ACCOUNTING FOR MANAGERS (MBA6103) MBA 1SR SEM SYLLABUS #HPTU #MBA

📘 Financial Accounting – Full 1 Unit (Overview → Mechanics → Final Accounts)

---

1) Overview of Accounting (Intro + Objective + Branches)

Meaning: Accounting = financial transactions ko record, classify, summarize & interpret karke financial statements banana.
(Hinglish: Paise ke saare lena–dena ko systematic tareeke se likhna aur uska report banana.)

Objectives: Profit/Loss batana, Financial Position dikhana, Compliance, Decision-making.

Main Branches:

• Financial Accounting: External reporting (P&L, Balance Sheet).

• Cost Accounting: Product cost, cost control.

• Management Accounting: Planning, control, decisions (budgets, ratios).

---

2) Users of Accounting (Kaun use karta hai?)

• Internal: Owners/Shareholders, Management, Employees.

• External: Investors, Lenders/Banks, Creditors/Suppliers, Government/Tax, Customers, Analysts.

• Use: Profitability check, liquidity/solvency, lending decision, tax assessment, pricing, strategy.

---

3) Accounting Concepts & Conventions (GAAP ke pillars)

Concepts (Rules of thinking):

• Business Entity: Business ≠ Owner (alag pehchaan).

• Going Concern: Business continue hoga (no immediate closure).

• Money Measurement: Sirf money-measurable facts record.

• Historical Cost: Assets initially cost par record.

• Dual Aspect: Har transaction ka do effect (Debit=Credit).

• Accrual & Matching: Income/Expense ko same period me match karo.

• Revenue Recognition: Earning substantially complete ho toh recognize.

Conventions (Practices):

• Prudence/Conservatism: “Anticipate no profit, provide for all losses.”

• Consistency: Methods bar-bar change na karo; change ho to disclose.

• Materiality: Sirf important (material) items detail me.

---

4) Book-keeping vs Accounting

Feature	Book-keeping	Accounting
Scope	Recording only	Recording + Classification + Analysis + Reporting
Output	Journals, Ledgers	Trial Balance, P&L, Balance Sheet, Ratios
Focus	Day-to-day	Decision-making

---

5) Principles / Rules of Accounting

Golden Rules (Traditional):

• Real A/c: Debit what comes in; Credit what goes out.

• Personal A/c: Debit the receiver; Credit the giver.

• Nominal A/c: Debit all expenses & losses; Credit all incomes & gains.

Modern (fast yaad):

• Assets, Expenses → Debit increases

• Liabilities, Equity, Income → Credit increases

---

6) Accounting Equation (Always true)

Formula: Assets = Liabilities + Equity (Capital)
(Hinglish: Jo kuchh business ke paas hai = Doosron ka udhaar + Owners ka hissa)

🔢 Quick Example (step-by-step)

1. Owner started business with ₹2,00,000 cash

   • Assets: Cash +2,00,000 | Equity: Capital +2,00,000

2. ₹1,20,000 cash bank me deposit kiya

   • Cash −1,20,000; Bank +1,20,000 (assets reshuffle)

3. Equipment ₹50,000 bank se kharida

   • Bank −50,000; Equipment +50,000

4. Goods on credit ₹60,000 (from Mohan)

   • Inventory +60,000; Liability (Creditor) +60,000

5. Rent ₹6,000 cash diya (expense equity ko kam karta hai)

   • Cash −6,000; Equity −6,000

6. Service revenue ₹40,000 bank me mila

   • Bank +40,000; Equity +40,000

Final check:

• Assets = Cash 74,000 (2,00,000 − 1,20,000 − 6,000) + Bank 1,10,000 (1,20,000 − 50,000 + 40,000) + Equipment 50,000 + Inventory 60,000 = ₹2,94,000

• Liab + Equity = Creditor 60,000 + (Capital 2,00,000 + Rev 40,000 − Rent 6,000) 2,34,000 = ₹2,94,000 ✔

---

7) Depreciation (SLM & WDV)

Meaning: Asset ki cost ko uski useful life me expense ki tarah baantna (wear & tear, time, obsolescence).
Why: Matching principle, true profit, realistic asset value, tax planning.

