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Working Capital

Fund or Cash required to meet the day to day expenses/operations. Excess Current Assets Current Assets Current Liabilities Short-term fund for operations Working Capital typically means the firms holdings of current or short-term assets such as cash, receivables, inventory and marketable securities.

ICAI Working Capital means the funds available for day-to-day operations of an enterprise.
Shubin Working capital is part of capital which is required for purchase of raw materials and for meeting day-to-day expenditure on salaries, wages, rent and advertising etc.

Types of Working Capital

Working Capital

Permanent (or Fixed)

Temporary (or Variable/Fluctuati ng)


Reserve Margin



Temporary Working Capital

The amount of current assets that varies with seasonal requirements.

The amount of current assets required to meet a firms long-term minimum needs.


Permanent Working Capital

Temporary current assets

Permanent current assets


Permanent current assets


Components of Working Capital

Current Assets Current Liabilities

Importance of Working Capital

1. To ensure continuous flow of production through regular supply. 2. To maintain the financial health of the firm 3. To establish the goodwill of the firm due to the prompt payment policy. 4. To achieve highest profitability. 5. To achieve highest productivity due to proper utilization of assets 6. To pay higher return to its owner 7. To enable the cash discount facilities on bulk purchases.

Purpose or Need for Working Capital

Purchase of Raw materials, Components and spares To Pay Wages and Salaries To incur day-to-day expenses and overhead costs such as fuel, power and office expenses etc. To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers To maintain the inventories For future growth and Expansion

Objectives of Cash Forecasting

Estimating Cash Requirement Interest costs and Income Excess Balances Administrative Costs Benefits Control Forecast System Costs

Cash Forecasting
The cash forecast is an estimation of the flows in and out of the firms cash account over a particular period of time, usually a quarter, month, week, or day. The cash forecast is primarily intended to produce a very useful piece of information: an estimation of the firms borrowing and lending needs and the uncertainties regarding these needs during various future periods.

Types of Cash forecasting

1. Long range Forecasts
2. Medium range Forecasts 3. Daily Cash Forecasts

2. Medium range forecasts

Cash flows during the next 12 months. A forecast of quarterly cash flows over the next 4 quarters It forecasts about firms existing technology and long-range financing. It is tactical rather than strategic. It is some times called as Cash Budgeting. Need for determination was - Short-term cash from credit lines - Commercial paper sales or Credit and Payables Policies

Line of Credit
1. Long-Range forecasts
Cash forecasts of 1 or more years into the future are needed primarily to assess the viability of the firms long-range financing and operating policies. Idea of how much cash the firm needs to raise through debt or equity or other sources. It assist managers in establishing dividend policies, determining capital investments, and planning a merger and acquisitions. It are generally based on accounting projections and considered strategic in the sense that possible major charges are examined.

An arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain. The borrower can draw down on the line of credit at any time, as long as he or she does not exceed the maximum set in the agreement. A bank permit the firm to borrow up to a specified limit during a particular time period. A credit line takes place through specific short term notes ranging from 90 days or more. At Maturity the interest on the note is paid along with the principal.

Line of Credit
The advantage of a line of credit over a regular loan is that interest is not usually charged on the part of the line of credit that is unused, and the borrower can draw on the line of credit at any time that he or she needs to. Depending on the agreement with the financial institution, the line of credit may be classified as a demand loan, which means that any outstanding balance will have to be paid immediately at the financial institution's request.

Types of Line of Credit

Types of Credit Line (a). Committed Credit line is a formal, legal agreement covering the terms and conditions of the credit line. (b). Uncommitted credit line is simply a verbal or informally written statement from the banker that as long as conditions dont change, the bank is prepared to lend the potential borrower up to the stated amount. It can be canceled or the terms or conditions changed at any time.

Money Market
As per RBI definitions A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market.
The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year). A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

It doesnt actually deal in cash or deals with substitute of cash like promissory notes & govt papers converted into cash without any transaction cost. money but trade bills, which can loss at low

It includes all individual, institution and intermediaries.

Objective of Money Market

To provide a parking place to employ short term surplus funds. To provide room for overcoming short term deficits. To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market. To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost.

Motives for maintaining cash

1. 2. 3. 4. Transaction motive Precautionary motive Speculative motive Compensating motive


Precautionary motive
Transaction motive
1. To meet routine cash requirements to finance transaction in the ordinary course of business To balance current receipts and disbursement Example: Cash payment for purchasing, operating expenses, financial charges



1. Defensive in nature 2. Holding cash/near-cash as a cushion to meet unexpected contingencies/demand for cash 3. Floods, strikes and failure of important customers 4. Earlier settlement of bills 5. Unexpected slow down in collection of accounts receivable 6. Cancellation of some orders 7. Sharp increase in cost of row materials

Speculative Motive
1. Holding cash/near-cash to quickly take advantage of opportunities typically outside the normal course of business 2. Positive and aggressive approach 3. Examplesi. An opportunity to purchase raw materials ii. A chance to speculate on interest rate movements iii. Make purchase at favorable prices

Compensating motive
1. Holding cash/near-cash to compensate banks for providing certain services or loans 2. Example: compensation balancesi. An absolute minimum ii. A minimum average balance


Features of FRN



All FRNs have a coupon that is reset at fixed intervals in accordance with some preset formula. The features of FRNs: The reference rate linked The margin The reference rate period Frequency of reset Coupon payment frequency Maturity




Role of IMM
Instruments of International Money Market
Short-term financing and investments that are issued or traded internationally. Instruments: Short-term Bank loans, Treasury Bills, Bank Certificates of deposit, Commercial Paper, Bankers Acceptances and repurchase agreements and other short-term assetbacked claims.

Reconciling the cash needs Holding or borrowing liquid claims Effective borrowing-lending spreads Operational efficiency Allocation efficiency Bearing the liquidity risk or interest risk Time Analysis, Credit risk Safety principal