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Approaches of Working Capital Investment - Aggressive, Moderate & Conservative (in Hindi)
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Heena Malhotra
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Unacademy user
Very useful information n so aptly presented Jyotika !! well done 👍
Jyotika Sood
a year ago
Thank you 😊
hello mam ...please tell the most imp. chapters for management paper2 subject. weightage knse chapters me se jyada aegi questions ki so i will prepare according to that.
Heena Malhotra
a year ago
Hello Sonali, each & every subject and each & every chapter is equally important for net purpose.. and if you asking me in regards to financial mgt. then capital budgeting techniques ke formulas, capital structure ki theories, cost of capital ch ke formulas, leverage ch ke formulas, dividend Decisions ki Theories, CAPM method etc. are important topics.. :) iske ilwa apko hr chapter ka thoda thoda basic pta hona chahiye.. and for detail you have to analyse previous year papers. :)
SONALI GERA
a year ago
ok! ty mam :) qnd happy teacher's dae :)
Heena Malhotra
a year ago
Thank you so much Sonali :)
Mam Is conservative approach risky? I somewhere read that it's a risk free strategy and with your lecture I understood that it has risk of bad debt and non payment ...so I'm a bit confused
Heena Malhotra
a year ago
Hi kanupriya, please do a new comment, as I'm able to get regarding which video you are asking question :)
  1. Management of Working Capital By Heena Malhotra


  2. Scope of Working Capital Management Liquidity and Profitablility Investment and Financing By Heena Malhotra


  3. Approaches of working capital investment Aggressive Moderate Conservative By Heena Malhotra


  4. (a) Aggressive o Here investment in working capital is kept at minimal investment in current assets which means the entity does hold lower level of inventory, follow strict credit policy, keeps less cash balance etc. O The advantage of this approach is that lower level of fund is tied in the working capital which results in lower financial costs but the flip side could be that the organisation could not grow which leads to lower utilisation of fixed assets and long term debts. In the long run firm stay behind the competitors By Heena Malhotra


  5. (b) Conservative: o In this approach of organisation use to invest high capital in current assets. Organisations use to keep inventory level higher, follows liberal credit policies, and cash balance as high as to meet any current liabilities immediately. O The advantage of this approach are higher sales volume, increased demand due to liberal credit policy and increase goodwill among the suppliers due to payment in short time. o The disadvantages are increase cost of capital, higher risk of bad debts, shortage of liquidity in long run to longer operating cycles. By Heena Malhotra


  6. (c) Moderate: o This approach is in between the above two approaches. o Under this approach a balance between the risk and return is maintained to gain more by using the funds in very efficient manner. By Heena Malhotra


  7. Conservative policy Averag e policy Aggressive policy Fixed asset level Output By Heena Malhotra


  8. Management of Working Capital By Heena Malhotra


  9. Forecast/ Estimate of Working Capital Requirements O The following points highlight the top five methods for estimating working capital requirements, i.e o 1. Percentage of Sales Method o 2. Regression Analysis Method o 3. Cash Forecasting Method o 4. Operating Cycle Method o 5. Projected Balance Sheet Method By Heena Malhotra


  10. 1. Percentage of Sales Method: o If sales for the year 2017 amounted to Rs 30,00,000 and working capital required was Rs 6,00,000; the requirement of working capital for the year 2018 on an estimated sales of Rs 40,00,000 shall be Rs 8,00,000; i.e. 20% of Rs 40,00,000 By Heena Malhotra


  11. 1. Percentage of Sales Method: O This method of estimating working capital requirements is based on the assumption that the level of working capital for any firm is directly related to its sales value. o If past experience indicates a stable relationship between the amount of sales and working capital, then this basis may be used to determine the requirements of working capital for future period O The individual items of current assets and current liabilities can also be estimated on the basis of the past experience as a percentage of sales. O This method is simple to understand and easy to operate but it cannot be applied in all cases because the direct relationship between sales and working capital may not be established.


  12. 2. Regression Analysis Method (Average Relationship between Sales and Working Capital): O This method of forecasting working capital requirements is based upon the statistical technique of estimating or predicting the unknown value of a dependent variable from the known value of an independent variable. It is the measure of the average relationship between two or more variables, i.e.; sales and working capital, in terms of the original units of the data. O The relationships between sales and working capital are represented by the equation: Y-a+bx By Heena Malhotra


  13. 3. Cash Forecasting Method: O This method of estimating working capital requirements involves forecasting of cash receipts and disbursements during a future period of time. Cash forecast wil include all possible sources from which cash will be received and the channels in which payments are to be made so that a consolidated cash position is determined O This method is similar to the preparation of a cash budget. The excess of receipts over payments represents surplus of cash and the excess of payments over receipts causes deficit of cash or the amount of working capital required. By Heena Malhotra


  14. The duration of working capital cycle may vary depending on the nature of the business. In the form of an equation, the operating cycle process can be expressed as follows: Operating Cycle R+ W F+D-C Where, R Raw material storage period W-Work-in-progress holding period FFinished goods storage period DReceivables (Debtors) collection period CCredit period allowed by suppliers (Creditors). By Heena Malhotra


  15. No. of days in a year Operating Number of Operating Cycles in a year Cycle period Workig Caial Regired5 r 360 ays Operaing cycle (days) Desired cash balance By Heena Malhotra


  16. 4. Operating Cycle Method: O This method of estimating working capital requirements is based upon the operating cycle concept of working capital. The cycle starts with the purchase of raw material and other resources and ends with the realization of cash from the sale of finished goods. O It involves purchase of raw materials and stores, its conversion into stock of finished goods through work-in-process with progressive increment of labour and service costs, conversion of finished stock into sales, debtors and receivables, realization of cash and this cycle continues again from cash to purchase of raw material and so on. The speed/time duration required to complete one cycle determines the requirement of working capital - longer the period of cycle, larger is the requirement of working capital and vice-versa By Heena Malhotra


  17. 5. Projected Balarice Simeet Method: o Under this method, projected balance sheet for future date is prepared by forecasting of assets and liabilities by following any of the methods stated above. O The excess of estimated total current assets over estimated current liabilities, in the projected balance sheet, is computed to indicate the estimated amount of working capital required. By Heena Malhotra