CU-BCOM-SEM-IV-Working Capital Management

BACHELOR OF COMMERCE SEMESTER IV WORKING CAPITAL MANAGEMENT 1 CU IDOL SELF LEARNING MATERIAL (SLM)

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Manisha Malhotra Dr. Nitin Pathak University Institute of Computing University School of Business © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit - 1: Principles Of Working Capital Management ........................................................... 5 Unit - 2: Operating Cycle And Cash Cycle .......................................................................... 24 Unit - 3: Determination Of Working Capital Needs ............................................................. 44 Unit – 4: Financing Of Working Capital.............................................................................. 64 Unit – 5: Cash Credit Advances & Overdraft....................................................................... 87 Unit – 6: Trade Credit ....................................................................................................... 116 Unit – 7: Management Of Cash ......................................................................................... 138 Unit – 8: Forecasting Cash Flows ...................................................................................... 158 Unit – 9: Management Of Surplus Cash ............................................................................ 172 Unit – 10: Cash Management Models................................................................................ 185 Unit – 11: Management Of Inventory................................................................................ 199 Unit – 12: Management Of Receivables ............................................................................ 221 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-1:PRINCIPLES OF WORKING CAPITAL MANAGEMENT STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Definition 1.3 Principles of Working Capital Management 1.4 Concept of Working Capital 1.5 Importance of Working Capital 1.6Characteristics of Current Assets 1.7Optimum Levels of Current Assets 1.8Advantage of Maintaining Working Capital at Optimal Level 1.9 Summary 1.10 Keywords 1.11 Learning Activity 1.12 Unit End Questions 1.13 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to  Describe principles of working capital management.  Describe the concept and importance of working capital.  Describe the types of working capital.  Describecomponents or composition of working capital.  List characteristics of current assets. 1.1 INTRODUCTION Working capital management is a business apparatus that assists organizations with utilizing current resources, assisting organizations with keeping up with adequate income to meet transient objectives and commitments. By adequately overseeing working capital, 5 CU IDOL SELF LEARNING MATERIAL (SLM)

organizations can let loose money that would somehow be caught on their monetary records. Accordingly, they might have the option to diminish the requirement for outside acquiring, grow their organizations, reserve consolidations or acquisitions, or put resources into R&D. Working capital is fundamental for the soundness of each business, yet overseeing it adequately is something of a difficult exercise. Organizations need to have sufficient money accessible to cover both arranged and sudden expenses, while likewise utilizing the assets accessible. This is accomplished by the compelling management of records payable, money due, stock and money. The working cycle is the normal timeframe needed for a business to make an underlying cost of money to create merchandise, sell the products, and get cash from clients in return for the merchandise. This is helpful for assessing the measure of working capital that an organization will require to keep up with or develop its business. An organization with a very short working cycle requires less money to keep up with its activities, thus can in any case develop while selling at generally little edges. Alternately, a business might have fat edges yet still require extra financing to develop at even an unassuming speed, if its working cycle is abnormally long. On the off chance that an organization is an affiliate, the working cycle does exclude any an ideal opportunity for creation - it is just the date from the underlying money expense to the date of money receipt from the client. It has been normal seen that the lack of working capital prompts the disappointment of a business. The legitimate management of working capital might achieve the accomplishment of a business firm. The management of working capital incorporates the management of current resources and current liabilities. Various organizations for as long as couple of years have been thinking that it’s hard to tackle the expanding issues of embracing truly the management of working capital. A firm might exist without making benefits yet can't get by without liquidity. The capacity of working capital management in an association is comparable that of the heart in a human body. Additionally it is a significant capacity of monetary management. The monetary administrator should decide the acceptable degree of working capital assets and furthermore the ideal blend of current resources and current liabilities. He should guarantee that the fitting wellsprings of assets are utilized to fund working capital and ought to likewise see that transient commitment of the business are met well on schedule. 1.2 DEFINITION \"Working Capital is the overabundance of C.A. over current liabilities.\" As per the meaning of Mead, Baker and Malott, \"Working Capital means Current Assets\". As per the meaning of J.S.Mill, \"The amount of the current resource is the functioning capital of a business\". As per the meaning of Weston and Brigham, \"Working Capital alludes to a 6 CU IDOL SELF LEARNING MATERIAL (SLM)

company's interest in transient resources, cash, momentary protections, accounts receivables and inventories\". As per the meaning of Bonneville\"Any obtaining of assets which builds the current resources, increment working capital additionally for they are indeed the very same\". As indicated by the meaning of Shubin, \"Working Capital is the measure of assets important to take care of the expense of working the ventures\". As per the meaning of Genestenberg, \"Circling capital means current resources of an organization that are shifted in the standard direction of business starting with one structure then onto the next, for instance, from money to inventories, inventories to receivables, receivables to cash\". 1.3 PRINCIPLES OF WORKING CAPITAL MANAGEMENT Working capital management is worried about the issue that emerges in endeavouring to deal with the current resources, the current liabilities and the between relationship that exist between them. The objective of working capital management is to deal with an association's present resources and current liabilities so that an acceptable degree of working capital is kept up with. The monetary supervisor should remember the accompanying standards of working capital management:  Principle of risk variation This standard depends with the understanding that the pace of profit from venture is connected with level of hazard in the business. Hazard here alludes to the failure of firm to keep up with adequate current resources for pay its commitments. In the event that functioning capital is differed comparative with deals, the measure of hazard that a firm accepts that is additionally shifted and the chance for gain or misfortune is expanded. At the end of the day, there is an unmistakable connection between the level of hazard and the pace of return. As a firm expects more danger, the chance for gain or misfortune increments. As the degree of working capital comparative with deals diminishes, the level of hazard increments. At the point when the level of hazard expands, the chance for gain and misfortune additionally increments. Along these lines, if the degree of working capital goes up, measure of hazard goes down, and the other way around, the chance for acquire resembles savvy unfavourably influenced. The various working capital policies indicating the relationship between current assets and sales are depicted as shown in figure 1.1. 7 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 1.1: Relationship between current assets and sales The effect of working capital policies on the profitability of a firm is illustrated in table 1.1. Table 1.1: Effect of working capital policies on the profitability Risk and Return (Costs of Liquidity and Illiquidity) Trade off We have examined before that there is a distinct opposite connection between the level of hazard and productivity. Hazard here alludes to the degree of current resources or the expense of liquidity. Higher the interest in current resources, higher is the expense and lower the benefit, and the other way around. In this manner,\" a firm needs to arrive at an equilibrium (compromise) between the expense of liquidity and cost of illiquidity. Figure 1.2: Expense of liquidity and cost of illiquidity. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

 Principle of cost of capital Each wellspring of working capital has distinctive expense of capital. The level of hazard likewise contrasts starting with one source then onto the next. The kind of capital used to back working capital straightforwardly influences the measure of hazard that a firm accepts just as the chance for gain or misfortune and cost of capital. A firm should bring capital up in such a way that an equilibrium is kept up with among hazard and benefit.  Principle of equity position This standard is worried about arranging the absolute interest in current resources. As per this guideline, the measure of working capital put resources into every part ought to be satisfactorily legitimized by a company's value position. Each rupee put resources into the current resources ought to add to the total assets of the firm. The degree of current resources might be estimated with the assistance of two proportions. i. Current resources as a level of all out resources and ii. Current resources as a level of all out deals. While choosing about the organization of current resources, the monetary chief might think about the applicable mechanical midpoints.  Principle of maturity of payment This standard is worried about arranging the wellsprings of money for working capital. As per this standard, a firm should bend over backward to relate developments of instalment to its progression of inside created reserves. Development example of different current commitments is a significant factor in hazard presumptions and hazard appraisals. By and large, more limited the development timetable of current liabilities corresponding to expected money inflows, the more noteworthy the powerlessness to meet its commitments on schedule. To summarize, working capital management ought to be considered as a vital piece of in general corporate management. In the expressions of Louis Brand, \"We need to realize when to search for working capital assets, how to utilize them and how to quantify, plan and control them\". To accomplish the previously mentioned destinations of working capital management, the monetary supervisor needs to play out the accompanying fundamental capacities.  Estimating the functioning capital necessities.  Financing of working capital requirements.  Analysis and control of working capital. 9 CU IDOL SELF LEARNING MATERIAL (SLM)