(A) Straight Line Method (SLM)

Annual Depreciation = (Cost − Residual) ÷ Life
Example: Cost ₹1,50,000; Residual ₹10,000; Life 4 yrs
→ (1,50,000 − 10,000) ÷ 4 = ₹35,000 per year
Book Value ends: 1,15,000 → 80,000 → 45,000 → 10,000

(B) Written-Down Value (WDV / Diminishing)

Depreciation = Rate × Opening Book Value
Example (25% on ₹1,00,000):

• Yr1: ₹25,000 dep → BV ₹75,000

• Yr2: ₹18,750 dep → BV ₹56,250

• Yr3: ₹14,062.50 dep → BV ₹42,187.50

---

8) Accounting Standards (International view)

• IASB issues IFRS/IAS (global norms). India me Ind AS (IFRS-aligned).

• Goal: Faithful, comparable, transparent financials.

• Key examples:

  • IAS 1 Presentation of FS (BS, P&L, Equity, Cash Flows, Notes)

  • IAS 2 Inventories (Lower of Cost & NRV)

  • IAS 16 Property, Plant & Equipment

  • IFRS 15 Revenue from Contracts

  • IFRS 16 Leases

  • IAS 7 Cash Flow Statements

---

9) Mechanics of Accounting (Double Entry → Final Accounts)

(i) Double Entry System

Har transaction me equal debits = equal credits. Isi se Trial Balance tally hota hai.

(ii) Journalizing (with narrations)

Example transactions (year):

1. Capital introduced ₹3,00,000 (cash)

2. Bank a/c me deposit ₹2,00,000

3. Furniture ₹40,000 cash

4. Purchases: Credit ₹1,50,000 (Aarav); Cash ₹50,000

5. Sales: Credit ₹1,80,000 (Beena); Cash ₹1,20,000

6. Purchase Return to Aarav ₹10,000

7. Sales Return from Beena ₹8,000

8. Carriage Inward ₹6,000 (direct) cash

9. Wages ₹14,000 (direct) cash

10. Rent ₹12,000 (indirect) cash

11. Salaries ₹18,000 (indirect) bank

12. Beena paid ₹1,70,000 (bank)

13. Paid Aarav ₹1,30,000 (bank)
    Adjustments: Closing stock ₹60,000; Depreciation on furniture 10% (₹4,000)

Main Journal Entries (illustrative):

• Cash Dr 3,00,000 To Capital 3,00,000

• Bank Dr 2,00,000 To Cash 2,00,000

• Furniture Dr 40,000 To Cash 40,000

• Purchases Dr 1,50,000 To Aarav 1,50,000

• Purchases Dr 50,000 To Cash 50,000

• Cash Dr 1,20,000; Beena Dr 1,80,000 To Sales 3,00,000

• Aarav Dr 10,000 To Purchase Return 10,000

• Sales Return Dr 8,000 To Beena 8,000

• Carriage Inward Dr 6,000 To Cash 6,000

• Wages Dr 14,000 To Cash 14,000

• Rent Dr 12,000 To Cash 12,000

• Salaries Dr 18,000 To Bank 18,000

• Bank Dr 1,70,000 To Beena 1,70,000

• Aarav Dr 1,30,000 To Bank 1,30,000

• Depreciation Dr 4,000 To Accumulated Dep—Furniture 4,000

(iii) Ledger Posting (T-accounts – closing balances)

• Cash (Dr): 3,00,000 − 2,00,000 − 40,000 − 50,000 − 6,000 − 14,000 − 12,000 + 1,20,000 = ₹98,000 (Dr)

• Bank (Dr): 2,00,000 − 18,000 + 1,70,000 − 1,30,000 = ₹2,22,000 (Dr)

• Debtors – Beena: 1,80,000 − 8,000 − 1,70,000 = ₹2,000 (Dr)

• Creditors – Aarav: 1,50,000 − 10,000 − 1,30,000 = ₹10,000 (Cr)

• Furniture (cost): ₹40,000 (Dr); Acc. Dep (Cr): ₹4,000

• Purchases: ₹2,00,000 (Dr); Purchase Return: ₹10,000 (Cr)

• Sales: ₹3,00,000 (Cr); Sales Return: ₹8,000 (Dr)

• Carriage Inward: ₹6,000 (Dr); Wages: ₹14,000 (Dr)

• Rent: ₹12,000 (Dr); Salaries: ₹18,000 (Dr)

• Capital: ₹3,00,000 (Cr)

(iv) Trial Balance (pre-closing stock)

Account	Dr (₹)	Cr (₹)
Cash	98,000	–
Bank	2,22,000	–
Furniture	40,000	–
Accumulated Dep—Furniture	–	4,000
Purchases	2,00,000	–
Purchase Return	–	10,000
Sales	–	3,00,000
Sales Return	8,000	–
Carriage Inward	6,000	–
Wages	14,000	–
Rent	12,000	–
Salaries	18,000	–
Debtors—Beena	2,000	–
Creditors—Aarav	–	10,000
Depreciation (expense)	4,000	–
Capital	–	3,00,000
Total	6,24,000	6,24,000

Closing Stock ₹60,000 (Trading Cr side & Balance Sheet Asset me show hoga).

