SAGE UNIVERSITY

INDORE

Institute of Management Studies

Session: 2021-24
BBA 4th SEMESTER
Power Point Presentation

Group:
1. Abhishek Kumar Mahato (21MGT2AVI1001)
2. Atish Arakka (21MGT2AVI0015)
3. Himanshu Mohnani (21MGT2AVI0005)
4. Pritam Pathak (21MGT2AVI1008)
Section: A
Subject: Financial Management
Submitted to: Prof. Akshay Kataria
 INDEX

Title Page No.

• WORKING CAPITAL 1
• COMPONENTS OF WORKING 2
CAPITAL
• CONCEPT OF WORKING CAPITAL 4
• DETERMINANTS OF WORKING 6
CAPITAL
• IMPORTANCE OF WORKING 7
CAPITAL
• NEEDS OF WORKING CAPITAL 8
• KINDS OF WORKING CAPITAL 9
• ADVANTAGES OF ADEQUATE 10
WORKING CAPITAL
• DISADVANTAGES OF INADEQUATE 11
WORKING CAPITAL
• DISADVANTAGES OF REDUNDANT 12
WORKING CAPITAL
• DIVIDEND DECISION 13
 WORKING CAPITAL
MEANING
Every business needs funds for two purposes — for its
establishment and to carry out its day to day operations.
Long term funds are required to create production,
facilities through purchase of fixed assets such as plant,
machinery land, building, furniture etc. investment in these
assets- represent that part of firm's capital which is blocked
on a permanent or fixed basis and is called fixed- capital.
Funds are also needed for short term purposes for the
purchase of raw materials, payment of wages and other
day to day expenses etc. these funds are working capital
funds. Thus invested in current assets keep evolving- fat
and are being constantly converted into cash and this cash
flow again in exchange for other current assets. Hence it is
also known as "revolving .or circulating capital or short
term capital.”

DEFINITION
"Working a capital has ordinarily been defined as the
excess of current assets over current liabilities”

IDEAL DEFINITION
"A firm's working capital consists of its investments in
current assets which include short term assets such as cash
and bank balance, inventories, receivables & marketable
securities.
 COMPONENTS OF WORKING CAPITAL
COMPONENTS OF WORKING CAPITAL:

There are two components, of working capital as under

1. Current Assets- Current Assets are those assets which
in the ordinary -course of business can be converted
into cash within a short period of normally one
accounting year

2. Current liabilities- Current liabilities are those liabilities

which are intended to be paid in the ordinary course of
business within a short period of normally one
accounting year
 CONCEPT OF WORKING CAPITAL
THERE ARE TWO CONCEPTS OF WORKING CAPITAL:
A. Balance Sheet Concept
B. Operating Cycle/Circular Flow Concept

A. Balance Sheet Concept — There are two interpretations

of working capital under the balance
sheet concept:
1. Gross Working capital — In the broad sense, the
term working capital refers to the gross working
capital represents the amount of funds invested in
current assets.
2. Net working capital — In a narrow sense, the
term working capital refers to the net working
capital. Net working capital is the excess of current
assets over current liabilities. Networking capital =
Current. Assets Current Liabilities
B. Operating Cycle/Circular Flow Concept - Funds thus
invested in current Assets keep revolving fast and are being
constantly converted into cash and this cash flow out again
in exchange for other, current assets. Hence, it is also
known as revolving or circulating capital The cycle starts
with the purchase of raw material & other resources and
ends with the realization of cash from the sale of finished
goods.
 DETERMINANTS OF WORKING CAPITAL
FOLLOWIG ARE THE DETERMINANTS OF WORKING CAPITAL:
1. Industry and Seasonality: Different industries have varying
working capital requirements. Seasonal businesses may
experience fluctuations in working capital needs
2. Sales Growth: Rapidly growing companies typically require
higher levels of working capital.
3. Payment Terms: The terms offered to customers and
received from suppliers can impact working capital.
4. Inventory Management: Efficient inventory management
plays a crucial role in working capital.
5. Accounts Receivable and Payable Management: The
average collection period for accounts receivable and the
average payment period for accounts payable affect working
capital.
6. Operating Efficiency: Operational efficiency can impact
working capital requirements
7. Capital Expenditures: Capital expenditure decisions, such as
investing in new equipment or expanding production
facilities, can have an impact on working capital.
8. Financial Policies: The financial policies and strategies
adopted by the company can influence working capital.
 IMPORTANCE OF WORKING CAPITAL
IMPORTANCE OF WORKING CAPITAL:

