Types of Working Capital - Hindi - YouTube

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Namashkar, my name is Mukul and welcome to Asset Yogi

where we unlock the knowledge of finance

In this video, we'll discuss about the types of working capital

This video is a part of a series in which we're discussing working capital management

which is a very important topic for any business

or if you invest in the share market

So if you haven't watched the previous 2 videos in which we discussed

Working capital operating cycle and its calculation

So you can watch those videos. You'll get the link in the description

In this video, we'll see in how many ways can we classify working capital

Let's switch to the blackboard

So let's see how the working capital is classified

We can classify it in 2 ways

Concept wise and Operating cycle wise

If we talk concept wise, one is Gross working capital and another is Net working capital

And operating cycle wise, one is Permanent/Fixed working capital

and the second is Temporary/Variable working capital

You can further divide temporary/variable working capital into

Seasonal working capital and Special working capital

Don't get confused. I'll explain all the working capitals in detail

Firstly, if we talk concept wise,

Then let's talk about the gross working capital

Gross working capital is your current assets

Current assets are those assets that get converted into cash in less than 1 year

If we talk about its examples

Then one is hard cash

There may be different types of cash

Either cash in hand

or some bank deposits. Maybe you have some money in your current account

Some FD's

You may have some marketable securities, some mutual funds, bonds which you can immediately convert into cash

That portion is under cash

Then there are some account receivables about which I already discussed before

Let's say you have a business in which you give goods on credit to wholesaler or retailer

and you receive the payment later

So the bills receivable comes in account receivable

and you don't receive that money immediately to you

But it can be converted into cash in less than 1 year

Then there are some inventories

Inventories are different types of stocks

This stock can be in the form of raw material, some stock can be under work in progress

which is under manufacturing process

Some stock can be in the form of finished goods

and if you will add these, you'll get the inventory cost

Then there can be some prepaid expenses

maybe you paid in advance for some things

For example, you pay the internet bill for the whole year at one time

or for 6 months

In this way, there may be some more bills

Maybe you paid the money for raw material in advance

So those prepaid expenses are also included in gross working capital or current assets

Under gross working capital, we only include current assets

So let's understand this through an example

Let's take the same example which I took in my previous video

Let's say this is a sports shop and a cricket academy places an order

Let's say an order of 10 cricket kits

And the price of these 10 kits is Rs 1.5 lakhs

But the cost of these kits to the sports shop is only Rs 1 lakh

So let's see how the calculation of gross working capital is done

Let's say the cash portion with the store owner is Rs 50,000

Generally, he maintains an inventory of Rs 2 lakhs

But Rs 1 lakhs will be subtracted from here

Because he sells the cricket kits worth Rs 1 lakhs to this cricket academy

Now this cricket academy ask the kits on credit because they don't have immediate capital

but they will pay the money after 30 days

So the owner of the sports shop is ready for this

and says 'because you are my regular customer, I'll allow 30 days credit period to you'

So the inventory in the account is now deducted

and the net inventory in your shop now is Rs 1 lakhs

After that in your accounts receivable,

You lent Rs 1.5 lakhs kits to the academy so Rs 1.5 lakhs

will come later, after 30 days

So for 30 days, these are the accounts receivable

Now how will you calculate the gross working capital?

Basically, you'll add all the current assets

So your current assets are cash + inventory + accounts receivable

The inventory is only finished goods because raw material and work in progress is mainly in the manufacturing

We're only talking about retail

But if you have any other type of business then you will add the inventory accordingly

It's not a big deal

In gross working capital, you'll add Rs 50,000 cash portion, Rs 1 lakh inventory, and Rs 1.5 lakhs accounts receivable

and the gross working capital came out Rs 3 lakhs

Now let's see what are the limitations

When you calculate gross working capital, you think that you need Rs 3 lakhs net per month to run your business

But it has some limitations

It cannot predict the exact requirement of your working capital

Let me tell you why it cannot predict exactly

For that, we need to understand the concept of net working capital

We'll keep the same example

Cash Rs 50,000, inventory net Rs 1 lakhs and accounts receivable Rs 1.5 lakhs

The formula of the net working capital is Current assets - Current liabilities

I told you about this in my previous video also

So if you want to understand broadly or want to learn the formula of any working capital then you can learn this

You don't need to think much about the gross working capital

So what are the current assets?

