A Seminar Paper On Working Capital Management Finance Essay

MBA ( Tech. ) focuses on doing pupil ‘s constructs clearer and stronger by including seminar paper presentations its course of study. I want to prosecute my calling in the field of finance. That is why I opted to show a seminar paper on “ MANAGING CASH FOR YOUR BUSINESS ” , a seminar paper on Working Capital Management.

The seminar paper covers all the constituents and facets of Working Capital Management ( WCM ) and how an efficient and effectual WCM can assist concerns keep smooth hard currency flows and profitableness thereby keep big market portions.

Every concern right from a pigment maker to a retail merchant face many challenges for nutriment. Global competition has increased manifold and as a consequence there is cut-throat conflict between concerns to cut down costs at which goods and services are sold to consumers. Cuting down on net income borders, increases the demand to do operational activities more efficient.

Cash is the line of life of each and every concern organisation. Therefore, it is really of import to pull off proper hard currency influxs and escapes. Working Capital Management ( WCM ) deals with direction of the hard currency flows within an organisation. WCM non merely deals with direction of money earned and spent by the company but besides trades with proper handling of company ‘s balance sheet.

The company ‘s fiscal construction is improved so that hard currency resources are non tied up. Efficient WCM non merely optimizes the hard currency flow rhythms but besides increases the efficiency of the full company. It releases the resources with high liquidness by cut downing stock list degrees and doing more hard currency readily available at manus.


Every company needs hard currency for its being. Cash is imperative for nutriment of each and every house. If the hard currency influxs and escapes of a house are non proper, so the house can non work decently. It can non pull off its daily operational activities, it can non invest/reinvest nor can it pay for its bills from providers and other capital demands for supplying services and goods to consumers.

Therefore, understanding the hard currency flow play a really of import function in determination devising. The hard currency flow of a company reflects its wellness and market place. A company with good hard currency flows is said to be in good wellness.

Understanding the hard currency flows is done by utilizing working capital direction. This helps companies pull offing their hard currency escapes and influxs expeditiously and besides helps maintain them in good books of investors and providers.

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The hard currency which is required by companies for their day-to-day operational activities is known as working capital. The on the job capital is used to supplement the transition of natural stuffs into finished goods, merchandising of which generates net incomes for a company.

Working capital in concern houses is correspondent to blood in human organic structure. When it is accurately handled, the houses flourish and spread out but its inefficient direction can do frailty to all operations within the house. Therefore, managing of working capital plays a really of import portion in today ‘s organisations and its proper direction can assist a company to set itself on path on rapid success.

Let us see a pizza sauce fabricating company. The company uses Rs. 5000 to buy the natural stuffs required to fabricate pizza sauce. The ingredients like onions, tomatoes, chilly, pepper etc are purchased and stocked as stock list for fabrication of the sauce. The company takes a hebdomad to fabricate one order of pizza sauce bottles. It dispatches the order and receives the payment after one hebdomad. Therefore, the Rs.5000 investing in pizza sauce devising is the WORKING CAPITAL of the company. This Rs.5000 is held up for 2 hebdomads. If the company can sell these bottles more rapidly, so the payment will come Oklahoman and it can once more purchase new ingredients for the 2nd unit of ammunition of orders.

If company fails to acquire any orders so it inventory stocks of ingredients will stay on reserves and the hard currency used in their purchase will stay trussed up. Sometimes, the bill payments are besides delayed, which once more ties up the hard currency being put in the concern. In such a state of affairs, the company will hold to borrow from outside to buy new stock of stock list for its following orders till the payment of old orders is struck up.

Hence, for the given illustration, the company will hold to borrow as much less as much well it manages its on the job capital.

Not merely this company, but every company needs to decently pull off its working capital so that its hard currency can be invested in net income maximizing ways.

Working Capital CYCLE

As shown in the rhythm above, industries/firms convert their hard currency into prepaid disbursals and stock lists. This stock list is used to bring forth goods and services for consumers. When goods and services are delivered, an bill of the same is generated by the house which is to be paid by the consumer. At this phase, it is said that goods and services get converted to histories receivables as their sale would acquire hard currency into the house. Once the consumer pays off the bills for purchased goods and services, account receivables acquire converted into hard currency. Again this hard currency is used by houses to spread out their concern and the rhythm moves on.


Working capital is by and large classified under two caput:

Gross working capital: The house ‘s investing in current assets which are easy exchangeable to hard currency ( within a period of 1 accounting twelvemonth ) . These current assets are hard currency, receivables, debitors and short-run securities.