1. Solvency of business — Adequate working capital

helps in maintaining solvency of the business by
providing uninterrupted flow of production.
2. Good will- Sufficient working capital enables a
business concern to make prompt payments and
hence helps creating and 'maintaining goodwill.
3. Easy loans- A concern having adequate working
capital, high solvency and 't standing can arrange
loans from banks other on easy and favorable
terms
4. Cash discount- Adequate working capita' also -
enables a concern to avail cash discounts on the
purchase and hence it reduce costs.
5. Regular Supply of Raw material- Sufficient
working capital ensures regular supply of raw
material and continuous production.
6. Regular payment of salaries, wages & day to day
commitments- By regular payments increases
efficiency, reduces wastages and costs and
enhances production and profits.
 NEEDS OF WORKING CAPITAL
METHODS OR TECHNIQUES OF 'FORECASTING OR
ESTIMATING WORKING CAPITAL:
 KINDS OF WORKING CAPITAL
WORKING CAPITAL CAN BE CLASSIFIESD IN TWO WAYS:

1. On the basis of concept

2. On the basis of time
 ADVANTAGES OF ADEQUATE WORKING
CAPITAL
FOLLOWING ARE THE ADVANTAGES OF
ADEQUATE WORKING CAPITAL:
1. Solvency of the business.
2. Goodwill.
3. Easy loans.
4. Cash discounts.
5. Regular supply of raw materials.
6. Regular payment of salaries, wages and other
day-to-day expenses.
7. Exploitation of favorable market conditions.
8. Ability to face crisis.
9. Quick and regular return on investments.
10. High morale
 DISADVANTAGES OF INADEQUATE
WORKING CAPITAL
FOLLOWING ARE THE DISADVANTAGES OF INADEQUATE
WORKING CAPITAL:
1. A concern which has inadequate working capital
cannot pay its short-term liabilities in time Thus; it will
lose its reputation and shall not be able to get good
credit facilities.
2. It cannot buy its requirements in bulk and cannot avail
of discount, etc.
3. It becomes difficult for the firm to exploit favorable
market conditions and undertake profitable projects
due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its
operations and it creates inefficiencies, increases costs
and reduces the profits of the business.
5. It becomes impossible to utilize efficiently the fixed
assets due to non-availability of liquid funds.
6. The rate of return on investments also falls with the
shortage of working capital.
 DISADVANTAGES OF REDUNDANT
WORKING CAPITAL
FOLLOWIG ARE THE DISADVANTAGES OF REDUNDANT OF
EXCESSIVE WORKING CAPITAL:
1. Excessive Working Capital means idle funds which
earn no profits business cannot earn a proper rate of
return on its investments.
2. When there is a redundant working capital, it may
lead to unnecessary inventories causing more chances
of theft, waste and losses
3. Excessive working capital implies excessive debtors
and defective higher incidence of bad debts.
4. It may result into overall inefficiency in the
organization.
5. When there is excessive working capital, relations1vith
banks and other financial institutions may not be
6. Due to low rate of return on investment in the
organization
7. The redundant working capital gives rise to
speculative transactions
 DIVIDEND DECISION
The dividend is that portion of the profit that is distributed
to the shareholders. The decision involved here is how
much of the profit earned by the company after paying the
taxes is to be distributed to the shareholders. It also
includes the part of the profit that should be retained in
the business. When the current income is re-invested, the
retained earnings increase the firm’s future earning
capacity. The dividend decision should be taken keeping in
view the overall objective of maximizing shareholders’
wealth. Following are the factors affecting dividend
decisions:
1. Company profitability
2. Cash flow
3. Retained earnings
4. Financial stability
5. Legal and regulatory requirements
6. Growth opportunities
7. Tax considerations
8. Shareholder expectations
9. Industry norms
10. Future outlook and uncertainty
11. Legal restrictions and agreements