1.4 CONCEPT OF WORKING CAPITAL The supports put resources into current resources are named as working capital. It is the asset that is expected to run the everyday activities. It courses in the systematic the blood flows in a living body. For the most part, working capital alludes to the current resources of an organization that are changed starting with one structure then onto the next in the conventional course of business, for example from money to stock, stock to work in progress (WIP), WIP to completed products, completed merchandise to receivables and from receivables to cash. There are two concepts in respect of working capital. i. Gross working capital and ii. Networking capital. Gross Working Capital The idea of gross working capital alludes to the complete worth of current resources. At the end of the day, net working capital is the aggregate sum accessible for financing of current resources. In any case, it doesn't uncover the genuine monetary situation of a venture. How? An acquiring will build current resources and, subsequently, will expand net working capital yet, simultaneously, it will build current liabilities moreover. Therefore, the net working capital will continue as before. This idea is normally upheld by the business local area as it raises their resources (current) and is in their benefit to acquire the assets from outer sources like banks and the monetary establishments. In this sense, the functioning capital is a monetary idea. According to this idea, Gross Working Capital = Total Current Assets Net Working Capital The net working capital is a bookkeeping idea which addresses the overabundance of current resources over current liabilities. Current resources comprise of things like money, bank balance, stock, account holders, charges receivables, and so forth and current liabilities incorporate things, for example, charges payables, leasers, and so on Abundance of current resources over current liabilities, consequently, demonstrates the fluid situation of a venture. The proportion of 2:1 between current resources and current liabilities is considered as ideal or sound. What this proportion infers is that the firm/undertaking have adequate liquidity to meet working costs and current liabilities. Notice that net working capital won't increment with each expansion in net working capital. Critically, net working capital will increment just when there is expansion in current resources without relating expansion in current liabilities. Hence, as a basic equation, Net Working Capital = Current Assets-Current Liabilities 10 CU IDOL SELF LEARNING MATERIAL (SLM)

Subsequent to deducting current liabilities from current resources what is left over is net working capital. This process functions much like the following. i. Current assets ii. Current liabilities iii. Working capital Working capital ordinarily alludes to net working capital. The banks and monetary foundations do likewise receive the net working capital idea as it surveys the necessity of the borrower. Indeed, if in a specific case, the current resources are not exactly the current liabilities, then, at that point the contrast between the two will be called 'Working Capital Deficit.' What this shortfall in working capital shows is that the assets from current sources, i.e., current liabilities have been redirected for getting fixed resources. In such case, the undertaking can't make due for a significant stretch since current liabilities are to be paid out of the acknowledgment made through current resources which are inadequate. Allow us to comprehend the two ideas of Gross Working Capital and Net Working Capital with the assistance of a model too. Example: The following is the balance sheet of Bhilwara Textiles Private Ltd. as at 31st December, 2011 as shown below. Table 1.2: Balance sheet 11 Now, the Gross working capital will be: CU IDOL SELF LEARNING MATERIAL (SLM)

Accordingly, net working capital will be: The ratio of current assets to current liabilities will be Rs. 60,000: Rs. 30,000, or say 2:1. 1.5 IMPORTANCE OF WORKING CAPITAL The expression \"Working Capital\" signifies those fluid supports whether in type of money, stores in bank or in whichever way which is kept by a venture to deal with the everyday running costs of the business, it can just be said that the asset continued overseeing day by day activities is known as Working Capital. To ascertain the functioning capital or fluid assets of business, underneath referenced equation can be utilized. Working Capital = Current Assets (Net of Depreciation) – Current Liabilities It can't be said that the prerequisites of assets or working capital ought to be judged precisely as nobody can pass judgment on the equivalent precisely. A close by estimation is to be ready based on future occasions and according to previous outcomes and costs brought about. The necessities could be an overseen by picking the elective alternatives as accessible for example for the stock technique could be changed to Just-In-Time (JIT) strategy from the holding of some fixed degree of inventories, change of length of credit period given to exchange receivable or term of exchange payables instalments, and so on will likewise help in the management of assets. At times the ventures may likewise take working capital credits from 12 CU IDOL SELF LEARNING MATERIAL (SLM)

the monetary organizations for the management of assets and pay for the cost’s ideal. Else, one might say that the appropriate management of working capital is considerably more significant for the new businesses or for the little undertakings for which the advances from monetary foundations couldn't be handily endorsed. Top 11 importance points of working capital are listed below. 1. Liquidity management: By appropriately investigating the costs payable or to be brought about soon the monetary group of an endeavour would effectively get ready for their assets as needs be. 2. Out of cash: In-proper arranged plans of everyday costs might bring about big business liquidity issues. They need to defer or to organize assets from some different sources which give an awful impression of an undertaking at the gathering. 3. Helps in decision making: By accurately examining the prerequisite of assets for everyday activities the money group can fittingly deal with the assets and can choose appropriately for accessible assets and for the accessibility of assets too. 4. Addition in the value of business: As the management as needs be deals with every one of the everyday required assets that assist the approved staff with ideal paying for all the remarkable makes a worth expansion or altruism upgrade on the lookout. 5. Helps in the situation of cash crunches: By appropriately dealing with the fluid supports one can help the association not to influence the circumstance of emergencies or money crunches and pay for its everyday costs on an ideal premise. 6. Perfect investments plans: Correctly dealing with the assets or working capital one can pick or plan for their speculations likewise and contribute the assets to expand the return according to their accessibility. 7. Helps in earning short term profits: Sometimes it is seen that the ventures keep a hefty measure of assets as working capital which is far well beyond the necessary degree of working capital. So by effectively setting up the necessary working capital those additional assets could be contributed for a limited capacity to focus time and could make esteem in the benefits of the endeavour. 8. Strengthening the work culture of entity: Timely instalment of the multitude of everyday costs principally cantered around the compensation of the representatives establishes a decent climate and a kind of inspiration among representatives to work more diligently and reinforcing the great work space. 9. Improves creditworthiness of entity: When the endeavour has sufficiently arranged their functioning capital prerequisites, they will clearly pay the instalments to sellers and different loan bosses ideal which further develops their reliability which could assist them with getting the assets as and when required without any problem. 13 CU IDOL SELF LEARNING MATERIAL (SLM)

10. Act as guarantor to other enterprises: When an undertaking has made a decent picture in the market then the business could likewise help some different ventures and in favour completes business benefits and agreements without any problem. 11. Good reputation of entity: Easy approach to make a decent standing in the market which thus helps the association or element in effectively getting contracts on account of a decent picture and satisfying their responsibilities on schedule. These days, everybody needs to bargain and work with such gatherings whose market notoriety and reliability is acceptable because of an increment in extortion and controls. To close the functioning capital in any business assumes a vital and essential part in accomplishing the authoritative objective and improving the productivity of the business. The computation of working capital might be done on month to month, quarterly or on yearly premise. For the most part, it is liked to compute the functioning capital necessity and accessibility each quarter so the further choices could be taken likewise according to the accessibility and prerequisites and the extra assets ought to be put resources into such a way with the goal that the profits from the equivalent could be augmented. 1.6 CHARACTERISTICS OF CURRENT ASSETS Current assets are a classification on the resource side of the asset report which significantly contains money and bank balance, inventories, account receivables/debt holders. Key highlights of current resources are their fleeting presence, quick transformation into different assets , choices are repeating and fast and ultimately, they are interlinked to one another. Essentially, current resource the executives is nearly comparable to working capital management. The term current assets is framed with two words – current and assets . Current means circling and assets implies assets. Current assets are those resources or assets of a business which continue to flow. The common time span for dissemination is the monetary period which is ordinarily one year. In explicit business language, current resources are those assets which are changed into cash inside one year. These resources incorporate money, attractive protections, account receivables/borrowers, a wide range of stock/stock and whatever other resource which can be changed over into cash inside one year. Significant Current Assets There are three principle parts of current resources which require the impressive consideration of the money director. Without successful management of these segments, the supervisor can't accomplish powerful working capital management. These are i. Cash or bank balances Money and bank balance are the equilibrium which an organization holds for his earnest necessities. This equilibrium would continue to vacillate and a specific equilibrium would not keep going for over possibly 14 days. The equilibrium will 14 CU IDOL SELF LEARNING MATERIAL (SLM)

