Working Capital Managment

Management Of works Capital Introduction on the job(p) Capital-Definition Working Capital is the cash needed to pay for the sidereal day to day operation of the lineage. Along with long term enthronizations , business as well as needs bills for footling-term purposes to finance afoot(predicate) operations. Investment in short term assets like cash, inventories, debtors etc. , is called Short-term Funds or Working Capital. Hence, the counsel of Working Capital is in truth important for the smooth racecourse of business. Calcution of Working CapitalWorking Capital of a company is the difference between the rate of flow Assets and the menstruum Liabilities of the company. Working not bad(p)=Current Assets-Current Liabilities Current Assets Assets of the business held in the work on of cash(e. g cash at the bank) or that basis be quickly turned into cash. Current Assests Stocks Cash Debtors Investments Current Liabilities Money owed by a business organization which is to b e paid within next 12 months Current Liabilities Trade Creditors DividendsTaxation Short term loans Circulating with child(p) work capital is withal known as circulating capital or modern capital. The use of the term circulating capital instead of operative(a) capital indicates that its flow is banknote in nature. Structure of Working Capital The different elements or components of current assets and current liabilities constitute the structure of working capital which can be illustrated in the shape of a chart as follows Working Capital Cycle makes it clear that the amount of cash is obtained mainly from issue of sh atomic number 18s, borrowing and operations.Cash funds are used to purchase fixed assets, raw materials and used to pay to creditors. The raw materials are processed wages and overhead expenses are paid which in subject produce finished goods for cut-rate sale. Working Capital circulation is like the blood circulation in the human body as once it stops the whole business becomes lifeless. categorization of Working Capital Working Capital can be classified in various ways. Conceptual classification on that point are twain apprehension of working capital viz. , quantitative and qualitative.The quantitative concept takes into account as the current assets while the qualitative concept takes into account the excess of current assets over current liabilities. Deficit of working capital exists where the amount of current liabilities exceeds the amount of current assets. The above can be summarized as follows (i) Gross Working Capital = Total Current Assets (ii) Net Working Capital = Excess of Current Assets over Current Liabilities (iii) Working Capital Deficit = Excess of Current Liabilities over Current Assets. Classification on the basis of fiscal reports The nformation of working capital can be collected from agreement Sheet or net income and Loss Account as such the working capital may be classified as follows (i) Cash Working Capital This is calculated from the entropy contained in profit and loss account. This concept of working capital has assumed a great significance in recent years as it shows the enough of cash flow in business. It is based on Operating Cycle Concepts (ii) Balance Sheet Working Capital The data for Balance Sheet Working Capital is collected from the balance sheet. On this basis the Working Capital can also be divided in tierce more types, viz. gross Working Capital, net Working Capital and Working Capital deficit. Classification on the Basis of Variability Gross Working Capital can be divided in two categories viz. ,(i) indissoluble or fixed working capital, and (ii) Temporary, Seasonal or variable working capital. Such type of classification is very important for hedgerow decisions. (i) Temporary Working Capital Temporary Working Capital is also called as displace or seasonal working capital. This represents additional investment needed during prosperity An favorable season s. It increases with the growth of the business. Temporary working capital is the additional assets required to accept the variations in sales above the permanent level. This can be calculated as follows Temporary Working Capital = Total Current Assets permanent Current Assets (ii) Permanent Working Capital It is a part of total current assets which is not changed collect to variation in sales. There is always a tokenish level of cash, inventories, and accounts receivables which is always maintained in the business even if sales are reduce to a minimum. Amount of such investment is called as permanent working capital. Permanent Working Capital is the amount of working capital that persists over time regardless of fluctuations in sales. This is also called as regular working capital. Importance of Working Capital Management For smooth running an enterprise, adequate amount of working capital is very essential. Efficiency in this area can help, to utilize fixed assets gainfull y, to assure the firms long- term success and to achieve the overall goal of maximization of the shareholders, fund. Shortage or bad counsel of cash may result in loss of cash discount and loss of reputation due to non-payment of obligation on due dates.Insufficient inventories may be the main make water of crossroadion held up and it may compel the enterprises to purchase raw materials at unfavorable rates. Like-wise facility of credit sale is also very essential for sales promotions. It is rightly observed that umteen a times business failure takes place due to lack of working capital. Adequate working capital provides a cushion for bad days, a concern can pass its period of depression without much difficulty. The significance of adequate working capital is to avoid interruption