Net working capital: Net working capital is normally known as working capital and it is given by the undermentioned equation:


Current liabilities mentioned supra have adulthood period of 1 accounting twelvemonth and include payables, creditors and outstanding disbursals.

Permanent working capital: It is the minimal sum of working capital that a house requires for direction of its daily operational activities. It is the fixed sum and this much is ever required by the company.

Impermanent on the job capital: It is the excess on the job capital ( over and above permanent working capital ) that is required by a company when any of the follwing parametric quantities undergo a alteration:

Production degrees

Gross saless Volume fluctuations

Fluctuations in monetary value degrees

Companies for which the difference of current assets minus current liabilities is positive are the 1s with high liquidness rates and can change over their assets to hard currency as and when needed. When company does non possess adequate assets to cover up its liabilities, it can hold jobs in paying back for the short-run loans to the creditors. Very low plus degree may even take to bankruptcy.


Working capital direction is the managing of current assets ( that is, working capital ) by concern houses. A company might posses ‘ assets and is profitable but if it can non change over its current assets into hard currency readily so it is said to hold less liquidness.

Management of working capital require houses to strike a balance between the sum of short-run assets and liabilities that they should keep to guarantee efficient direction of its all house ‘s operations. It besides helps the house in refunding back for short term adoptions and any other impending disbursals.

Working capital direction is one of the best methods which is being used to look into the wellness of a company and find how good it is making. A company ‘s place is determined by its profitableness which is a map of working capital ( more the on the job capital better is the fiscal status of the company ) . The investors and other rivals check a company ‘s balance sheet to see the computation of its working capital and find it fiscal good being.

Therefore, by cognizing the working capital sum of a house, one can judge house ‘s public presentation and contemplate its growing and promotion. A house can thrive merely by holding the equal sum of working capital.

Working capital direction trades with efficient and effectual direction of the degree of currents assets and current liabilities that a company must keep and how current assets can be used to cover up for current liabilities.


The three major ends of working capital direction are:

But the major end is to accomplish all the above stated ends and ne’er be out of hard currency, that is, the companies must hold working capital ( hard currency ) readily available. This is ensured by puting some hard currency in marketable securities which can be easy liquifiable and by restricting short-run adoption of the house.

These ends are really industry specific and alteration in conformity to the type of industry working capital direction is applied excessively. For some industries even zero liquidness can be advantageous and can give high profitableness. Such industries do non keep net working capital instead use the recognition sums for daily maintaining operational activities.


Working capital direction involves two procedures:


Determining the size of working capital

Arranging the beginnings of working capital

1. Determining the size of working capital: For every industry, there are different parametric quantities based on which one can make up one’s mind the equal sum of working capital. Some of the factors lending to this determination doing procedure is as follow:

Nature of the industry

Manufact-uring Cycle

Volumes of gross revenues

Business Cycle

Supply of natural stuffs

Operation efficiency

Capital Structure

Size of Business



Footings of purchase and gross revenues

Growth and enlargement

Price degree fluctuations

Net income Margin

Monetary Policy

2. Arranging the beginnings of working capital: The beginnings of working capital are arranged depending of the fund ‘ handiness and the sort of usage working capital is put to. Working capital fundamentally involves the undermentioned constituents:

Cash and hard currency balance


Histories receivables

Market securities

Therefore, direction of working capital trades with managing of these four constituents in a company. These constituents are managed in the undermentioned mode:

As shown in the above tabular array, companies try to accomplish low degrees of histories receivables and stock lists and high degrees of history payables. Following such sort of a pattern increases the hard currency flow and profitableness of the company.


Significant work has already been on the construct of working capital and its direction. The cardinal driver that gives impulse to profitableness of a company is efficient and effectual working capital direction. Scientists and other fiscal experts claim that when assorted constituents of WCM are managed in an organized mode than the worthiness of such patterns additions and contribute towards the upliftment of the full organisation.

Although there is a batch of informations available on the topic, still more research is required in this country. Concepts of WCM are applicable to assorted industries like finance, fabrication, chemical etc. WCM is applied in a assortment of countries based on consultancy by SMEs ( Capable Matter Experts ) .

In this survey, I have tried to analyze the impact and effects of efficient working capital direction and how assorted industries apply it within their specific context.







Gross saless Degree

As seen in the above diagram, working capital direction is governed by three policies:


No affair what sort of concern one is into, working capital will certainly impact the hard currency flow of the concern. It is the cardinal driver of hard currency flow in any house. Therefore, a really good apprehension and analysis of working capital becomes important for houses to be successful.