be high when the assortment is finished by the client and it will again diminish when instalment is made for buying of crude materials. ii. Inventories Inventories are framing a wide range of inventories whether that is crude material, work in progress stock or completed products. The time span of their change is additionally ordinarily between 2 to 60 days and lay relying upon the business an organization works in. iii. Account receivables/ debtors These are the client records to whom merchandise are sold at credit. This cash is flowed regularly inside 30 to 60 days. This relies upon a ton of the credit terms and the business norms of such credit terms. Highlights of Current Assets 1. Short-lived We just saw in the meanings of the multitude of significant current resources that they are extremely fleeting particularly when we contrast them and their partner for example Fixed Assets. 2. Fast conversion cycle of current asset These resources are immediately changed over into other current resource structures in a cyclic way. The current resource cycle functions as follows: Money changed over into crude material, which again converts to completed merchandise, further that believers into account receivables lastly account receivables are changed over once more into cash. 3. Decisions are recurring and require quickness Since, the current resources are extremely fleeting and are oftentimes changed over into other current resources, the choices identifying with such resources additionally repeating in nature and requires fast dynamic. 4. Inter-connected A chief can't consider one segment separately and take a choice on it. In case that is done, that won't work for generally working capital management. These segments are interlinked to one another as found in the current resource cycle. For instance, if a business needs cash, it should offer a rebate to indebted individuals for their quicker acknowledgment though if a business has a lot of completed merchandise stockit will attempt to offer it to borrowers with liberal credit terms. Is working capital management on par with current asset management? 15 CU IDOL SELF LEARNING MATERIAL (SLM)

As a general rule, working capital management would include viable management of current resources just as current liabilities. In any case, in the event that we think from an alternate point, we might discover the assertion right. It would not be too off-base to even think about accepting working capital management as great as current resource the board because of two reasons. One is that the interest in current resources is a considerable piece of the absolute resources of the organization. Besides, the current liabilities are made simply because the firm needs to make current resources. 1.7 OPTIMUM LEVELS OF CURRENT ASSETS In deciding the suitable sum, or level, of current resources, the executives should consider the compromise among profitability and hazard. To represent this compromise, assume that, with existing fixed resources, a firm can deliver up to 100,000 units of yield a year. Production is persistent all through the period viable, in which there is a specific degree of yield. For each degree of yield, the firm can have various degrees of current resources. How about we expect, at first, three distinctive current resource strategy options. We see from the figure that the more noteworthy the yield, the more prominent the requirement for interest in current resources for help that yield (and deals). Nonetheless, the relationship isn't straight; current resources increment at a diminishing rate with yield. This relationship depends on the thought that it takes a more prominent corresponding interest in current resources when a couple of units of yield are delivered than it does later on, when the firm can utilize its present resources all the more efficiently. In the event that we compare liquidity with \"conservativeness,\" Policyis the most traditionalist of the three other options. At all degrees of yield, Policy An accommodates more current resources than some other approach. The more prominent the degree of current resources, the more noteworthy the liquidity of the firm, any remaining things equivalent. Strategy An is viewed as setting up the firm for practically any possible current resource need; it is the financial comparable to wearing a belt and suspenders. Strategy C is least fluid and can be named \"forceful.\" This \"lean and signify\" strategy calls for low degrees of money and attractive protections, receivables, and inventories. We should remember that for each yield level there is a base degree of current resources that the firm needs to get by. There is a cut-off to how \"lean and signify\" a firm can get. We would now be able to sum up the rankings of the elective working capital arrangements in regard to liquidity as follows: HIGH LOW Liquidity Policy A Policy B Policy C Though policy A clearly provides the highest liquidity, how do the three alternative policies rank when we shift our attention to expected profitability? To answer this question, we need to recast the familiar return on investment (ROI) equation as follows: 16 CU IDOL SELF LEARNING MATERIAL (SLM)

From the condition above we can see that diminishing the measures of current resources held (for instance, a development from Policy A toward Policy C) will build our expected profitability. On the off chance that we can lessen the firm's interest in current resources while as yet having the option to appropriately uphold yield and deals, ROI will increment. Lower levels of money, receivables, and stock would diminish the denominator in the condition; and net profits, our numerator, would remain generally something very similar or maybe even increment. Strategy C, then, at that point, gives the most elevated profitability potential as estimated by ROI. Nonetheless, a development from Policy A toward Policy C outcomes in different impacts other than expanded profitability. Diminishing money lessens the firm's capacity to meet financial commitments really. Diminishing receivables, by embracing stricter credit terms and a harder authorization strategy, may bring about some lost clients and deals. Diminishing stock may likewise bring about lost deals because of items being unavailable. Subsequently more forceful working capital approaches lead to expanded danger. Unmistakably, Policy C is the most hazardous working capital approach. It is likewise an approach that underlines profitability over liquidity. So, we would now be able to make the accompanying speculations: Curiously, our conversation of working capital approaches has quite recently represented the two most. Fundamental standards in finance are listed below. 1. Profitability shifts conversely with liquidity. Notice that for our three elective working capital arrangements, the liquidity rankings are the specific inverse of those for profitability. Expanded liquidity by and large comes to the detriment of decreased profitability. 2. Profitability moves along with hazard (i.e., there is a compromise among hazard and return). Looking for higher profitability, we should hope to face more noteworthy challenges. Notice how the profitability and hazard rankings for our elective working capital strategies are indistinguishable. You may say that danger and return walk connected at the hip. Eventually, the ideal level of every current resource (cash, attractive protections, receivables, and stock) will be dictated by the board's disposition to the compromise among profitability and hazard. For the time being, we keep on limiting ourselves to some expansive sweeping 17 CU IDOL SELF LEARNING MATERIAL (SLM)

statements. In resulting sections, we will manage the ideal levels of these resources, thinking about both profitability and hazard. 1.8 ADVANTAGE OF MAINTAINING WORKING CAPITAL AT OPTIMAL LEVEL Some of the major advantages of keeping working capital at optimal level are as under.  Solvency of the organization: Satisfactory working capital aides in staying with dissolvability of the by providing persistent progression of creation.  Reputation: Adequate working capital empowers an organization to dispense convenient instalments and accordingly, helps in making and keeping notoriety.  Unproblematic loans: An organization having ideal degree of working capital, high dissolvability and brilliant credit position can get advances from banks and different sources on agreeable and productive terms.  Cash limits: Adequate working capital moreover empowers an organization to get advantage of money limits on the acquirement's and in this manner, it diminishes costs.  Uninterrupted conveyance of crude material: Optimum degree of working capital guarantees continuous receipt of crude material for the relentless creation.  Uninterrupted dispensing of compensations compensation and other everyday commitments: An organization which has adequate working capital will actually want to make common payment of pay rates, compensation and other everyday commitments which raise the spirits of its representatives, increment their viability, decline wastages, save expenses and increment benefits.  Utilization of positive economic situations: Simply an organization which has ideal degree of working capital can use positive market circumstance, for example, securing its necessities of material in mass when the costs are low and by holding its stock at special costs.  Capability to confront emergency: Sufficient working capital makes an organization ready to confront business emergency in crises, for example, misery for the explanation that during such periods, by and large, there is a lot of weight on working capital.  Rapid and interfered with profit from venture: Every saver wants a quick and intruded on return on his reserve funds. Sufficiency of working capital makes an organization ready to dispense profits quickly to its financial backers as there perhaps won't be a lot of power to furrow back income. This expands the fearlessness of its financial backers and makes a urging business sector to procure further assets. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