(v) Trading Account → Gross Profit

• Net Sales = Sales 3,00,000 − Sales Return 8,000 = ₹2,92,000

• Net Purchases = Purchases 2,00,000 − Purchase Return 10,000 = ₹1,90,000

• Direct Expenses = Carriage Inward 6,000 + Wages 14,000 = ₹20,000

• COGS = Opening 0 + 1,90,000 + 20,000 − Closing 60,000 = ₹1,50,000

• Gross Profit (GP) = 2,92,000 − 1,50,000 = ₹1,42,000

(vi) Profit & Loss (Indirect items) → Net Profit

• Expenses: Rent 12,000 + Salaries 18,000 + Depreciation 4,000 = ₹34,000

• Net Profit (NP) = GP 1,42,000 − 34,000 = ₹1,08,000

(vii) Balance Sheet (year-end)

Assets

• Cash ……………………………………… ₹98,000

• Bank ……………………………………… ₹2,22,000

• Debtors (Beena) …………………… ₹2,000

• Inventory (Closing Stock) …… ₹60,000

• Furniture 40,000 − Acc. Dep 4,000 = ₹36,000
  Total Assets = ₹4,18,000

Equity & Liabilities

• Creditors—Aarav ………………… ₹10,000

• Capital ………………………………… ₹3,00,000

• Add: Net Profit …………………… ₹1,08,000
  → Closing Capital = ₹4,08,000
  Total = ₹4,18,000 ✔

---

10) Ray Diagram / Flow (super quick visual)

Source Docs → Journal → Ledger → Trial Balance
                 ↓
           Adjustments (Dep, Closing Stock etc.)
                 ↓
        Trading A/c → Gross Profit/Loss
                 ↓
        Profit & Loss A/c → Net Profit/Loss
                 ↓
            Balance Sheet (Assets = Equity + Liabilities)

---

11) Mini Practice – Depreciation (SLM vs WDV)

SLM: Machine ₹2,40,000; Scrap ₹40,000; Life 4 yrs
Annual Dep = (2,40,000 − 40,000) ÷ 4 = ₹50,000
Book Values: 1,90,000 → 1,40,000 → 90,000 → 40,000

WDV 20%: Cost ₹1,50,000
Y1 dep 30,000 → BV 1,20,000
Y2 dep 24,000 → BV 96,000
Y3 dep 19,200 → BV 76,800

---

✅ Quick Revision Lines

• Accounting Equation: Always balances—Assets = Liabilities + Equity.

• SLM vs WDV: SLM = equal charge; WDV = declining charge.

• Trading A/c: Direct items → GP; P&L: Indirect items → NP.

• Closing Stock: Trading Cr & Balance Sheet Asset.

• Double Entry: Every debit has equal credit → Trial Balance tallies.

 

📘 Unit II – Financial Statements Analysis (15 Lectures)

---

1. Financial Statements

👉 Meaning:
Financial statements are the final reports of a company’s financial performance. They show:

• Profitability (company ne kitna profit kamaya)

• Financial position (assets, liabilities, equity kitna hai)

• Cash flow (paise kahan se aaye aur kahan gaye)

Main financial statements:

1. Profit & Loss Account (Income Statement) – profit/loss dikhata hai.

2. Balance Sheet – financial position ek specific date par.

3. Cash Flow Statement – cash inflows & outflows.

4. Notes to Accounts – additional details.

---

2. Ratio Analysis

👉 Concept:
Ratios are mathematical relationships between two accounting figures.
(Example: Current Ratio = Current Assets ÷ Current Liabilities).

👉 Types of Ratios:

1. Solvency Ratios – Long-term stability check karte hain.

   • Debt-Equity Ratio = Debt ÷ Equity

     • Example: Debt ₹10,00,000, Equity ₹5,00,000 → Ratio = 2:1 (Zyada risky hai).

