Page 157 - DMGT409Basic Financial Management

Basic Financial Management

Notes
Mr. Mysore is seriously considering the proposal for expansion by installing an automatic
plant costing ` 30 crores. The expansion will bring in an additional capacity of 100 lakh

units per annum. Mr. Mysore is not worried about the financing of this plant as the same
would be done for the retained earnings supplemented by finances from Mr. Mysore’s

personal sources. He expects that the company would be able to increase its sale from 50
lakh pieces after the expansion scheme.
Questions

1. As a manager, what steps would you take to effectively manage the working capital in
an infl ationary situation?
2. What additional informations are required while evaluating the additional working
capital requirement and expansion plans?
3. What steps must be taken to manage the working capital effectively under
inflationary situation? What would be the effect of expansion plan on working capital

requirement?

8.6 Summary

Working capital management is concerned with the problems that arise in attempting to
manage the current assets, current liabilities and their inter-relationship that exists between
them.
Working capital management goal is maintain a satisfactory level of working capital.

Gross Working Capital Concept focuses attention on the two aspects of current assets

management; they are optimum investment in current assets, and financing of current
assets.
Net working capital concept focuses attention on maintaining liquidity position, and to
decide upon the extent of long-term capital in financing current assets.

The working capital management is concerned with determination of relevant levels of
current assets and their efficient use as well as the choice of the fi nancing mix.

The time that elapses to convert raw materials into cash is known as operating cycle
Cash Conversion Cycle (CCC) is the time length between the payment for suppliers of raw
materials and the collection of cash for sales, CCC = OC – APP.

There are three financing policies vis-à-vis, to finance current assets.
8.7 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, fi nished goods, stores and spares, and book debts to facilitate
uninterrupted operation in a fi rm.
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.

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