 Sky-scratching spirit: Sufficiency of working capital makes an air of security, certainty, high resolve and makes adequacy in an organization, in general. 1.9 SUMMARY  The appropriate management of working capital might achieve the accomplishment of a business firm. The management of working capital incorporates the management of current resources and current liabilities.  Working capital management is worried about the issue that emerges in endeavouring to deal with the current resources, the current liabilities and the between relationship that exist between them. The objective of working capital management is to deal with a company's present resources and current liabilities so that a good degree of working capital is kept up with.  Principle of Risk Variation depends with the understanding that the pace of profit from venture is connected with level of hazard in the business.  The supports put resources into current resources are named as working capital. It is the asset that is expected to run the everyday tasks. It circles in the systematic the blood courses in a living body. By and large, working capital alludes to the current resources of an organization that are changed starting with one structure then onto the next in the normal course of business.  There are two ideas in regard of working capital. i. Gross working capital and ii. Networking capital.  To ascertain the functioning capital or fluid assets of business, beneath referenced recipe can be utilized. Working Capital = Current Assets (Net of Depreciation) – Current Liabilities  Current resources are a classification on the resource side of the asset report which significantly contains money and bank balance, inventories, account receivables/debt holders.  The term current resource is shaped with two words – current and resource. Current means circling and resource implies assets. Current resources are those resources or assets of a business which continue to flow. The commonplace time period for course is the monetary period which is ordinarily one year.  In explicit business language, current resources are those resources which are changed into cash inside one year. These resources incorporate money, attractive protections, 19 CU IDOL SELF LEARNING MATERIAL (SLM)

account receivables/indebted individuals, a wide range of stock/stock and whatever other resource which can be changed over into cash inside one year.  Adequate working capital empowers an organization to dispense convenient instalments and in this manner, helps in making and keeping notoriety.  Rapid and interfered with profit from venture: Every saver wants a quick and intruded on return on his investment funds. Ampleness of working capital makes an organization ready to dispense profits quickly to its financial backers as there potentially won't be a lot of power to furrow back income. This expands the fearlessness of its financial backers and makes a urging business sector to get further assets. 1.10 KEYWORDS  Asset: A thing of property, like land, capital, cash, an offer in possession, or a case on others for future instalment, for example, a bond or a bank store.  Liability: A sum that is owed, rather than a resource. A responsibility might come about because of acquiring, from commitment to pay for an item or management got, and so forth.  Optimum: The best. Typically alludes to a most favoured decision by shoppers subject to a spending imperative, a benefit boosting decision by firms or industry subject to a mechanical requirement, or in everyday balance, a total distribution of variables and merchandise that in some sense expands government assistance.  Equity: Share in the responsibility for organization; all the more normally called a stock, as in the securities exchange.  Liquidity: The capacity of a resource for be changed over into cash without a huge value concession. The ability to transform resources into cash, or the measure of resources in a portfolio that have that limit. Money itself (i.e., cash) is the most fluid resource. The capacity to promptly trade a resource for merchandise or different resources at a known cost, in this way working with financial exchanges. It is generally estimated by the contrast between the rates at which the vendors can purchase and sell that resource. The straightforwardness with which a resource can be traded for another resource of equivalent worth. 1.11 LEARNING ACTIVITY 1. Conduct a seminar on principles of working capital. ________________________________________________________________________ ________________________________________________________________________ 20 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Discuss the concept of working capital. ___________________________________________________________________________ _____________________________________________________________________ 1.12 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is working capital management? 2. Define working capital management? 3. List the characteristics of current assets? 4. Describe the formula of working capital? 5. What are assets and liabilities? Long Questions 1. Explain principles ofworking capital management? 2. List and explain importance of working capital? 3. Describe the concept of working capital? 4. List and explain characteristics of current assets? 5. What are the advantages of maintaining working capital at optimum level? B. Multiple Choice Questions 1. Which of the following statements is correct? a. Working capital is also known as circulating capital. b. Large organization need larger working capital. c. Shortage of working capital reduces return on investment. d. All of these 2. What is the major current assets? a. Cash and marketable securities b. Accounts receivable (debtors) c. Inventory (stock) d. All of these 3. Which are the secondconcepts of working capital aftergross? 21 a. Zero CU IDOL SELF LEARNING MATERIAL (SLM)

b. Net c. Cumulative d. Distinctive 4. What working capital refers to the firm’s investment in current assets? a. Zero b. Net c. Gross d. Distinctive 5. How do Investment in current assets should be? a. Just adequate b. More c. Less d. Maximum Answers 1-d, 2-d, 3-b. 4-c, 5-a. 1.13 REFERENCES References  James, C, Van Horne. Fundamentals of Financial Management. 11th Edition. New Delhi. Prentice Hall of India Private Ltd.  Prasanna, Chandra. Financial Management: Theory and Practice. Sixth edition. New Delhi. Tata McGraw-Hill Publishing Company Limited.  Khan&Jain. Financial Management: Text and Problems, Third edition. New Delhi. Tata McGraw-Hill Publishing Company Limited. Textbooks  Maness, Terry, S&John, T, Zietlow. (2005). Short-Term Financial Management, 3rd edition. Cincinnati, OH: South-Western.  Gamble, Richard, H. (2002). “The Long and Short of Debt.” Business Finance.  Shapiro, Alan C. (2008). Foundations of Multinational Financial Management. Sixth ed. Hoboken, NJ: John Wiley & Sons. Website 22 CU IDOL SELF LEARNING MATERIAL (SLM)

 https://www.yourarticlelibrary.com/financial-management/working-capital  https://www.researchgate.net/publication/216665316_Working_Capital_Management  https://www.investopedia.com 23 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 2:OPERATING CYCLE AND CASH CYCLE STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2Operating cycle 2.3 Cash cycle 2.4Working capital leverage 2.5 Summary 2.6Keywords 2.7 Learning Activity 2.8 Unit End Questions 2.9 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the Operating cycle.  Describe the cash cycle.  Explain the working capital leverage. 2.1 INTRODUCTION Working capital is the existence blood of any business, without which the fixed resources are defective. Working capital circles in the business, and the current resources change from one structure to the next. Money is utilized for obtainment of crude materials and stores things and for instalment of working costs, then, at that point changed over into work-in-progress, then, at that point to completed merchandise. At the point when the completed products are sold using a loan terms receivables adjusts will be shaped. At the point when the receivables are gathered, it is again changed over into cash. The requirement for working capital emerges on account of delay between creation of products and their genuine acknowledgment after deals. This delay is called in fact called as 'working cycle' or 'working capital cycle'. The working cycle is the normal timeframe needed for a business to make an underlying cost of money to create products, sell the merchandise, and get cash from clients in return for the merchandise. This is valuable for assessing the measure of working capital that an organization will require to keep up with or develop its 24 CU IDOL SELF LEARNING MATERIAL (SLM)

business. An organization with an amazingly short working cycle requires less money to keep up with its activities, thus can in any case develop while selling at somewhat little edges. Then again, a business might have fat edges yet still require extra financing to develop at even an unassuming speed, if its working cycle is strangely long. In the event that an organization is an affiliate, the working cycle does exclude any an ideal opportunity for creation - it is basically the date from the underlying money expense to the date of money receipt from the client. Working capital implies cash needed for everyday tasks of an association. No business can run without the arrangement of satisfactory workingcapital. There are two ideas of working capital. Net working capital alludes to the company's interest in current resources. Net working capital means the differencebetween current resources and current liabilities, and hence, addresses thatposition of current resources which the firm needs to fund either from long-termfunds or bank borrowings. The two ideas have equivalent importance from themanagement's view point, so they are not selective. The gross working capital idea centres consideration around enhancement of interest in current resources, and successful and affordable financing of current resources. The net working capital idea is subjective, demonstrates the liquidityposition of the firm and recommends the degree to which working capital necessities perhaps financed by lasting wellsprings of assets. 2.2 OPERATING CYCLE Each business association needs sufficient working capital in light of the fact that the transformation of money into completed merchandise to indebted individuals and back to cash isn't quick. It requires some investment. For instance, in an assembling firm, cash is utilized to buy crude materials. They are not devoured right away. They stay some time in stores to guarantee smooth creation and to secure the firm against the danger of non- accessibility of crude materials in future. Then, at that point they are given from stores to creation place for change. This transformation additionally for the most part takes some time. At the point when certain costs, for example, wages and overheads are brought about on it, it gets itself changed over into semi-completed merchandise or work-in-progress and, at long last, into completed products. These completed merchandise should be put away for quite a while previously deal. Then, completed merchandise are offered to clients which might appear as money or receivables/debt holders. Receivable/account holders, when acknowledged, again appear as money and the cycle begins once more. This can be explained with the help of the following diagram. 25 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 2.1 Working capital cycle The proceeding with stream from money to providers, to stock, to records of sales and back into cash is known as the functioning capital cycle or working cycle. All in all, the term working cycle alludes to the time span which starts with the procurement of crude materials of a firm and finishes with the last acknowledgment of money from borrowers. The measure of working capital relies on the length of working capital cycle. Longer the functioning cycle, higher is the need of working cash-flow to be kept up with. This is on the grounds that the asset will then, at that point stay restricted in different things of current resources for a more extended period. The length of working cycle fluctuates from one industry to another and from one business to another. A marketing concern will have a more limited working cycle as it bargains in completed items. Then again, in an assistance undertaking, working cycle is most limited and include transformation of money into account holders and borrowers into cash. Consequently, if crude materials stay coming up for, say, 30 days, the change or preparing period is 45 days, completed merchandise stay coming up for 30 days and obligations assortment period is 40 days then the absolute of this period (i.e., 30 + 45 + 30 + 40 or 145 days) is alluded to as Gross Operating Cycle. Business endeavours get credit in the acquisition of crude materials from providers. This instalment deferral period lessens the length of working capital. The net-working cycle period is determined by deducting from net activity cycle the instalment deferral period or time of credit allowed by providers of crude materials. In the event that time of credit given by provider is 45 days, Net Operating Cycle is 100 days (i.e., 145 days – 45 days). Comparable ends can likewise be drawn for different components of cost i.e., for direct wages and overheads. On account of direct wages and overheads, the working cycle begins with the work-in-progress or handling time as there will be no crude materials stockpiling period. 26 CU IDOL SELF LEARNING MATERIAL (SLM)