2. Profitability Ratios – Profit earning ability check karte hain.

   • Net Profit Ratio = (Net Profit ÷ Sales) × 100

     • Example: Net Profit ₹50,000, Sales ₹5,00,000 → 10%.

3. Activity Ratios – Assets ka utilization kaisa hai.

   • Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

     • Example: COGS ₹6,00,000, Avg. Inventory ₹1,00,000 → 6 times.

4. Liquidity Ratios – Short-term obligations ko pay karne ki ability.

   • Current Ratio = Current Assets ÷ Current Liabilities

     • Example: CA ₹2,00,000, CL ₹1,00,000 → Ratio = 2:1 (ideal).

5. Market Capitalization Ratios – Shareholders ke returns check karte hain.

   • Earnings Per Share (EPS) = Net Profit ÷ No. of Shares

---

3. Common Size Statement

👉 Concept:
In common size statement, sabhi figures ko ek base ke % me dikhaya jata hai.

• In P&L A/c – base = Sales = 100%

• In Balance Sheet – base = Total Assets/ Liabilities = 100%

✔ Example: Sales ₹10,00,000, COGS ₹6,00,000 → COGS = 60%.

---

4. Comparative Balance Sheet & Trend Analysis

• Comparative Balance Sheet – 2 ya zyada years ke Balance Sheets compare karna.

• Trend Analysis – Time ke saath data ka % change study karna.

✔ Example:

• Sales 2022 = ₹5,00,000

• Sales 2023 = ₹7,50,000
  👉 Trend = (7,50,000 ÷ 5,00,000) × 100 = 150%

---

5. Funds Flow Statement

👉 Meaning:
Funds = Working Capital (Current Assets – Current Liabilities).
Funds Flow = Changes in working capital + Non-current items ke inflows/outflows.

👉 Steps:

1. Prepare Schedule of Changes in Working Capital.

2. Show inflow (issue of shares, sale of fixed assets, etc.).

3. Show outflow (purchase of fixed assets, redemption of debentures, etc.).

4. Prepare Funds Flow Statement.

✔ Example:

• Share Capital increased = Inflow

• Purchase of Machinery = Outflow

---

6. Cash Flow Statement

👉 Meaning:
Cash Flow Statement shows cash inflows & outflows during a period.

👉 Activities:

1. Operating Activities – day-to-day business cash flow (e.g., cash from customers, payment to suppliers).

2. Investing Activities – cash used in buying/selling fixed assets.

3. Financing Activities – raising capital (issue of shares, repayment of loans).

👉 Difference b/w Cash Flow & Fund Flow:

• Cash Flow = movement of cash only

• Fund Flow = movement of working capital

✔ Example:

• Cash received from issue of shares = Financing inflow.

• Cash paid to buy machinery = Investing outflow.

---

7. Application in Different Sectors

1. Manufacturing firms – ratio analysis for production efficiency, cost control.

2. Service firms – liquidity, profitability important (kyunki assets kam hote hain).

3. Banking organizations – liquidity, solvency & capital adequacy ratios important.

---

🎯 Summary (Easy Hinglish)

👉 Financial statements help in knowing profit, position and cash flow.
👉 Ratios simplify analysis (Solvency, Profitability, Activity, Liquidity, Market).
👉 Comparative & Common size statements show trend and percentage analysis.
👉 Fund Flow = change in working capital.
👉 Cash Flow = change in cash.
👉 Useful for manufacturing, service & banking firms in decision-making.

📘 Unit III – Cost Accounting & Management Accounting (15 Lectures)

---

1. Cost: Meaning, Concept and Classification

👉 Meaning:
Cost = expenditure incurred in producing a product or service.
(Example: Raw material, labour, rent, electricity, etc.)

👉 Concept:
Cost = Money value of resources used in production.

👉 Classification of Cost:

1. By Element:

   • Material Cost (raw materials used)

   • Labour Cost (wages, salaries)

   • Overheads (indirect expenses like electricity, rent).

2. By Nature:

   • Fixed Cost – Constant (e.g., rent).

   • Variable Cost – Changes with output (e.g., raw material).

   • Semi-variable Cost – partly fixed, partly variable (e.g., electricity bill).

3. By Function:

   • Production Cost – related to manufacturing.

   • Administration Cost – office expenses.

   • Selling & Distribution Cost – advertisement, salesmen salary.

