Page 235 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 10: Working Capital Management

 Net working capital refers to the excess of total current assets over total current liabilities. Notes
 The important factors Affecting Working Capital are General Nature of Business, Production
Policy, Credit Policy, Inventory Policy, Abnormal Factors and Market Conditions.

 An optimum working capital ratio is dependent upon the business situation as such and
the nature and composition of various current assets.
 The methods used for in Forecasting Working Capital Needs are: Current assets holding
period, Ratio of sales and Ratio of fixed investment
 Two important issues in formulating the working capital policy are: What should be the
ratio of current assets to sales and what should be the ratio of short term financing to long-
term financing?
 The different short-term sources available for working capital are Bank credit, Transaction
credit, etc.
 long-term sources of working capital finance are Retained earnings, debentures/bonds of
different types, loans from financial institutions, venture capital financing etc.

 Banks have always been important providers of funds in Indian scenario.

10.9 Keywords

Gross Working Capital: The total current assets are termed as the gross working capital.
Net Working Capital: The excess of current assets over current liabilities represents net working
capital.
Permanent Working Capital: It is the minimum investment kept in the form of inventory of raw
materials, work in progress, finished goods, stores and spares, and book debts to facilitate
uninterrupted operation in a firm.
Temporary Working Capital: Any additional working capital apart from permanent working
capital required to support the changing production and sales activities is referred to as temporary
working capital.

Working Capital: It refers to short-term funds to meet operating expenses.
10.10 Review Questions

1. Why do we distinguish between permanent and variable working capital?
2. Why is the volume of sales the most important factor affecting working capital? Besides
sales, what other factors affect working capital? Why?
3. What two processes are accomplished in the management of working capital?
4. Why should the manager know the percentage of funds in current accounts?
5. What are the two kinds of fluctuations in working capital levels? How should they be
viewed?
6. What technique is used for identifying relationship between working capital levels and
other variables such as sales level? What does this technique do?
7. At least three sets of guidelines for the sources of working capital are available. How are
the three similar? How are they different?

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