Working Capital Management Flashcards
- the capital invested in total
current assets of the business concern. - simply called as the total current
assets of the concern.
Gross Working Capital
- is the specific concept which considers both current assets and current liability of the business.
- is the excess of current assets over the
current liability of the entity during a particular period.
Net Working Capital
TYPES OF WORKING CAPITAL
- It is the capital that the business concern must maintain as a certain amount of capital at minimum level at all times.
- will not change irrespective of time or volume of sales,
Permanent Working Capital / Fixed Working Capital
TYPES OF WORKING CAPITAL
It is the amount of capital which is required to meet the Seasonal demands and some special purposes.
Temporary Working Capital / Variable Working Capital
TYPES OF WORKING CAPITAL
The capital required to meet the seasonal needs of the business concern
CLASSIFICATIONS: Temporary Working Capital
Seasonal Working Capital
TYPES OF WORKING CAPITAL
The capital required to meet the special exigencies such as launching of extensive marketing campaigns for conducting research, ctc.
CLASSIFICATIONS: Temporary Working Capital
Special Working Capital
TYPES OF WORKING CAPITAL
Certain amount of Working Capital is in the field level
up to a certain stage and after that it will increase
depending upon the change of sales or time.
Semi Variable Working Capital
COMPUTATION (OR ESTIMATION) OF WORKING CAPITAL
Finance Manager first estimates the assets and required Working Capital for a particular period. he has to estimate how much current assets as inventories required and how much cash required to meet the short term obligations
Estimation of components of working capital method
COMPUTATION (OR ESTIMATION) OF WORKING CAPITAL
- Based on the past experience between Sales and Working Capital requirements
- A ratio can be determined for estimating the Working Capital requirement in future.
- It is the simple and tradition method to estimate the Working Capital requirements
- Under this method, first we have to find out the sales to Working Capital ratio and based on that We have to estimate Working Capital requirements.
- This method also expresses the relationship between the Sales and Working Capital.
Percent of sales method
COMPUTATION (OR ESTIMATION) OF WORKING CAPITAL
- Working Capital requirements depend upon the operating cycle of the business.
- The operating cycle begins with the acquisition of raw material and ends with the collection of receivables
Operating Cycle
WORKING CAPITAL MANAGEMENT POLICY
- refers to minimize risk by maintaining a higher level of Working Capital.
- This type of Working Capital Policy is suitable to meet the seasonal fluctuation of the manufacturing operation.
Conservative working capital policy
WORKING CAPITAL MANAGEMENT POLICY
- refers to the moderate level of WorkingI Capital maintainance according to moderate level of sales.
- It means one percent of change in Working Capital, that is Working Capital is equal to sales
Moderate working capital policy
WORKING CAPITAL MANAGEMENT POLICY
one of the high risk and profitability policies which maintains low level of Working Capital against the high level of sales in the business concern during a particular period.
Aggressive working capital policy
3 Basic Approaches for Determining an Appropriate WC Finance Mix
- Under this approach, the entire estimated finance in current assets should be financed from long-term sources and the short-term sources should be used only for emergency requirements
- This aproach is called as “Low Profit - Low Risk”
concept.
Conservative Approach / Restricted
3 Basic Approaches for Determining an Appropriate WC Finance Mix
- Under this approach, the business concern can adopt a financial plan which matches the expected life of assets with the expected life of the sources of funds raised to finance assets.
- Under this approach, long-term finance shall be used to fixed assets and permanent current assets and short-term financing to finance temporary or variable assets.
Hedging Approach / Moderate / Matching
3 Basic Approaches for Determining an Appropriate WC Finance Mix
- Under this approach, the entire estimated requirement of current assets should be financed from short-term sources and even a part of fixed assets financing be financed from short- term sources.
- This approach makes the finance mix more risky, lesscostly and more profitable.
Aggressive Approach / Relaxed