✔ Example:
If a company produces 100 chairs:

• Wood = ₹5,000 (Material)

• Labour = ₹3,000 (Labour)

• Rent = ₹2,000 (Overheads)
  👉 Total Cost = ₹10,000

---

2. Elements of Cost

1. Direct Material – raw material used directly in product.

2. Direct Labour – wages of workers directly making goods.

3. Direct Expenses – special tools, royalties, etc.

4. Overheads – indirect expenses (factory, admin, selling).

---

3. Cost Sheet

👉 Definition: A statement showing detailed cost of production.

👉 Format (Simplified):

1. Prime Cost = Direct Material + Direct Labour + Direct Expenses

2. Factory Cost = Prime Cost + Factory Overheads

3. Cost of Production = Factory Cost + Admin Overheads

4. Cost of Sales = Cost of Production + Selling & Distribution Overheads

✔ Numerical Example:

• Direct Material = ₹10,000

• Direct Labour = ₹5,000

• Factory OH = ₹3,000

• Admin OH = ₹2,000

• Selling OH = ₹1,000

👉 Prime Cost = 10,000 + 5,000 = 15,000
👉 Factory Cost = 15,000 + 3,000 = 18,000
👉 Cost of Production = 18,000 + 2,000 = 20,000
👉 Cost of Sales = 20,000 + 1,000 = 21,000

---

4. Material Costing & Control

(a) Valuation of Material Issue Methods

1. FIFO (First In First Out): Oldest stock issued first.

2. LIFO (Last In First Out): Latest stock issued first.

3. Average Price Method: Weighted average of stock price.

✔ Example:
Stock: 100 units @ ₹10, 100 units @ ₹12.
Issue 100 units → FIFO = ₹1,000, LIFO = ₹1,200, Weighted Avg = ₹1,100

(b) Material Control Techniques

1. EOQ (Economic Order Quantity)

2. ABC Analysis (A = costly items, B = medium, C = cheap)

3. Perpetual Inventory System (continuous stock record).

---

5. Marginal Costing

👉 Concept:
Marginal Cost = Variable Cost per unit.
Fixed cost is treated as period cost.

👉 Key Terms:

1. Profit Volume (P/V) Ratio = Contribution ÷ Sales × 100

   • Contribution = Sales – Variable Cost
     ✔ Example: Sales ₹50,000, VC ₹30,000 → Contribution ₹20,000
     👉 P/V Ratio = 20,000 ÷ 50,000 × 100 = 40%

2. Break-Even Point (BEP): Point where profit = 0 (No Profit, No Loss).

   • Formula: BEP (Sales) = Fixed Cost ÷ P/V Ratio
     ✔ Example: Fixed Cost ₹10,000, P/V Ratio 40% → BEP = 25,000

3. Margin of Safety (MOS): Actual Sales – BEP Sales
   ✔ Example: Sales ₹40,000, BEP ₹25,000 → MOS = ₹15,000

👉 Application of BEP Analysis:

• Helps in fixing selling price.

• Helps in deciding whether to accept special order.

• Helps in “Make or Buy” decisions.

---

6. Standard Costing

👉 Meaning: Predetermined cost set for production, compared with actual cost.
👉 Variance = Difference b/w Standard & Actual Cost

• Material Variance, Labour Variance, Overhead Variance.

✔ Example:
Standard Labour Cost = ₹100 per unit, Actual = ₹120 → Variance = ₹20 (Adverse).

---

7. Budgetary Control

👉 Meaning: Preparing budgets (future plan in monetary terms) & comparing with actual performance.

👉 Types of Budgets:

1. Sales Budget – estimated sales.

2. Production Budget – output required.

3. Cash Budget – cash inflows & outflows.

4. Flexible Budget – changes with level of activity.

👉 Importance:

• Controls cost

• Guides management

• Helps in coordination between departments

✔ Example:
If Cash Budget predicts shortage next month → company arrange loan in advance.

---

🎯 Summary (Easy Hinglish)

• Cost = Expense of production (classified into fixed, variable, semi-variable).

• Cost Sheet shows cost step-by-step (Prime → Factory → Production → Sales).

• Material Costing ke liye FIFO, LIFO, Average use hota hai + control with EOQ & ABC.

• Marginal Costing → P/V ratio, BEP, MOS for decision-making.

• Standard Costing → set standard, compare with actual, find variances.