Measurement of Operating Cycle Rigorously talking, the volume of working capital relies on the length of working capital cycle. In this way, measure working capital cycle for the board of working capital. The fiscal reports i.e., Profit and Loss Account and Balance Sheet, can direct us to gauge working capital cycle. The means engaged with the assurance of the working cycle are displayed underneath. Particulars Days 1. Raw materials holding period *** 2. Work-in-progress period *** 3. Finished goods holding period *** 4. Debtors’ collection period *** Gross Operating Cycle *** 5. Less: Creditor’s payment period (***) *** Net Operating Cycle The procedure can be summarized as below. 1. Raw material storage period: It represents the average period during which raw materials are kept in stores. 2. Processing period Once materials are issued to production, it again involves time gap between issue of materials and production of finished product. This time gap is called processing period. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Finished goods storage period Manufacturing enterprises produce the output in the expectation of future demand. Till the demand for finished product materializes, the product would remain in the store. This period is termed as finished goods storage period. 4. Credit period allowed to debtors The business enterprises due to competitive and other reasons—extend credit facilities to customers. The time gap between sale and realisation of cash is known as credit or collective period from debtors. 28 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Credit period received from suppliers The business enterprises receive credit in the purchase of raw materials from suppliers. It refers to the average time taken for payment to suppliers from the date of purchase. Illustration 1 200 The following information is available for Swagat Ltd. 300 Average stock of raw materials and stores 180 Average WIP inventory 300 Average finished goods inventory 180 Average accounts receivable 10 Average accounts payable 12.5 Average raw materials and stores purchase on credit and consumed per day 18 Average WIP value of raw materials committed per day 20 Average cost of goods sold per day Average sales per day 29 You are required to calculate. i. Duration of raw material stage ii. Duration of WIP stage iii. Duration of finished goods stage iv. Duration of accounts receivable stage CU IDOL SELF LEARNING MATERIAL (SLM)

v. Duration of accounts payable stage, and vi. Duration of operating cycle Solution Reasons for a Longer Operating Cycle: Working capital requirements rely upon the working cycle. It begins with instalment for procurement of crude materials and finishes with the assortment of receivables from borrowers. The span of the functioning capital cycle changes as indicated by the idea of business. The explanations behind longer working cycle are given underneath. 1. Firstly, the functioning capital cycle might be longer if the accessibility of crude materials is difficult. Subsequently, the association should hold enormous measure of crude materials in stores. 2. Secondly the handling time frame might be longer. The idea of the item is with the end goal that the item goes through different divisions to get wrapped up. 3. Thirdly the item might be sluggish. All things considered the time taken to drain the completed merchandise stock will be longer. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Finally, the credit strategy and the shortcoming of the association under water assortment likewise increment the length of working cycle. 2.3 CASH CYCLE The cash conversion cycle (CCC) – otherwise called the money cycle – is a functioning capital metric which communicates what amount of time it requires for an organization to change over cash into stock, and afterward back into cash by means of the business interaction. The more limited an organization's CCC, the less time an organization has cash restricted in its records receivable and stock. The CCC is a significant measurement for organizations that purchase and oversee stock as it means that functional productivity just as monetary wellbeing. All things considered, it ought not be taken a gander at in disengagement, however related to other monetary measurements like profit from value. Note that CCC is anything but a critical thought for all organizations, as only one out of every odd association will hold actual stock. Calculating the Cash Conversion Cycle The money transformation cycle exemplifies three key phases of an organization's business action.  Selling current stock  Collecting cash from current deals  Paying merchants for labour and products bought As such, the CCC is calculated using three other working capital metrics: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO). DIO and DSO are short-term assets, while DPO is classed as a liability. Cash Conversion Cycle Formula The cash conversion cycle formula is as follows: CCC = DIO + DSO – DPO Where: DIO = Days Inventory Outstanding (average inventory/cost of goods sold x number of days) DSO = Days Sales Outstanding (accounts receivable x number of days/total credit sales) DPO = Days Payable Outstanding (accounts payable x number of days/cost of goods sold) So for example, if a company has DIO of 70 days, DSO of 30 days and DPO of 45 days, its cash conversion cycle will be calculated as follows: CCC = 70 + 30 – 45 = 55 days 31 CU IDOL SELF LEARNING MATERIAL (SLM)

Cash Conversion Cycle Calculator Analysing the Cash Conversion Cycle The commonplace length of the money transformation cycle will change extensively between various ventures importance there is no single figure that addresses a 'positive or negative' cash change cycle. In any case, it very well may be helpful to think about the CCC of two organizations inside a similar industry, as a lower CCC might demonstrate that one organization is dealing with its functioning capital more viably than the other. It can likewise be valuable to follow the CCC of an individual organization over the long run, as this can determine if the business is turning out to be pretty much productive. Since the CCC incorporates DIO, DSO and DPO, a high (poor) CCC may likewise be a sign of explicit issues. For instance, an organization with a high CCC might consume most of the day to gather instalment from its clients, or it very well might be insufficient at gauging interest for its items, implying that it consumes a large chunk of the day to change over stock into deals. A high or expanding CCC may likewise recommend that an organization isn't utilizing its short-terms resources as proficiently as possible. Negative Cash Conversion Cycle While the money change cycle is typically a positive figure, a few organizations might have a negative money transformation cycle. In the present circumstance, the organization is adequately getting instalments for the merchandise it sells prior to paying its providers for materials. This can be accomplished through a mix of selling stock quickly, gathering instalment from clients expeditiously, and paying the organization's providers sometime in the future. Normally, a negative money change cycle is related with exceptionally proficient online retailers. How to Improve the Cash Conversion Cycle To improve (diminish) the CCC, organizations can zero in on any of its three segments. Expanding DPO, decreasing DSO or lessening DIO will all diminish the CCC. Organizations can accordingly further develop the money transformation cycle in one of a few different ways:  Convert stock into deals quicker  Collect instalment from clients sooner  Extend the time taken to pay providers Nonetheless, comprehend that an organization's money transformation cycle doesn't exist in disconnection, as it depicts the manner in which an organization connects with its providers and clients. Along these lines, if an organization stretches out the time it takes to pay its providers, those providers will see an unfriendly effect on their own money change cycle through an expansion in their DSO. Sometimes, providers might confront income pressures 32 CU IDOL SELF LEARNING MATERIAL (SLM)