Cash + accounts receivable + inventories

and current liabilities are the accounts payable

So just keep these things in mind

So basically, the net working capital = current assets - current liabilities

So how the net working capital will be calculated

The cricket academy borrowed for 30 days on credit

Similarly, the sports shop can go to the cricket equipment factory

and can ask to give the inventory on credit for 30 days

So maybe all the inventory with the sports shop

is lent and it is

totally financed and cricket equipment factory is lending for 30 days

So the Rs 2 lakhs inventory maintained by the sports shop is completely

a liability and he is keeping all these on credit

So the accounts payable or the current liabilities is of Rs 2 lakhs

So now how will you calculate the net working capital?

Net working capital will be

Rs 50,000 cash, Rs 1 lakh inventory

+ Rs 1.5 lakhs accounts receivable - Rs 2 lakhs accounts payable

That means you subtracted the current liabilities

The net working capital came out Rs 1 lakh

If you would have calculated through gross working capital then the requirement was...

the gross working capital we calculated just now

That was Rs 3 lakhs

So you would think that you need Rs 3 lakhs to run this business.

But no, you need only Rs 1 lakhs to run this business

That's why you should only calculate the net working capital

Because it predicts the total working capital requirement better

So this was about gross working capital and working capital

Now let's see how the working capital is divided according to the operating cycle

The forecasting of the working capital that how much total working capital is required

can be divided into fixed or variable working capital

Now, what is fixed or variable?

Permanent or fixed working capital is your minimum working capital

which does not change and you have to maintain it every month

You can easily predict and forecast it

What is temporary/variable working capital?

that may vary every month

and you cannot exactly predict but you can just estimate roughly.

Now let me explain this through an example

Let's say you have an electronic store in which you have TV screens, LCD monitors

Microwaves, washing machines, refrigerators, AC's

You keep these products in your electronic store

In this, let's say you sell the TV screens, LCD screens, microwaves, washing machines

in equal quantity regularly every month

But the refrigerator and AC's are sold only in summers

So this was the seasonal working capital

that depends on the season

Maybe some products are sold more in summers

Some products are sold more in the winters

For example in winters, heaters and geysers are sold more

So you'll receive more demand for these

Then there may be some specific products sold more in the wedding season

Mostly, electronic items are high in demand in the wedding season

So you should be good at predicting those demands as well

2nd is special working capital

Special working capital means sometimes you get some big orders

For example, Commonwealth Games were organised in Delhi

In that case, the requirement of everything increases

You need more AC's, more washing machines

Then there may be a new office going to open near your shop then you can receive large orders

So if I take an example for net working capital

Let's say for this electronic store

And let me calculate it for summers

So I say that I have a requirement of Rs 50 lakhs every month

So this was my permanent working capital

Permanent or fixed because Rs 50 lakhs selling is done every month

No matter what happens but this is the minimum

After that, what else do I need to maintain

There are some seasonal. Now how much that can be?

Maybe I receive Rs 20 lakhs order extra in summers

Basically, I receive these many extra orders

because the demand for refrigerators and AC's increases so much

Then there may be any new office going to open near your store.

then there can be a big order of Rs 10 lakhs

So you have to arrange Rs 10 lakhs

You may not have the working capital immediately so you can finance it

So basically, this is your special working capital

You can request your creditor/manufacturer

or you may have to finance it

I'll make a different video on working capital financing

But after watching this video, you might have understood broadly that

what are gross and net working capitals

You should always calculate the net working capital because it exactly predicts

your working capital requirement

Secondly, according to the operating cycle

how much is your permanent and variable working capital

You should be able to predict it

So that's it in this video

I actually enjoyed making this video

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