• Budgetary Control → prepare budgets, compare, control future cost.

Unit IV — Financial Management (in-depth — Easy English + Hinglish)

---

1. Meaning of Financial Management

Easy English: Financial management is the art and science of managing money in a business — getting funds, allocating them, and controlling their use to achieve firm goals.
Hinglish: Financial management ka matlab hai business ke paise ko sahi time par sahi jagah pe lana, use karna aur control karna taaki firm ka goal (wealth/profit) achieve ho.

Short definition: “Procurement, allocation and control of financial resources to maximize owners’ wealth.”

---

2. Aims & Objectives of Financial Management

Main aim (primary): Wealth maximization of shareholders (share price / owners’ wealth).
Secondary aim: Profitability, liquidity and solvency balance.

Objectives (detailed):

• Profitability — Ensure adequate returns (profit maximization as a component).

• Liquidity — Maintain enough cash/current assets to meet short-term obligations.

• Safety — Protect capital; avoid risky over-leveraging.

• Growth — Provide funds for expansion and modernization.

• Efficiency — Minimize cost of funds and maximize ROI.

• Market value — Improve market valuation of the firm.

• Compliance & Tax planning — Legally reduce tax burden and comply with regulations.

---

3. Nature of Financial Management

• Managerial function: Financial decisions are managerial — planning, organizing, directing, controlling.

• Dynamic: Changes with markets, interest rates, regulations.

• Pervasive: Every department needs finance — production, marketing, HR.

• Decision-oriented: Focus on choices (which project to fund, debt vs equity).

• Interdisciplinary: Uses accounting, economics, law, statistics, marketing.

• Risk & return trade-off: Always balancing risk and expected return.

---

4. Scope of Financial Management

Areas covered (typical syllabus map):

1. Financial planning & forecasting (short & long term).

2. Capital budgeting / Investment decisions (NPV, IRR, Payback).

3. Capital structure / Financing decisions (debt vs equity mix).

4. Dividend policy decisions (payout vs retention).

5. Working capital management (cash, inventory, receivables, payables).

6. Financial analysis & control (ratios, budgets, variance).

7. Risk management & insurance.

8. Financial markets & instruments (bonds, shares, derivatives).

9. Mergers, acquisitions & restructuring.

---

5. Functions of Financial Management

Practical functions managers perform:

• Fund raising (procurement): Decide sources & timing of funds.

• Investment allocation: Allocate to projects with best returns (capex).

• Dividend decisions & retained earnings management.

• Working capital control: Manage cash, inventory, receivables, payables.

• Financial analysis & control: Budgeting, ratio analysis, variance analysis.

• Risk management & insurance.

• Tax planning and regulatory compliance.

---

6. Major Financial Decisions (the 3 classical decisions)

1. Investment Decision (Capital budgeting): Which long-term projects to accept? Use NPV, IRR, Profitability Index.

2. Financing Decision (Capital structure): How to raise funds — debt or equity? Balance cost vs financial risk.

3. Dividend Decision: How much profit to distribute vs retain for reinvestment? Effects on share price and liquidity.

Plus: Working capital decision (short-term financing & management).

---

7. Sources of Finance — Overview, Types, Pros & Cons

A. Long-term sources (for fixed assets / growth)

1. Equity capital / Share capital (owner’s funds)

   • Pros: No fixed obligation, improves creditworthiness

   • Cons: Dilution of control, cost of equity high

2. Retained earnings (internal funds)

   • Pros: Cheap, no dilution

   • Cons: May be insufficient

3. Debentures / Bonds (long-term debt)

   • Pros: Tax deductibility of interest, no ownership dilution

   • Cons: Fixed interest burden, bankruptcy risk

4. Term loans from banks / Financial institutions

   • Pros: Large amounts, structured repayment

   • Cons: Collateral, covenants

5. Leasing / Hire-purchase (asset financing)

   • Pros: Less initial cash outflow, off-balance options (depends)

   • Cons: Effective cost may be higher

6. Venture capital / Private equity

   • Pros: Growth capital + expertise

   • Cons: Equity dilution, control loss

7. Rights issue / Bonus shares / Preference shares

   • Each has specific features (preference shares pay fixed dividend).

B. Short-term sources (for working capital)

1. Bank overdraft / Cash credit / Working capital loan

2. Trade credit (suppliers’ credit) — most common

3. Commercial paper (large firms)

4. Factoring of receivables

5. Advance from customers (deposits)

6. Inter-company loans (within group)

Key rule: Match the financing horizon with asset life — long term funds for fixed assets, short term funds for working capital (matching principle).