that might actually impede their capacity to satisfy orders on schedule. Subsequently, buying organizations might decide to reinforce their stock chains by exploiting early instalment projects, for example, production network finance. Providers can along these lines get early instalment on their solicitations from an outsider funder, while the organization pays the receipt sometime in the future. This sort of arrangement can empower both purchaser and provider to advance their functioning capital positions. 2.4 WORKING CAPITAL LEVERAGE It shows the affectability of the profit from speculation with change in current resources. As we as a whole realize the functioning capital is distinction between current resources and current liabilities. Furthermore, the functioning capital is use for meeting everyday capital prerequisites in business activities. With the assistance of working capital influence we will discover how efficiency or productivity of a business is influenced by change in current resources. Influence alludes to the work of resources or wellsprings of asset bearing fixed instalment to amplify EBIT or EPS individually. So it could be related with invest-ment exercises or financing exercises. According to its association we find mainly two types of lever-ages: 1. Operating leverage and 2. Financial leverage. It is to be noted here that these two influences are not autonomous of one another; somewhat they structure a piece of the entire interaction. So we need to know the com-bined impact of both venture and financing choices. The consolidated impact of working and monetary influence is estimated with the assistance of joined influence. 1. Operating leverage Operating influence is worried about the venture exercises of the firm. It identifies with the incurrence of fixed working expenses in the association's revenue source. The working expense of a firm is grouped into three kinds: Fixed expense, variable expense and semi- variable or semi-fixed expense. Fixed expense is a legally binding expense and is a component of time. So it doesn't change with the adjustment of deals and is paid paying little heed to the business volume. Variable expenses fluctuate straightforwardly with the business income. In the event that no deals are made variable costs will be nil. Semi-variable or semi-fixed expenses shift somewhat with deals and remain mostly fixed. These change over a scope of deals and afterward stay fixed. With regards to working influence, semi-variable or semi-fixed expense is separated into fixed and variable bits and is consolidated likewise with variable or fixed expense. Speculation choice goes for utilizing resources having fixed expenses on the grounds that fixed working expenses can be utilized as a switch. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

With the utilization of fixed expenses, the firm can amplify the impact of progress in deals on change in EBIT. Consequently the company's capacity to utilize fixed working expenses to amplify the impacts of changes in deals on its profit before interest and charges is named as working influence. This influence identifies with variety in deals and benefit. Working influence is estimated by registering the Degree of Operating Leverage (DOL). DOL communicates working influence in quantitative terms. The higher the extent of fixed working expense in the expense structure, higher is the level of working influence. The rate change in the profit before revenue and expenses comparative with a given rate change in deals and yield is characterized as the DOL. Along these lines, It's obviously true that an adjustment of the volume of deals prompts a proportionate change in the working benefit of a firm because of the capacity of the firm to utilize fixed working expenses. The worth of level of working influence ought to be more prominent than 1. In case it is equivalent to 1, one might say that working influence doesn't exist. Example 34 CU IDOL SELF LEARNING MATERIAL (SLM)

Calculate the degree of operating leverage from the following data. Sales: 1, 50,000 units at Rs 4 per unit. Variable cost per unit Rs 2. Fixed cost Rs 1, 50,000. Interest charges Rs 25,000. 2. Financial leverage Financial influence is essentially identified with the blend of obligation and value in the capital design of a firm. It exists because of the presence of fixed monetary charges that don't rely upon the working benefits of the firm. Different sources from which assets are utilized in financing of a business can be ordered into reserves having fixed monetary accuses and assets of no fixed monetary charges. Debentures, bonds, long haul credits and inclination shares are remembered for the principal class and value shares are remembered for the subsequent classification. Financing choice goes for utilizing reserves having fixed monetary charges since it very well may be utilized as a switch. Monetary influence results from the presence of fixed monetary charges in the company's revenue source. With the utilization of fixed monetary charges, a firm can amplify the impact of progress in EBIT on change in EPS. Thus monetary influence might be characterized as the association's capacity to utilize fixed monetary charges to amplify the impacts of changes in EBIT on its EPS. The higher the extent of fixed charge bearing asset in the capital design of a firm, higher is the Degree of Financial Leverage (DFL) and the other way around. Monetary influence is processed by the DFL. DEL communicates monetary influence in quantitative terms. The rate change in the procuring per offer to a given rate changes in income before revenue and assessments is characterized as Degree of Financial Leverage (DFL). In this manner, 35 CU IDOL SELF LEARNING MATERIAL (SLM)

A firm is said to be highly financially leveraged if the proportion of fixed interest bearing securities, i.e. long term debt and preference share capital in the capital structure is higher in comparison to equity share capital. Like operating leverage, the value of financial leverage must be greater than 1. It is to be noted here that if the preference share capital is given in the problem the degree of financial leverage shall be computed by using the following formula. Example: Calculate the degree of financial leverage from the following information: Capital structure: 10,000, Equity shares of Rs 10 each Rs 1, 00,000. 5,000, 11 % Preference Shares of Rs 10 each Rs 50,000. 9% Debentures of Rs 100 each Rs 50,000. The EBIT of the company is Rs 50,000 and corporate tax rate is 45%. 3. Combined leverage A firm brings about absolute fixed charges as fixed working expense and fixed monetary charges. Working influence is worried about working danger and is communicated quantitatively by DOL. Monetary influence is related with monetary danger and is communicated quantitatively by DFL. Both the influences are worried about fixed charges. In the event that we consolidate these two we will get the absolute danger of a firm that is related with complete influence or joined influence of the firm. Consolidated influence is 36 CU IDOL SELF LEARNING MATERIAL (SLM)

principally related with the danger of not having the option to cover all out fixed charges. The association's capacity to cover the total of fixed working and monetary charges is named as joined influence. The rate change in EPS to a given rate change in deals is characterized as Degree of Combined Leverage (DCL). DCL communicates joined influence in quantitative terms. The higher the extent of fixed working expense and monetary charges, higher is the level of joined influence. Like other two use the worth of joined influence should be more prominent than 1. DCL can be computed in the following manner. Example X Limited has given the following information: 37 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Working capital leverage Interest in working capital fundamentally affects the benefit and hazard of a business. A decline in interest in current resources will prompt an expansion in the benefit of the firm and the other way around. This is because of the way that current resources are less beneficial in contrast with fixed resources. Decline in interest in current resources likewise expands the volume of hazard. Hazard and returns are straightforwardly related. Accordingly, as hazard expands, benefit of firm will in general increment. Along these lines Working Capital Leverage (WCL) might be characterized as the capacity of the firm to amplify the impacts of progress in current resources—expecting current liabilities stay consistent—on company's Return on Investment (ROI). Hence WCL may be computed as: 38 CU IDOL SELF LEARNING MATERIAL (SLM)

Example 39 From the information given below, compute the working capital leverage. CU IDOL SELF LEARNING MATERIAL (SLM)

Total assets: Rs 15, 00,000 Current assets: Rs 5, 00,000 Increase in current assets: Rs 1, 00,000. 2.5 SUMMARY  Working capital is the existence blood of any business, without which the fixed resources are broken. Working capital flows in the business, and the current resources change from one structure to the next. Money is utilized for acquirement of crude materials and stores things and for instalment of working costs, then, at that point changed over into work-in-progress, then, at that point to completed products.  When the completed merchandise are sold using a loan terms receivables adjusts will be framed. At the point when the receivables are gathered, it is again changed over into cash. The requirement for working capital emerges in light of delay between creation of merchandise and their real acknowledgment after deals. This delay is called actually called as 'working cycle or working capital cycle.  The cash transformation cycle (CCC) – otherwise called the money cycle – is a functioning capital metric which communicates what amount of time it requires for an organization to change over cash into stock, and afterward back into cash through the business interaction. The more limited an organization's CCC, the less time an organization has cash restricted in its records receivable and stock.  The CCC is a significant measurement for organizations that purchase and oversee stock as it means that functional effectiveness just as monetary wellbeing.  In request to improve (diminish) the CCC, organizations can zero in on any of its three parts. Expanding DPO, decreasing DSO or diminishing DIO will all lessen the CCC.  working capital is use for meeting everyday capital necessities in business activities. With the assistance of working capital influence we will discover how usefulness or productivity of a business is influenced by change in current resources. 40 CU IDOL SELF LEARNING MATERIAL (SLM)