Working capital is analyzed utilizing one of the undermentioned methods:

All these methods are adopted to analyze the form of altering place of working capital for a peculiar house and to foretell future demands of working capital so that it is readily available for usage as and when required.

Besides these methods an easier manner to analyse working capital is to cipher the OPERATING CYCLE.

This rhythm analyzes the undermentioned parametric quantities in footings of yearss:

Histories receivables

History payables


The mean no. of yearss which are taken to roll up histories analyzes the histories receivables. Average no. of yearss taken to change over a merchandise from the clip it enters the house to the clip it is converted to cash/account receivables, analyzes the stock list. And the mean no. of yearss taken to pay back the provider analyzes the history payables.

By and large it is really hard for houses to finance their operating rhythms merely with the funding of histories collectible. Therefore, the demand for funding of working capital arises. The operating rhythm is financed by both histories collectible funding and working capital funding.

Now, utilizing working capital to finance the operating rhythm generates a demand cover up for the loss of working capital by some other agencies. This deficit of working capital is done off with by utilizing borrowed financess ( internal/external/combination of both ) to bring forth net net incomes.

Majority of the concerns need working capital for short -term funding of their operational activities. For illustration, a retail merchant merchandising crackers faces a seasonal rise in client demand during Diwali period and hence demands working capital to finance the excess stock list stocks during the extremum season. Working capital financess seasonal hikings in stock list and ensuing build-ups in history receivables during such seasonal extremums.

Few common beginnings of short-run funding by working capital are:

1. Equity: Equity refers to financess that are taken from some personal plus or from a friend/family member or from some investor. These equity financess are by and large utilized during initial old ages of constitution of a new house for its short-run funding.

2. Trade creditors: Keeping good dealingss with providers proves really fruitful in acquiring trade credits from them. Companies which have ever lived up to the footings and conditions of the providers and have made timely payments of their bills, can widen the recognition period of their payments. Once the recognition period is extended, the money can be used as a beginning of short-run funding.

3. Factoring: Many new concern adopt factoring attack for short-run funding wherein, after puting an order, the company factors its history receivables to some other company which henceforth manages all its aggregations and pays the factorization company some sum as the involvement of the same which is used for funding.

4. Line of recognition: Bank adoptions from Bankss are known as Line of recognition. These adoption are by and large for a little period of clip, say around a twelvemonth or so.

5. Short-run loan: In many state of affairss, company do non measure up to acquire a line of recognition sanctioned from Bankss. In such instances they might use for short-run loans at pretty nice involvement rates for short-run funding.


Every company is seeking to strike a balance between its current assets and current liabilities so that current assets overrun the current liabilities and the company has sufficient working capital to pull off its operations. But optimising of working capital is non simple and faces the undermentioned challenges:

Every company is confronting a stiff competition on the planetary graduated table due to which it has immense force per unit areas on net income borders. Everyone is seeking to win the race by cut downing monetary values of goods and services being offered to the consumers.

Due to such intensive cost film editing, companies are forced to maintain high stock lists which has made their hard currency flows unstable and deteriorated its public presentation.

Companies are seeking to spread out more. They are come ining into dearly-won acquisitions which are in bend making deficit of financess at manus and increased debt burdens on the company thereby diminishing overall company net incomes.

Hence, when companies try and overcome these challenges so merely they can hold equal sum of working capital at manus taking to following effects:

More capital is available for investings

Business procedures get optimized giving maximal end product due to concentrate on identified drivers of working capital

Liquid of the house is protected

Profitableness of the house increases manifold


Working capital has different relevancy with mention to different sort of companies. Some common fluctuations seen are as follow:

1. Businesss like Supermarkets have really few debitors as these companies possess big hard currency balances and minimum creditors.

2. Some concerns deal with sale and purchase of merely finished merchandises. Such sorts of traders do non necessitate to keep any natural material/work in advancement stocks. Hence such companies automatically have more hard currency in manus as stock list direction is narrowed down to pull offing merely finished goods and therefore hold a larger portion of working capital.

3. Insurance companies are financially stronger as compared to other companies because they receive premium payments from clients before they make any payment. In malice of this, insurance companies have extremely unpredictable hard currency escapes. When insurance claims come up, they have to do immense payments sometimes even without any anterior notice.

4. When it comes to retail merchants, their major focal point is on stock lists as histories receivables are of no job because client wages immediately as he/she buys any merchandise. But these retail merchants face a tough challenge keeping the equal stock list stocks. They do painstaking prediction to find the exact sum of stock lists required so that operating expense of excess reserves can be avoided.

5. When it comes to fabricating companies, the problem shapers are the history payables. By and large more hard currency is being consumed than is generated out of such industries.

