Ever wondered why some businesses thrive financially while others struggle with cash flow issues? The secret lies in effective working capital management!
If you’re preparing for the JAIIB/CAIIB exam, understanding Working Capital Management is crucial. This concept ensures that a business has sufficient funds to manage daily operations smoothly without financial distress.
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In this session, we’ll cover:
- The meaning & importance of Working Capital
- Types of Working Capital (Gross & Net Working Capital)
- The Working Capital Cycle and its influencing factors
- Sources of financing Working Capital
- Assessment methods used by banks
- Real-world applications and case studies
- Common pitfalls and best practices for businesses
👉 Before we dive in, watch this video for a complete breakdown:
What is Working Capital?
A company requires funds not only to purchase long-term assets (like buildings and machinery) but also for day-to-day operations. The capital used for daily operations is called Working Capital.
Types of Working Capital
- Gross Working Capital (GWC): The total current assets owned by the company (Example: Cash, inventory, accounts receivable).
- Net Working Capital (NWC): The difference between current assets and current liabilities. Formula: NWC = Current Assets – Current Liabilities
Understanding the Working Capital Cycle
The Working Capital Cycle (WCC) is the process of purchasing raw materials, converting them into finished goods, selling them, and receiving cash from sales.
Key Phases of WCC:
- Raw material purchase
- Production process
- Finished goods inventory
- Sales & Receivables
- Cash Collection
Sources of Working Capital Financing
Internal Sources
- Retained earnings
- Depreciation funds
- Accrued expenses (delayed payments like salaries)
External Sources
- Trade Credit (buy now, pay later agreements)
- Bank Loans (short-term financing)
- Commercial Papers (short-term unsecured promissory notes)
Common Mistakes Businesses Make in Working Capital Management
- Overestimating or underestimating cash flow needs
- Poor inventory management leading to stockouts or excess stock
- Extending too much credit to customers
Key Takeaways
- Working Capital is essential for managing daily operations.
- Efficient Working Capital Management ensures smooth business functioning.
- Banks use various methods like turnover method, holding norms, and cash budget analysis to assess a firm’s working capital needs.
Download the PDF Notes
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