the requirements of

working capital increase in direct proportion to

length of manufacturing process.

The raw materials and other supplies have to be

carried for a longer period.


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SEASONAL VARIATION

!n certain industries raw material is not available

throughout the year.

The raw materials is bought in bulk.

#uge amount is blocked in the form of material

inventories during such seasons demanding moreworking capital requirement.


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WORKING CAPITAL CYCLE

!n manufacturing firm working capital cycle starts with

the purchase of raw material and ends with the

realisation of cash from the sale of finished products.

The speed with which the working capital complete one

cycle determines the requirement of working capital. $onger the period of the cycle larger the requirement of

working capital.


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WORK-IN-PROGRESS

DEBTORS(RECEIVABLES)

FINISHED GOODSCASH

RAW MATERIALS

WORKING CAPITAL/OPERATING CYCLE OF A MANUFACTURING CONCERN


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RATE OF STOCK TURNOVER

There is a high degree of inverse co%relationship

between the quantum of working capital and the

velocity with which the sale is effected.

&irm with high stock turnover will need lower

working capital compared to a firm having low rateof turnover.


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CREDIT POLICY

'redit policy of a concern means how firm deal with

their debtors and creditors.

'oncern purchase on credit and sells its products(service

on cash require less working capital.

!f the concern buy its requirements for cash and allow

credit to its customers will require more working capital

since huge fund will be tied up in debtors or receivables.


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BUSINESS CYCLE

)usiness cycle refers to alternate expansion and contraction

in general business activity.

during boom there is need for more working capital due to

increase in sale" rise in prices" optimistic expansion of

business etc.

*uring depression the business contracts" sales decline"

difficulties are faced in collection from debtors and will

have large amount of working capital lying idle.


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RATE OF GROWTH OF BUSINESS

Working capital requirement increases with the

growth and expansion of business activities.

!t may conclude that for normal expansion in the

volume of business" we may have retained profit to

meet working capital needs but in fast growingconcerns require large amount of working capital.


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EARNING CAPACITY AND DIVIDEND POLICY

+ firm that maintain a steady high rate of cash

dividend irrespective of its generation of profits need

more working capital.

!f the firm that retains larger part of its profit and

does not pay so high rate of cash dividend theworking capital requirement will be less.


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PRICE LEVEL CHANGES

The effect of rising prices may be different for

different firms.

,ome firms may be affected much while some other

may not be effected at all.

-ise in price level will require the firm to maintain

larger amount of working capital as more amount is

required to maintain the same current assets.


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OTHER FACTORS

Operatin e!"ien"# I$p%rt p%&i"#

A''et 'tr"treBanin *a"i&itie'


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Approaches to determ!e

a! approprate F!a!c!"#m$ T+ere are t+ree ,a'i" appr%a"+e' t%

eter$ine an appr%priate .nan"in$i/0

Hein appr%a"+1 a&'% "a&&e t+e

$at"+in appr%a"+1 C%n'er2ati2e appr%a"+1 Are''i2e appr%a"+3


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Hed"!" Approach% &atch!"Approach

A""%rin t% t+i' appr%a"+1 t+e $atrit# %* t+e '%r"e' %* t+e *n' '+%&$at"+ t+e natre %* t+e a''et' t% ,e .nan"e3 F%r t+e prp%'e %* ana'i'1t+e "rrent a''et' "an ,e ,r%a "&a''i.e int% t4% "&a''e'-

o t+%'e 4+i"+ are re5ire in a "ertain a$%nt *%r a i2en &e2e& %* %perati%nan1 +en"e1 % n%t 2ar# %2er ti$e3

o t+%'e 4+i"+ 6"tate %2er ti$e3

T+e Hein appr%a"+ 'e't' t+at &%n ter$ *n' '+%& ,e 'e t%.nan"e t+e ./e p%rti%n %* "rrent a''et' re5ire$ent' in a $anner 'i$i&art% t+e .nan"in %* ./e a''et'3

T+e pre te$p%rar# re5ire$ent'1 t+at i'1 t+e 'ea'%na& 2ariati%n' %2er ana,%2e t+e per$anent .nan"in nee' '+%& ,e appr%priate .nan"e 4it+'+%rt ter$ *n'3

T+i' appr%a"+1 t+ere*%re1 i2ie' t+e re5ire$ent' %* t%ta& *n' int%per$anent an 'ea'%na& "%$p%nent'1 ea"+ ,ein .nan"e ,# a i7erent'%r"e3


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&atch!" approach to asset

'!a!c!"

Fi/e A''et'

Per$anent Crrent A''et'

T%ta& A''et'

F&"tatin Crrent A''et'

Ti$e

8

S+%rt-ter$De,t

L%n-ter$De,t 9E5it#Capita&


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Co!ser(at(e Approach

T+i' appr%a"+ 'e't' t+at t+ee'ti$ate re5ire$ent %* t%ta& *n''+%& ,e $et *r%$ &%n ter$'%r"e': t+e 'e %* '+%rt ter$ *n''+%& ,e re'tri"te t% %ne$eren"# 'itati%n' %r 4+en t+ere

i' an ne/pe"te %t6%4 %* *n'3


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Co!ser(at(e approach to asset

'!a!c!"

Fi/e A''et'


T%ta& A''et'


Ti$e

8

S+%rt-ter$De,t

L%n-ter$De,t 9E5it#"apita&


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A""ress(e approach

A 4%rin "apita& p%&i"# i' "a&&e an are''i2e p%&i"# i* t+e.r$ e"ie' t% .nan"e a part %* t+e per$anent 4%rin"apita& ,# '+%rt ter$ '%r"e'3 T+e are''i2e p%&i"# 'ee' t%$ini$i;e e/"e'' &i5iit# 4+i&e $eetin t+e '+%rt ter$re5ire$ent'3 T+e .r$ $a# a""ept e2en reater ri' %*

in'%&2en"# in %rer t% 'a2e "%'t %* &%n ter$ .nan"in ant+' in %rer t% earn reater retrn3

T+e trae-%7 ,et4een ri' an pr%.ta,i&it# epen' &are%n t+e .nan"ia& $anaer


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A""ress(e approach to asset

'!a!c!"

Fi/e A''et'


T%ta& A''et'


Ti$e

8

S+%rt-ter$De,t

L%n-ter$De,t 9E5it#"apita&


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CONCLUSION

T+ere are $an# *a"t%r' 4+i"+ in6en"e t+e

a$%nt %* in2e't$ent i' t% ,e $ae %n

4%rin "apita&3

T+e *a"t%r' are t% ,e "%n'iere 4+i&e ./in

t+e $ini$$ 4%rin "apita& re5ire$ent

4+i"+ i' n a2%ia,&e *%r t+e "%n"t %*

r%tine %perati%n' %* a ,'ine''3


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THAN) YOU*+

Factors Affect factors affecting working capitaling Working Capital

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