 Operating influence is worried about the venture exercises of the firm. It identifies with the incurrence of fixed working expenses in the association's revenue source.  Financial influence is essentially identified with the blend of obligation and value in the capital design of a firm. It exists because of the presence of fixed monetary charges that don't rely upon the working benefits of the firm. 2.6 KEYWORDS  Operating Cycle: The timeframe from the responsibility of money for buys until the assortment of receivables coming about because of the offer of merchandise or managements.  Cash Cycle: The timeframe from the real cost of money for buys until the assortment of receivables coming about because of the offer of merchandise or managements; additionally called cash transformation cycle.  Raw Material: A decent that has not been changed by creation; an essential item.  Leverage: The utilization of fixed expenses trying to increment (or switch up) benefit.  Degree of Financial Leverage (DFL): The rate change in a company's income for each offer (EPS) coming about because of a 1 percent change in working benefit (EBIT). 2.7 LEARNING ACTIVITY 1. Take an example and calculate the cash conversion cycle. ___________________________________________________________________________ _____________________________________________________________________ 2. Discuss on the topic of operating cycle and cash cycle. ___________________________________________________________________________ ____________________________________________________________________ 2.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is operating cycle? 2. Define cash cycle? 3. What is working capital leverage? 41 CU IDOL SELF LEARNING MATERIAL (SLM)

4. What is cash cycle formula? 5. List the type of working capital leverage? Long Questions 1. Explain operating cycle? 2. Discuss about cash cycle? 3. Describe working capital leverage? 4. Suppose that last year a firm had a DSO of 35 days and annual revenues equal to $10,000,000. The treasury department has made it a goal to reduce the DSO to 30 days while holding constant revenues. If this reduction is realized, then calculate the following. i. The dollar change in receivables. ii. The change in the OC and CCP given that next year's DIH and DPO are expected to equal 45 days and 75 days, respectively. 5. What is working capital leverage and explain the leverage types? B. Multiple Choice Questions 1. What will increase the operating cycle? a. Increasing the inventory period b. Decreasing the cash cycle c. Decreasing the accounts payable period d. Increasing the accounts payable period 2. Which option should a manager take if he or she wants to decrease the operating cycle? a. Decrease the rate at which the average inventory is sold b. Delay payments to suppliers to decrease the cash cycle c. Increase the inventory level while maintaining constant sales d. Decrease the period of time for which credit is granted to customers 3. Identify the right option for the statement, all else equal, which one of the following will decrease the cash cycle? a. Decreasing the accounts receivable turnover rate b. Decreasing the accounts payable period c. Increasing the inventory turnover rate d. Increasing the credit period granted to a customer 42 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Which is studied with the help of operating leverage? a. Analysis of business risk b. Analysis of financial risk c. Analysis of product risk d. All of these 5. Which among the following is also known as Financial leverage? a. Composite leverage b. Breakeven point c. Trading on equity d. Capital structure leverage Answers 1-a, 2-d, 3-c. 4-a, 5-c. 2.9 REFERENCES References  Cash and Working Capital Management October 29, 2013, at the Way back Machine  \"Negative Working Capital: Definition & Examples\". Inevitable Steps. August 18, 2015. Retrieved February 21, 2016.  The Cash Conversion Cycle by CI Staff Archived October 29, 2013, at the Way back Machine Textbooks  Maness, Terry, S&John, T, Zietlow. (2005). Short-Term Financial Management, Third edition. Cincinnati, OH: South-Western.  Gamble, Richard, H. (2002). “The Long and Short of Debt.” Business Finance.  Shapiro, Alan, C. (2008). Foundations of Multinational Financial Management, Sixth edition. Hoboken, NJ: John Wiley & Sons. Website  https://www.yourarticlelibrary.com  https://www.researchgate.net  https://www.investopedia.com 43 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT -3:DETERMINATION OF WORKING CAPITAL NEEDS STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Determination of working capital needs 3.2.1 How to Determine Your Working Capital Needs 3.3Factors affecting size of working capital 3.4Banker’s appraisal of working capital proposals 3.5 Summary 3.6 Keywords 3.7 Learning Activity 3.8 Unit End Questions 3.9 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to  Illustrate determination of working capital needs.  Explainfactors affecting size of working capital.  Explain the banker’s appraisal of working capital proposals. 3.1 INTRODUCTION Working capital is quite possibly the most troublesome monetary ideas for the entrepreneur to comprehend. Truth be told, the term implies a variety of things to various individuals. By definition, working capital is the sum by which current resources surpass current liabilities. In any case, on the off chance that you just run this computation every period to attempt to break down working capital, you will not achieve much in sorting out what your functioning capital requirements are and how to meet them. A more valuable device for deciding your functioning capital necessities is the working cycle. The working cycle breaks down the records receivable, stock and records payable cycles as far as days. At the end of the day, accounts receivables are examined by the normal number of days it takes to gather a record. Stock is dissected by the normal number of days it takes to turn over the offer of an item 44 CU IDOL SELF LEARNING MATERIAL (SLM)

(from the point it comes in your entryway to the point it is changed over to cash or a record receivable). Records payable are dissected by the normal number of days it takes to pay a provider receipt. Most organizations can't back the working cycle (money due days + stock days) with creditor liabilities financing alone. Therefore, working capital financing is required. This deficiency is regularly covered by the net benefits produced inside or by remotely acquired assets or by a blend of the two. Most organizations need momentary working capital eventually in their tasks. For example, retailers should discover working money to subsidize occasional stock development among September and November for Christmas deals. Yet, even a business that isn't occasional sporadically encounters top months when orders are abnormally high. This makes a requirement for working money to support the subsequent stock and records receivable development. Some independent ventures have sufficient money stores to subsidize occasional working capital requirements. Be that as it may, this is extremely uncommon for another business. In the event that your new pursuit encounters a requirement for momentary working capital during its initial not many long periods of activity, you will have a few possible wellsprings of subsidizing. The significant thing is to prepare. On the off chance that you get surprised, you may pass up the one major request that could put your business over halfway there. 3.2 DETERMINATION OF WORKING CAPITAL NEEDS The quantum of working capital is relying on an enormous number of variables. It is truly challenging to stick point the factor which is profoundly dependable. The level of impact of each factor differs occasionally. Nonetheless, coming up next are viewed as a portion of the significant elements that for the most part impact necessity for working capital. 1. Nature of business determines working capital requirement On account of exchanging worry, there is a need of keeping up with enormous inventories, receivables and money. Least fixed resources is sufficient. Henceforth, the exchanging concern requires more sum working capital. On account of management association, huge number of fixed resources are required and the managements are delivered uniquely on cash premise. Credit is permitted distinctly partly and brief period. Subsequently, the help association requires less measure of working capital. On account of assembling concern, sizable measure of working capital is needed alongside enormous number of fixed resources as speculation. In nutshell, exchanging concern requires seriously working capital and management association requires less working capital while fabricating concern requires the functioning capital between these finishes. 2. Size of business/ scale of operation determines working capital requirement 45 CU IDOL SELF LEARNING MATERIAL (SLM)

For the most part, more measure of working capital is required if the size of business concern is huge and the size of activity is additionally high and the other way around. Some of the time, little concerns need seriously working capital because of high overhead charges and wasteful being used of accessible assets. 3. Production policy determines working capital requirement On the off chance that the creation is carried based on hand, less measure of working capital is sufficient. Here and there, the creation is carried on fully expecting request in future. Assuming this is the case, more measure of working capital is required. A few items have occasional interest. For this situation, more measure of working capital is required. 4. Credit policy determines working capital requirement On the off chance that the organization follows liberal credit strategy and permits more acknowledge deals for significant stretch for reimbursement, there is a need of more measure of working capital and the other way around. 5. Credit period allowed by the suppliers determines working capital requirement The credit period permitted by the providers might be either short or long. On the off chance that the credit period is short, there is a need of more measure of working capital and the other way around. 6. Manufacturing process determines working capital requirement The assembling interaction might be two, three or four. Besides, the time needed in each cycle might contrast starting with one interaction then onto the next. On the off chance that the quantity of assembling measure is enormous and the time needed for each cycle is short or more, there is a need of more measure of working capital. Then again, if the quantity of assembling measure is short and the time needed in the process is likewise short, there is a need of less measure of working capital. 7. Working capital cycle determines working capital requirement Working capital cycle alludes to the time needed to change over the crude materials into completed products and up to the phase of transformation of completed merchandise into cash structure. On the off chance that the functioning capital cycle is long, there is a need of more measure of working capital and the other way around. 8. Seasonal variation determines working capital requirement Some crude materials are accessible just in season. Be that as it may, the need of crude material is consistently. Consequently, the organization is compelled to purchase the crude materials in mass and store them for one year. Provided that this is true, more measure of working capital is required. 9. Season business determines working capital requirement 46 CU IDOL SELF LEARNING MATERIAL (SLM)

