WORKING CAPITAL & OPERATING CYCLE
WORKING CAPITAL & OPERATING CYCLE
Banking Promotion Exam | Easy Study Notes
Business profit kama raha ho, phir bhi salaries aur suppliers ko payment karne ke liye paisa kam pad sakta hai. Reason: paisa stock aur credit sales mein atka ho sakta hai. Working capital aur operating cycle isi funding requirement ko samjhate hain.
1. Working Capital kya hai?
Working capital business ki day-to-day operations mein invested funds ko kehte hain—jaise raw material, stock, receivables aur cash.
Iske do important concepts hain:
| Concept | Meaning | Formula |
|---|---|---|
| Gross Working Capital | Total current assets | Inventory + receivables + cash/bank + other current assets |
| Net Working Capital (NWC) | Current assets minus current liabilities | CA − CL |
Current liabilities mein trade creditors, outstanding expenses aur short-term bank borrowings jaise items shamil ho sakte hain.
Example:
| Particulars | ₹ lakh |
|---|---|
| Inventory | 40 |
| Receivables | 30 |
| Cash and other current assets | 10 |
| Total Current Assets | 80 |
| Trade creditors | 20 |
| Outstanding expenses | 5 |
| Short-term bank borrowings | 25 |
| Total Current Liabilities | 50 |
Gross Working Capital = ₹80 lakh
Net Working Capital = ₹80 − ₹50 = ₹30 lakh
Yeh ₹30 lakh current assets ka woh portion hai jo long-term funds se financed hai.
2. Positive aur Negative Working Capital
Positive NWC: Current assets current liabilities se zyada hain. Lekin inventory obsolete ho ya receivables recover na ho rahe hon, toh positive NWC ke bawajood cash shortage ho sakti hai.
Negative NWC: Current liabilities current assets se zyada hain. Yeh liquidity pressure ka signal ho sakta hai. However, fast cash collection aur supplier credit wale kuch business models mein negative NWC normal bhi ho sakta hai.
Exam point: NWC ka amount dekhne ke saath current assets ki quality aur realisability bhi check karni chahiye.
3. Permanent aur Temporary Working Capital
| Type | Meaning | Example |
|---|---|---|
| Permanent Working Capital | Minimum investment jo business mein continuously required rehta hai | Regular stock aur normal receivables |
| Temporary Working Capital | Seasonal ya additional demand ki wajah se extra requirement | Festival season mein additional inventory |
Permanent working capital ka matlab fixed assets nahi hai. Assets stock se receivables aur cash mein badalte rehte hain, lekin minimum funding need bani rehti hai.
4. Operating Cycle kya hai?
Operating cycle woh time hai jo inventory acquire karne se lekar sale proceeds collect karne tak lagta hai.
Manufacturing business mein sequence hota hai:
Raw Material → Work-in-Progress → Finished Goods → Receivables → Cash
Cash sales mein receivables stage nahi hoti. Trading business mein generally raw material aur work-in-progress stages nahi hoti.
Gross Operating Cycle = Inventory Holding Period + Receivables Collection Period
Manufacturing mein inventory holding period ko aur divide kar sakte hain:
Gross Operating Cycle = Raw Material Period + WIP Period + Finished Goods Period + Receivables Period
5. Cash Conversion Cycle kya hai?
Suppliers se credit milne par business ko purchases ka payment turant nahi karna padta. Isliye supplier credit period ko operating cycle se deduct karte hain.
Cash Conversion Cycle (CCC) = Gross Operating Cycle − Payables Deferral Period
Isse Net Operating Cycle bhi kaha jata hai.
Simple meaning: Supplier ko payment karne aur customer se cash milne ke beech ka funding gap.
Terminology alert: Kuch exam material “operating cycle” term ko net cycle ke liye bhi use karta hai. Question mein diya hua formula aur definition dhyan se padhein.
6. Complete Numerical Example
Ek manufacturer ke holding periods hain:
| Component | Days |
|---|---|
| Raw material holding | 30 |
| Work-in-progress | 15 |
| Finished goods holding | 20 |
| Receivables collection | 45 |
| Supplier credit | 25 |
Step 1: Inventory holding period
30 + 15 + 20 = 65 days
Step 2: Gross operating cycle
65 + 45 = 110 days
Step 3: Cash conversion cycle
110 − 25 = 85 days
Business ka cash approximately 85 days ke liye operations mein tied up rahega.