---

8. Working Capital — Meaning & Concept

Simple formula:
Net Working Capital (NWC) = Current Assets − Current Liabilities

Gross Working Capital = Total Current Assets.
Net Working Capital = Excess of current assets over current liabilities.

Hinglish: Working capital matlab business ke roz-marra ke kaam chalane ke liye zaroori paise (cash/stock/debtors less short term loans).

---

9. Significance / Importance of Working Capital

• Liquidity: Meet day-to-day obligations (salaries, suppliers).

• Smooth operations: Maintain uninterrupted production & sales.

• Creditworthiness: Banks & suppliers judge liquidity—affects terms and sourcing.

• Profitability link: Too much WC ties funds (low RoE); too little causes stock outs & lost sales.

• Buffer against seasonal fluctuations (har season sales different).

• Supports expansion: Helps finance growth until long-term funds arrive.

---

10. Classification / Types of Working Capital

A. By Nature / Time

• Permanent (Fixed) Working Capital: Minimum level of current assets required always (e.g., minimum inventory, receivables).

• Temporary / Variable (Fluctuating) Working Capital: Varies with seasonal demand or cyclical factors.

B. By Purpose

• Regular working capital — required for routine operations.

• Reserve working capital — contingency funds for emergencies.

• Seasonal working capital — to meet seasonal peaks.

C. By Measurement

• Gross working capital — Total current assets.

• Net working capital — Current assets − current liabilities.

D. Other types

• Negative working capital — Current liabilities > Current assets (possible in some retail models with quick turnover).

• Permanent + Variable split — Firms often finance permanent WC with long-term funds.

---

11. Methods to Estimate Working Capital Requirement (practical)

1. Operating Cycle Method (most common)

Working capital requirement relates to the time funds are blocked in inventory and receivables.

Operating Cycle (OC) = Inventory Period + Work-in-progress Period + Receivable Period − Payable Period

Then,

$$\text{WCR} = \frac{\text{Operating Cycle (days)}}{365} \times \text{Annual Sales} \;-\; \text{Spontaneous Current Liabilities}$$

Numerical example:

• Annual sales = ₹1,20,00,000 (₹12 million)

• Inventory period = 50 days; Receivable period = 40 days; Payable period = 30 days
  Operating cycle = 50 + 40 − 30 = 60 days
  WCR ≈ (60/365) × 12,000,000 = ₹1,97,260 (≈ ₹1.97 lakh)
  If trade creditors already finance ₹50,000 (payables), net external working capital requirement ≈ ₹1,47,260.

2. Ratio / Percentage of Sales Method

Based on historical current assets to sales ratio:
WCR = (Average current assets / Average sales) × Projected sales.

3. Projected Balance Sheet Method

Prepare pro-forma balance sheet for the period and compute current assets minus current liabilities.

4. Cash Budgeting Method

Estimate cash inflows & outflows monthly → derive minimum cash required + precautionary balances.

---

12. Factors Affecting Working Capital Requirement (detailed)

1. Nature of business: Manufacturing firms (higher WC) vs trading vs service firms (lower WC).

2. Scale of operations: Larger firms need more absolute WC.

3. Production cycle length: Long production time → higher inventory → more WC.

4. Credit policy to customers: Liberal credit increases receivables → more WC.

5. Credit allowed by suppliers: More trade credit reduces WC requirement.

6. Business seasonality / demand variability: Seasonal peaks ↑ WC.

7. Growth and expansion plans: Fast growth needs more WC.

8. Operating efficiency: Faster inventory turnover reduces WC.

9. Inflation & price levels: Rising prices increase nominal WC requirement.

10. Availability of finance & interest rates: Costlier short-term finance may force conservative policies.

11. Market competition & sales policy: Heavy promotional activities may increase receivables/inventory.

12. Government policy / Regulations / Taxation cycles (advance tax, subsidies).

(Hinglish tip: Agar tumhara production cycle lamba hai, ya tum credit dete ho customer ko, to tumhe zyada working capital chahiye.)

---

13. Working Capital Management — Techniques & Policies

A. Policies for financing WC

• Conservative policy: Finance both permanent and temporary WC with long-term funds → safe but costly (higher idle funds).