A few items have attractiveness just in season. For this situation, more measure of working capital is needed during convenient period and less measure of working capital is needed for slow time of year duration. 10. Business cycle determines working capital requirement Business cycle implies times of thriving, downturn, discouragement and recuperation. At whatever point the interest for the item is high, costs of the items are additionally high during the time of thriving. Accordingly, the organization requires more measure of working capital. Then again, if the interest for the item is low, costs of the items are likewise low during the time of misery. Along these lines, the organization requires less measure of working capital. During the time of downturn and recuperation, interest at the item and cost of the item are moderate. Subsequently, the organization requires moderate measure of working capital. 11. Rate of stock turnover determines working capital requirement Pace of stock turnover alludes to the speed at which the crude materials, work in progress and completed products changed over into cash structure. Accordingly, if the pace of stock turnover is high, the need of working capital sum is low and the other way around. 12. Speed of growth of the company determines working capital requirement The need of measure of working capital is high if the speed of development of the organization is high and the other way around. 13. Earning capacity of the company determines working capital requirement A few organizations have more procuring limit than others because of better nature of the items, syndication in market and such. These organizations can produce more money inflows than different organizations. Consequently, these organizations require less measure of working capital than others. 14. Dividend policy determines working capital requirement The profit strategy of an organization impacts the necessities of its functioning capital. In the event that the organization like to give extra offers in the spot of money profit, the organization requires less measure of working capital. At the end of the day, if the organization chose to give high pace of money profit, whatever be the age of benefits, the organization requires more measure of working capital. 15. Changes in the price of the product determines working capital requirement In the event that the cost of the item is profoundly fluctuating, the organization requires more measure of working capital. On the off chance that the cost of the items is consistent, the need of working capital is low. 16. Volume of sales determines working capital requirement 47 CU IDOL SELF LEARNING MATERIAL (SLM)

The volume of deals and the size of the functioning capital are straightforwardly identified with one another. On the off chance that the volume of deals expands, the organization requires more measure of working capital and the other way around. 17. Term of purchases and sales determines working capital requirement In the event that an organization follows credit buy and money deals, the need of measure of working capital is less. Then again, if an organization follows cash buy and credit deals, the need of measure of working capital is high. In like manner, an organization requires moderate measure of working capital at whatever point an organization follows cash buy and money deals and credit buy and credit deals. 18. Expansion of the company determines working capital requirement On the off chance that an organization has the arrangement for extension, such an organization requires more measure of working capital. In the event that an organization has no arrangement for development, less measure of working capital is sufficient. 19. Operating efficiency of the company determines working capital requirement This identifies with the ideal use of assets at the very least expense. In the event that an organization is successfully worked, there is plausible of controlling of working expenses. 20. Profit appropriation determines working capital requirement The benefits procured by an organization arenot completely accessible for working capital purposes. The manner in which benefits are appropriated straightforwardly influences the commitment towards working capital. On the off chance that more measure of benefits is appropriated, more measure of working capital is accessible and the other way around 21. Credit policies of Reserve Bank of India determines working capital requirement On the off chance that the Reserve Bank of India follows particular and prohibitive credit approachesthe organization isn't a situation to get credit office from its providers. For this situation, the organization requires more measure of working capital. 22. Capital structure of the company determines working capital requirement On the off chance that investors have given a few assets towards the functioning capital requirements somewhat, the organization can get satisfactory measure of working capital with no trouble. On the off chance that the organization needs to rely altogether on external hotspots for both perpetual and brief working capital necessities, the organization faces a great deal of troubles for getting sufficient measure of working capital. 23. Proportion of the cost of raw materials to total costs determines working capital requirement In those businesses where cost of material is a huge extent of the absolute expense of the products created or where exorbitant crude materials are utilized, enormous measure of 48 CU IDOL SELF LEARNING MATERIAL (SLM)

working capital is required. In the event that the extent of crude materials is little, the measure of working capital necessities is likewise low. 24. Other factors determining working capital requirement Some different elements are likewise influencing the prerequisites of measure of working capital. They are the board capacity, association of representatives, import strategy, resource structure, usage of assets, significance of work, banking offices and such. 3.2.1 How to Determine Your Working Capital Needs Working capital is quite possibly the most troublesome monetary ideas for the entrepreneur to comprehend. Indeed, the term implies many things to a variety of individuals. By definition, working capital is the sum by which current resources surpass current liabilities. Nonetheless, on the off chance that you just run this computation every period to attempt to examine working capital, you will not achieve much in sorting out what your functioning capital requirements are and how to meet them. A more valuable instrument for deciding your functioning capital requirements is the working cycle. The working cycle dissects the records receivable, stock and records payable cycles as far as days. All in all, money due are dissected by the normal number of days it takes to gather a record. Stock is dissected by the normal number of days it takes to turn over the offer of an item. Records payable are breaking down by the normal number of days it takes to pay a provider receipt. Most organizations can't fund the working cycle (debt claims days + stock days) with creditor liabilities financing alone. Thus, working capital financing is required. This shortage is commonly covered by the net benefits created inside or by remotely acquired assets or by a blend of the two. Most organizations need momentary working capital sooner or later in their tasks. For example, retailers should discover working cash-flow to finance occasional stock development among September and November for Christmas deals. Yet, even a business that isn't occasional at times encounters top months when orders are strangely high. This makes a requirement for working money to support the subsequent stock and records receivable development. Some private ventures have sufficient money stores to subsidize occasional working capital requirements. Be that as it may, this is exceptionally uncommon for another business. In the event that your new pursuit encounters a requirement for transient working capital during its initial not many long stretches of activity, you will have a few likely wellsprings of subsidizing. The significant thing is to prepare. On the off chance that you get surprised, you may pass up the one major request that could put your business over halfway there. Here are the five most normal wellsprings of momentary working capital financing. 49 CU IDOL SELF LEARNING MATERIAL (SLM)

 Equity - On the off chance that your business is in its first year of activity and has not yet become beneficial, then, at that point you may need to depend on value assets for momentary working capital requirements. These assets may be infused from your very own assets or from a relative, a companion or an outsider financial backer.  Trade creditors - On the off chance that you have an especially decent relationship set up with your exchange lenders, you could possibly request their assistance in giving transient working capital. In the event that you have paid on schedule before, an exchange lender might stretch out terms to empower you to meet a major request. For example, in the event that you get a major request that you can satisfy, transport out and gather in 60 days, you could acquire 60-day terms from your provider if 30-day terms are typically given. The exchange loan boss will need evidence of the request and might need to record a lien on it as security, yet on the off chance that it empowers you to continue, that ought not be an issue.  Factoring - Considering is another asset for momentary working capital financing. Whenever you have taken care of a request, a considering organization purchases your record receivable and afterward handles the assortment. This sort of financing is more costly than regular bank financing yet is frequently utilized by new organizations.  Line of credit - Credit extensions are not regularly given by banks to new organizations. Nonetheless, if your new business is all around promoted by value and you have great insurance, your business may fit the bill for one. A credit extension permits you to get assets for transient necessities when they emerge. The assets are reimbursed once you gather the records receivable that came about because of the momentary deals top. Credit extensions ordinarily are made for each year in turn and are relied upon to be paid off for 30 to 60 sequential days at some point during the year to guarantee that the assets are utilized for transient necessities as it were.  Short-term loan. While your new business may not fit the bill for a credit extension from a bank, you may have achievement in acquiring a one-time transient advance (not exactly a year) to back your brief working capital requirements. In the event that you have set up a decent financial relationship with a financier, the individual in question may give a momentary note to one request or for an occasional stock as well as records receivable development. As well as investigating the normal number of days it takes to make an item (stock days) and gather on a record (money due days) versus the quantity of days financed by creditor liabilities, the working cycle examination gives one other significant investigation. You can see that functioning capital straightforwardly affects income in a business. Since income is the situation for all entrepreneurs, a decent comprehension of working capital is basic to making any endeavour fruitful. 50 CU IDOL SELF LEARNING MATERIAL (SLM)