6. Firms with good market repute and big market portions have advantage over smaller houses when it comes to obtaining more relaxed, drawn-out and favourable recognition footings and conditions from their several providers. The big and old houses get advantage due to past records of their recognition worthiness which helps them to maintain more hard currency in manus by detaining payment to creditors and therefore keep high degrees of working capital.

7. Some concerns like going agents have seasonal extremums. They get money from clients merely during some months whereas they incur disbursals throughout the twelvemonth. For such concerns pull offing of working capital becomes overly important as hard currency influxs are really limited and seasonal in nature.

Hence, working capital direction depends on the sort of house and its operations. Different houses use different constituents of working capital for remaining in concern and pull offing its cashflow.


Sum of working capital: Excessive

Excessive working capital means the financess are idle and therefore do non lend to house ‘s net income.

It means that excessively many debitors are present which can take to bad debts due to improper recognition policies.

It besides makes it hard to keep sound dealingss with fiscal establishments.

Excessive working capital leads to diminish in ROI ( return on investings ) which in bend decreases the portion value.

Sum of working capital: Redundant

It leads to evitable purchases and constructing up of stock lists, thereby increasing the chance of loss, wastage and larcenies. hypertext transfer protocol: //t1.gstatic.com/images? q=tbn: ANd9GcRCepfqGcG26k8G4x91ZDtVh0j4eSr-l1TtyefM1Sd4il5O6YmD1w

It leads to estimates in minutess.

Due to redundancy, company might finance long-run assets from short term financess. Such sort of a pattern is really deleterious to company ‘s wellness.

Sum of working capital: Inadequate/Shortage

Company fails to pay for its short term liabilities.

Company ‘s growing is halted as it can no more buy stuffs and goods in majority measures as per its demands.

Non-availability of hard currency at the right clip shackles company ‘s capableness to take advantage of any favorable market state of affairss.

Day to twenty-four hours operational disbursals can non be met ( besides disturbs the one-year operational marks and programs ) . This increases the cost of operating expenses and reduces net incomes.

Therefore, deficit of financess puts the repute of a company on interest and debars it from acquiring entree to favourable recognition footings and policies.

Any such instability in the sum of working capital has a heavy negative impact on company ‘s operational efficiency.

Therefore managing of current assets becomes really of import to avoid the above discussed instabilities. The finance director is responsible for taking these of import determinations so as to guarantee that the undermentioned entities are as per the right proportion and measure as needed by the company:


Working Capital Management is a common pattern followed in all organisations. Efficient and effectual direction of working capital becomes an clamant undertaking when it comes to developing states in Asia ( particularly India ) . In states like India, directors pull offing working capital devote most of their clip in pull offing and keeping hard currency for their company thereby guaranting all day-to-day demands of their company are fulfilled swimmingly. These directors try to strike a balance between the liquidness and the profitableness of their house as equal liquidness is really indispensable but excessively much of it can take to a lessening in company ‘s net incomes.

In India, the demand for uninterrupted direction of working capital arises due to following grounds:

1. India being a developing state lacks sufficient financess for proper operation of its economic system.

2. Many of the pecuniary policies are invariably modified and changed to command the of all time changing rising prices rates of the state.

3. As the state has deficient financess, there is a heavy load on Bankss for loans which lead to high rates of involvement.

4. The state is doomed with corruptness and black markets predominating in the Southern Cross of its economic system as it faces scarceness of goods and services doing concern houses and general public reserve.


Till now, the theory says that every company should hold positive working capital rhythm. While analyzing the constructs of working capital, I came across the negative world of working capital. I saw that many booming companies of today are holding negative on the job capitals. Companies like Hero Honda Motors Ltd, Dabur India have negative on the job capital and at the same clip are making really good in their several markets and have high net incomes.

Here, I have tried to explicate this world by striking the illustration of hero Honda Motors Ltd. Although theory does non talk about this but in practical applications we see that negative on the job capital is really fruitful to companies and helps in pull offing its resources good thereby increasing its efficiency, cut downing costs and keeping solvency.

Hero Honda is one of the innovators in car industry. It uses a really efficient attack to direction of working capital which can be discussed under the undermentioned caput:

1. Inventory handling: Hero Honda is utilizing Just in Time attack for managing its stock lists. By utilizing Just in clip attack, the company reduces its stock list handling costs as the natural stuffs are brought merely when there need arises therefore no hemorrhoids of stocks of natural stuffs is required. The company is utilizing Supply concatenation direction to cut down the stock list transporting costs of finished goods. The supply concatenation direction streamlines the full production rhythm of hero Honda and delivers merchandises straight to the clients. It besides makes the production procedure efficient and reduces overall costs of production.

