Lecture 1 Intro to WCM

7/28/2019 Lecture 1 Intro to WCM

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Mukul Bhatia


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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

Lecture 1 Intro to WCM

Documents

Transcript of Lecture 1 Intro to WCM