• Aggressive policy: Finance temporary WC with short-term funds → cheaper but risky (rollover risk).

• Matching / Hedging (moderate) policy: Match short-term needs with short-term funds; long-term funds for permanent needs → balanced approach.

B. Key management areas & techniques

1. Cash management: Cash budget, cash concentration, float management, marketable securities.

2. Inventory management: EOQ, ABC analysis, Just-In-Time (JIT), safety stock calculations.

   • EOQ formula: $EOQ = \sqrt{\frac{2DS}{H}}$

     • D = annual demand (units), S = ordering cost per order, H = holding cost per unit per year.

3. Receivables management: Credit policy (credit period, credit standards), collection procedures, factoring, discounts for early payment.

4. Payables management: Stretch payables subject to supplier relations; take cash discounts if beneficial.

5. Short-term financing mix: Bank overdraft, cash credit, commercial paper, bills discounting, trade credit.

6. Working capital ratios & monitoring: Current ratio, Quick ratio, Working capital turnover, Inventory days, Debtor days.

---

14. Important Formulas & Ratios (quick list)

• Net Working Capital (NWC) = Current Assets − Current Liabilities

• Current Ratio = Current Assets ÷ Current Liabilities (ideal ≈ 2:1, sector dependent)

• Quick Ratio (Acid test) = (Current Assets − Inventory) ÷ Current Liabilities (ideal ≈ 1:1)

• Working Capital Turnover = Net Sales ÷ Average Working Capital (higher = efficient)

• Inventory Turnover = COGS ÷ Average Inventory → Inventory days = 365 ÷ Turnover

• Receivable (Debtor) Turnover = Net Credit Sales ÷ Avg. Debtors → Receivable days = 365 ÷ Turnover

---

15. Numerical Examples (short & clear)

Example A — Compute NWC & ratios

Balance sheet snapshot:

• Cash = ₹50,000; Inventory = ₹2,00,000; Debtors = ₹1,50,000; Prepaid = ₹10,000;

• Current liabilities (creditors) = ₹3,00,000; Short term loan = ₹20,000

Current assets = 50k + 200k + 150k + 10k = ₹4,10,000
Current liabilities = 3,00,000 + 20,000 = ₹3,20,000
Net working capital = 4,10,000 − 3,20,000 = ₹90,000

Current ratio = 4,10,000 ÷ 3,20,000 = 1.28 : 1 (low; may signal liquidity pressure)
Quick ratio = (4,10,000 − 2,00,000) ÷ 3,20,000 = 2,10,000 ÷ 3,20,000 = 0.66 : 1

Example B — Operating cycle based WCR

Given earlier: Annual sales ₹12,00,000; inventory days 45; receivable days 30; payable days 20
Operating cycle = 45+30−20 = 55 days
WCR ≈ (55/365) × 12,00,000 = ₹1,80,822 ≈ ₹1.81 lakh

---

16. Practical Tips & Policies (do’s & don’ts)

• Do match finance type with nature of asset (matching principle).

• Do keep minimum necessary inventory (use JIT if possible).

• Do implement strict credit appraisal & quick collection.

• Don’t over-leverage short term for long term needs.

• Do prepare rolling cash budgets and stress test for 3–6 months.

• Use factoring when receivables are large and you need immediate cash.

• Negotiate trade credit and cash discounts carefully (take discount if effective rate better than borrowing cost).

---

17. Examination / Assignment Pointers (what professors ask)

• Define and distinguish gross vs net working capital.

• Calculate WCR by operating cycle.

• Compute current ratio / quick ratio / working capital turnover.

• Explain sources of finance with pros & cons and suggest mix for a case (start-up vs matured firm).

• Discuss working capital policies (conservative vs aggressive) with advantages/disadvantages.

• Solve numerical with EOQ, CCC, and simple cash budget.

---

18. Quick Recap (one-page summary — Hinglish)

• Financial management = paise ka planning, procurement, allocation & control.

• Main decisions: Investment (which projects), Financing (debt vs equity), Dividend (pay vs retain), Working capital (day-to-day).

• Sources: Long-term (equity, debt, retained earnings), Short-term (bank credit, trade credit, commercial paper).

• Working capital: Current Assets − Current Liabilities; essential for liquidity & operations.

• Factors affecting WC: Nature of business, production cycle, credit policy, seasonality, inflation, growth.

• Techniques: EOQ, ABC, JIT, factoring, cash budgeting, receivables management.