2. Histories Receivables: Hero Honda has adopted DMS ( traders direction system ) to pull off its dealingss with the traders ( debitors ) . DMS is an online system that connects the company to its traders throughout the state. It helps in cut downing the clip for hard currency aggregation from debitors.

Besides, the company is utilizing decentralized systems for hard currency direction. This system helps in cut downing cost of roll uping money from debitors and helps in increasing the working capital as other operating expense costs get reduced.

3. History Payabless: Hero Honda is following deferral policy so as to form and manage its working cost at minimal possible costs. The company extends its recognition period by negociating with the suppliers/bank and manages to maintain hard currency on manus for longer periods. This hard currency on manus serves as the working capital boulder clay it is being used to pay off the debts. All this has been possible because of the good will and repute of Hero Honda which has helped it in acquiring favourable footings and conditions from the creditors.

The working capital direction of Hero Honda is really alone and efficient in itself. The alone features of this direction system are:

The company has non taken any short-run loans from Bankss or other fiscal establishments. Therefore, the company is financing its current assets by utilizing the money which is to be paid to the creditors, i.e. alternatively of borrowing money for short period, the company is concentrating on increasing its recognition period to pay off for its debts and is utilizing this money to finance its current assets till the due day of the month for payment arises.

As the company is maintain low stock list degrees and at the same clip is avoiding short-run adoptions, its current plus ‘s degrees are rather low. On the contrary the company has high degree of current liabilities as it seeks to detain payment to creditors, therefore doing its working capital negative.

The company is following aggressive policy of working capital direction wherein the net working capital of company is zero. The company lacks liquidness in the short term but has high profitableness.

Therefore, the company is making really good inspite of holding negative on the job capital and no short-run liquidness. Hence, although these theoretical constructs are applicable to existent clip but in existent pattern its non merely about following the constructs but it is about making the right things at the right clip. Many external facets besides affect working capital and it is how a company can acquire the best out of them for its profitable nutriment.


The full papers summarizes the undermentioned expression:

It is the deficit of hard currency which is responsible for failure of many concerns and non the greed for more net incomes.

The working capital direction has two dimensions:

As seen throughout the paper, the key to efficient direction of working capital is to strike a balance between clip and money. There is a really celebrated saying- ” TIME IS MONEY ” and if concerns can optimise their money flow i.e. , use the right sum of money at the right clip so there would be no looking back. The full rhythm of hard currency flow manages money. If the hard currency flow becomes faster than less sum will be tied up and company will hold more money to put in daily operations and can cut down its adoptions.

Proper working capital direction helps in keeping a good market repute and good will among the clients, providers and investors. It non merely helps in set uping hard currency during concern convulsion ( crisis taking to bankruptcy in absence of immediate hard currency financess ) but besides helps in acquiring loans sanctioned from Bankss and other fiscal establishments on company favoring footings and conditions.

Therefore, following WCM patterns create a really secure, confident environment throughout the company and increase its overall efficiency guaranting that the company maintains its solvency.


From the above studied, the undermentioned recommendations can be made to the Working capital direction patterns at companies:

Cash flow prediction forms the Southern Cross of efficient working capital direction. This prediction must anticipate uncertainnesss in future demands, market lags, loss of repetition clients and alone stairss taken by rivals to can harm one ‘s concern.

Working capital direction strategic programs must be realistic and must be able to pull off hazards and move quickly at clip of concern crisis.

Execution of working capital direction on an organisational footing helps in modulating hard currency flow throughout all companies/firms within that organisation. Cash from one company can be used at others. This sort of a cash-exchange system requires efficient information accessing platforms with good inter-department linkages.

Companies can follow an advanced attack wherein, operational and fiscal competences can be combined to organize WCM programs which would be capable of bring forthing short term financess of hard currency. This is merely possible when such companies hire personals that perform more than their abilities and set marks to accomplish higher degrees of public presentation.

Adopting difference direction patterns can besides assist in cut downing the overall operational costs. With such patterns, the company functionaries can cut down differences by cut downing the clip of taken to serve a client ‘s petition and diminishing hard currency aggregation period.

Customer/supplier coaction programmes can assist in synchronising their several demands with the production rhythm of the company so that the company maintains minimal sum of stock lists.

Therefore, working capital direction is non merely a fiscal pattern instead ; it is a benchmark to mensurate a company ‘s efficiency. The construct of this direction must be included in all activities being practiced by the company which will assist in increasing company ‘s efficiency and satisfaction among its clients.