Agar customer collection period 45 se 60 days ho jaye:
Revised CCC = 65 + 60 − 25 = 100 days
Collection mein 15 days ki delay se funding gap bhi 15 days badh gaya.
7. Holding Periods kaise calculate karein?
Neeche formulas annual figures aur 365-day year par based hain:
| Period | Formula |
|---|---|
| Raw Material Holding Days | Average RM Stock ÷ Annual RM Consumption × 365 |
| WIP Holding Days | Average WIP ÷ Annual Cost of Production × 365 |
| Finished Goods Holding Days | Average FG Stock ÷ Annual Cost of Goods Sold × 365 |
| Receivables Collection Days | Average Trade Receivables ÷ Annual Credit Sales × 365 |
| Payables Deferral Days | Average Trade Payables ÷ Annual Credit Purchases × 365 |
Average balance = (Opening balance + Closing balance) ÷ 2
Use the day convention specified in the question—360 ya 365. Seasonal businesses mein monthly averages zyada representative ho sakte hain.
Important: Stock ko generally relevant cost se compare karte hain; receivables ko credit sales se. Har item ke denominator mein sales use nahi karni chahiye.
8. Cycle aur Funding Requirement ka Connection
Other things remaining equal:
| Change | General effect on funding need |
|---|---|
| Inventory holding increases | Increases |
| Customer collection takes longer | Increases |
| Supplier credit increases | Decreases |
| Production becomes faster | Decreases |
| Sales volume grows with unchanged cycle | Usually increases |
Simplified illustration: Assume ₹2 lakh daily cash operating cost ko poore 85-day net cycle ke liye fund karna hai.
Indicative funding tied up = ₹2 lakh × 85 = ₹170 lakh
Cycle 70 days ho jaye toh:
₹2 lakh × 70 = ₹140 lakh
Indicative release of funds = ₹30 lakh
Yeh simplified estimate hai. Detailed bank assessment mein stock, WIP, receivables, creditors, margins aur borrower contribution separately evaluate hote hain.
9. Working Capital Gap, NWC aur Bank Finance
Banking appraisal mein in terms ko interchangeably use nahi karna chahiye.
Working Capital Gap (WCG) = Current Assets − Other Current Liabilities
Yahan Other Current Liabilities (OCL) se working-capital bank borrowings excluded hote hain.
Agar:
- Current Assets = ₹100 lakh
- OCL = ₹25 lakh
- Working-capital bank borrowings = ₹50 lakh
Then:
WCG = ₹100 − ₹25 = ₹75 lakh
NWC = ₹100 − (₹25 + ₹50) = ₹25 lakh
Thus, is simplified example mein:
WCG ₹75 lakh = Bank Finance ₹50 lakh + NWC ₹25 lakh
Exam trap: Working capital gap, net working capital aur sanctioned bank limit teen alag figures ho sakte hain.
10. Banker ko kya dekhna chahiye?
Working capital assessment ke waqt sirf projected turnover enough nahi hai. Banker ko dekhna chahiye:
- Stock genuine, saleable aur business requirement ke according hai?
- Receivables ageing aur actual collection pattern kya hai?
- Holding periods industry aur past performance se match karte hain?
- Creditors badhne ka reason normal credit terms hain ya overdue payments?
- Short-term funds fixed assets ya unrelated purposes mein divert toh nahi ho rahe?
- Sanctioned limit ke saath drawing power aur actual cash flows adequate hain?
Profit aur cash flow alag hain: Credit sale profit generate kar sakti hai, jabki customer ka payment baad mein aata hai.
Quick Revision
Gross WC = Current Assets
Net WC = Current Assets − Current Liabilities
Gross Operating Cycle = Inventory Days + Receivables Days
Cash Conversion Cycle = Inventory Days + Receivables Days − Payables Days
Yaad rakho: Stock jaldi bike, customer jaldi pay kare aur supplier ka agreed credit available rahe— toh cash ka funding gap generally chhota hota hai.
Put it into practice with a timed mock test.
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