in the production schedule and maintain sales, a concern equires funds to finance inventories and receivables. The adequacy of cash and current assets together with their efficient handling virtually determines the survival or demise of a concern. An enterprise should maintain adequate working capital for its smooth functioning. Both, excessive working capital and inadequate working capital provide impair the profitability and general health of a concern. The danger of excessive working capital are as follows Heavy investment in fixed assets A concern may invest heavily in its fixed assets which is not justified by effective sales.This may create situation of over capitalization. Reckless purchase of materials- Inventory is purchased recklessly which results in dormant slow moving and obsolete inventory. At the aforesaid(prenominal) time it may increase the cost due to mishandling, waste, theft, etc. Speculative tendencies Speculative tendencies may increase and if profit is increased dividend distribution willing also increase. This will hamper the image of a concern in future when speculative loss may start. Liberal credit Due to liberal credit, size of accounts receiv ables will also increase.Liberal credit facility can increase bad debts and wrong practices will start, regarding delay in payments. Carelessness Excessive working capital will lead to carelessness about costs which will adversely affect the profitability. Paucity of working capitalist also bad and has the following dangers 1. writ of execution of operating plans becomes difficult and a concern may not achieve its profit target. 2. It is difficult to pay dividend due to lack of funds. 3. Bargaining capacity is reduced in credit purchases and cash discount could not be availed. 4.An enterprise looses its reputation when it becomes difficult even to meet day-to- day commitments. 5. Operating inefficiencies may spectre in when a concern cannot meet it financial promises. 6. Stagnates growth as the funds are not available for new projects. 7. A concern will have to borrow funds at an exorbitant rate of interest in case of need. 8. Sometimes, a concern may be bound to sale its product at a very reduced rates to collect funds which may harm its image. Meaning of Working Capital Management The management of current assets, current liabilities and inter-relationship between them is termed as working capital management. Working capital management is concerned with problems that arise in attempting to manage the current assets, the current liabilities and the inter-relationship that exist between them. In practice, There is usually a distinction made between the investment decisions concerning current assets and the financing of working capital. From the above, the following two aspects of working capital management emerges (1) To determine the magnitude of current assets or level of working capital and (2) To determine the mode of financing or hedging decisions. Significance of Working Capital Management Funds are needed in every business for carrying on day-to-day operations. Working capital funds are regarded as the life blood of a business firm. A firm can exis t and get going without making profit but cannot survive without working capital funds. If a firm is not earning profit it may be termed as sick, but, not having working capital may cause its bankruptcy working capital in order to survive. The alternatives are not pleasant. Bankruptcy is one alternative. Being acquired on unfavorable term as another.Thus, for each one firm must decide how to balance the amount of working capital it holds, against the risk of failure. Working capital has acquired a great significance and sound point in the recent past for the twin objects of profitability and liquidity. In period of rising capital costs and scare funds, the working capital is one of the almost important areas requiring management review. It is rightly observed that, Constant management review is required to maintain appropriate levels in the various working capital accounts. in the main the success of a concern depends upon proper management of working capital so working capita l management has been looked upon as the driving seat of financial manager. It consumes a great deal of time to increase profitability as well as to maintain proper liquidity at minimum risk. There are many aspects of working capital management which make it an important function of the finance manager. In fact we need to know when to look for working capital funds, how to use them and how measure, plan and control them. A study of working capital management is very important for internal and external experts.Sales expansion, dividend declaration, plants expansion, new product line, increase in salaries and wages ,rising price level, etc. , put added strain on working capital maintenance. Failure of any enterprise is undoubtedly due to poor management and absence of management skill. Importance of working capital management stems from two reasons, viz. , (i) A substantial portion of total investment is invested in current assets, and (ii) level of current assets and current liabili ties will change quickly with the variation in sales.Though fixed assets investment and long-term borrowing will also response to the changes in sales, but its response will be weak. Conclusion Although some companies began the process of improving their working capital management fiver or even 10 years ago, many others were driven to focus on the issues by funding disruptions and cash shortages brought by the global crisis. The effects of the many challenges faced by large companies during that period are evident today in both operational practices and strategic priorities.