MBA Project Report – Working Capital Management

Project Report – Working Capital Management

WORKING CAPITAL – Meaning of Working Capital

Capital required for a business can be classified into two main categories,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its business and to carry out its day-to-day transactions. Long terms funds are required to create production facilities through the purchase of fixed assets such as land, building, furniture, etc. Investments in these assets represent that part of firm’s capital which is blocked on the stable or fixed basis and is called fixed capital. Funds are also needed for short-term plans for the purchase of raw material, payment of wages and another day – to- day expenses, etc.

These funds are known as working capital. In simple words, working capital refers to that part of the firm’s assets which is required for financing short-term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assets keep revolving fast and are being converted continuously into cash and this cash flow out again in exchange for other current assets. Hence, it is also known as rotating or circulating capital or short-term capital.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital

2. Networking capital

The gross working capital is the capital invested in the total current assets of the enterprise’s existing assets are those

Assets which can convert into cash within a short period usually one accounting year.

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. A short investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

Networking capital is the excess of current assets over current liability,

NETWORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.

Networking capital may be positive or negative. When the current assets exceed, the current liabilities are more than the current assets. Current liabilities are those liabilities, which are expected to be paid in the ordinary course of business within a short period of usually one accounting year out of the current assets or the income business.

COMPONENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances, and deposits.

3. Bills payable.

4. Bank overdraft.

5. Provision for taxation, if it does not require amt. To app. Of Profit.

6. Sundry creditors.

7. Dividends payable.

The whole working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the ideas have their own merits.

The gross concept is sometimes referred to the idea of working capital for the following reasons:

1. It enables the enterprise to provide the right amount of working capital at the correct time.

2. Every management is more interested in total current assets with which it has to operate than the source from where it is made available.

3. It takes into consideration of the fact every development in the funds of the enterprise would increase its working capital.

4. This idea is also helpful in defining the rate of return on investments in working capital. The networking capital concept, however, is also essential for following reasons:

– It is a qualitative concept, which indicates the firm’s ability to meet its operating expenses and short-term liabilities.

– It indicates the margin of protection available to the short-term creditors.

– It is an indicator of the financial soundness of enterprises.

– It suggests the need of financing a part

of working capital requirement out of the permanent sources of funds.

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