Factors Working Capital

8/6/2019 Factors Working Capital

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Excess of current assets(CA) overcurrent liabilities(CL)

NWC=CA-CL Investment in working capitalfacilitates smooth day to day

operations of the business



The assets that are converted in to cash

or cash equivalents within a period of one year are called as current assets

Example:cash,bank,B/R,Debtors,

finished goods inventory,Work in progress(Semi finished goods),Raw materials,Prepaid expenses



Those payment obligations which ,whenarise are due for payment within one yearare called current liabilities

ExampleB/PCreditorsO/S Expenses

Advances received from customers



Sufficient Investment incurrent assts increaseliquidity of business

Insufficient investment incurrent assets may make itdifficult for an organization tomeet it’s payment obligation

As compare to fixed assets,current assets provide little or

low return or profit

Therefore balanceneed to be

maintained betweenliquidity and

Profitability

Liquidity Profitability



Factors affectingworking capital



Manufacturing business

Trading business

Service Industry

More WorkingCapital

Less thanmanufacturing

business

Very less WorkingCapital

Raw material need tobe converted in to

finished goods beforeany sales is possible

There is no processingso

No distinctionbetween raw material

and finished goods

Do not maintain any

inventory or stock



Scale of business

Small scalebusiness

Large scale

business

LessWorking

capital

MoreWorking

capital Becausequantum of debtors andinventory is

more in large

scale business



Business cycle

More Workingcapital

Less Working

capital

Depression

Boom

t h

e

the sales as well as

production are likely

to be higher

The sales as well

as production willbe low.



In peak season,higher level of

activity higher amount

of working capital isrequired.

lean season the level of activity

is lower

Lower Workingcapital

Peakseason

winters

Leanseason

Summer

s



Production cycle is the time span betweenthe receipt of raw material and theirconversion into finished goods.

Finishedgoods

Rawmaterial

Factory

10 March

15 March

Production Cycle in above case is 5 days



Duration and the length of production cycle,affects the amount of funds required for rawmaterials and expenses.

longerprocessing cycle

shorterprocessing cycle.

MoreWorkingcapital

LessWorkingcapital



Different firms allow different credit terms to their customers.

These depend upon the level of competition that a firm faces as well as

the credit worthiness of their clientele.

A liberal credit policy results

in higher amount of debtors,increasing the requirement of

working capital.

A strict credit policy results

in Lower amount of debtors,increasing the requirement

of working capital.



Firm may get credit from its suppliers.

A liberal credit policy

Less working capital.

A strict credit policy

More working capital.



Higher efficiency Less working Capital

Requirement

higher inventory

turnover ratio

firm managing

its raw materials

efficiently

Firm is able to

manage with

a smaller

balance of raw

materials

higher debtor

turnover ratio

reducing the

amount tied up

in receivable.

. resulting in

lower debtors



Raw materials are

available freely and

Continuously

lower stock levels are

maintained

Less Working Capital

InterruptedAvailability of

Raw material

higher stock

levels may be

required..

More Working

Capital



Supplier of raw

materialBusiness man

When canI get Rawmaterial

It will takeat least 10

days

Lead timeThe time lag between the placement of order and

actual receipt of the materials

Lead time is 10 days

It willsupply raw

materialtomorrow

Lead time is 1 day



Lead timeThe time lag between the placement of order and

actual receipt of the materials

Higher lead time

Higher stock levels

are maintained

More Working Capital

Lower lead time

lower stock levels are

maintained

Less Working Capital



Growth potentialbe higher

Higher production and

sales target

More Working

Capital



Higher level of competitiveness

Higher stocks of finished

goods to meet

urgent orders

from

customers.

More Working Capital

Competition may

force the firm to

extend liberal

credit terms



Rising prices

More workingcapital requirement

Higher amounts are required tomaintain a constant volume of

production and sales

Rawmaterialcost isrising

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Factors Working Capital