WORKING CAPITAL MANAGEMENT

Click to edit Master subtitle style

INTRODUCTION

Working capital is the life blood and nerve Centre of a business. As the circulation of blood is essential in the human body for maintains of life, in the same way working capital is essential to all the organization to maintain the smooth running of a business.

MEANING OF WORKING CAPITAL

Working capital is the part of total capital. It is used for carrying out the regular business operations. In other words, it is the amount of funds used for financing the day to day operation s or activities. The funds invested in current assets such as stock of materials, work-in-progress, investments, bills receivables, sundry debtors, bank balance etc., are known as working capital or short term capital.

DEFINITION OF WORKING CAPITAL

GERESTENBURG defines, Circulating means current assets of a company that are changed in the ordinary course of business form one from to another, as for example, from cash to inventories, investment to receivable, receivable into cash.

DEFINITION OF WORKING CAPITAL

SHUBIN define, Working capital is the amount of funds necessary to cover the cost of operating the enterprise.

CONCEPT OF WORKING CAPITAL

There are two concept of working capital Net working Gross working capital

NET WORKING CAPITAL

Working capital is the excess of current assets over current liabilities. In the form of equation as follows. Working capital = current assets current liabilities Components of working capital according to net concept working capital has two components viz. a. Current assets b. Current liabilities

NET WORKING CAPITAL

Current assets : those assets which are converted into cash within a period not exceeding one year normally, such assets are called current assets. Example of current assets: Cash in hand Cash at bank Bills receivable Sundry assets Prepared expenses Outstanding income

NET WORKING CAPITAL

Those liabilities are to be paid within a period of one year, such liabilities are called current liabilities. Generally current liabilities are paid out of current assets or the income from the business. Example of current liabilities: Trade creditors Outstanding expenses

NET WORKING
Short-term borrowings Taxes and dividend payable Bank overdraft Outstanding liabilities Advances received from parties against goods to be sold. So net working capital is an accounting concept. Net working capital may be positive or negative.

GROSS WORKING CAPITAL

The gross working capital refers to firms investment in all the current assets taken together. The total of investment in all the current assets is the gross working capital. This concept is supported by the authorizes like mean banker etc. According to them the working capital concept is financial or going concern concept.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT The working capital needs of a firm are
determined and influenced by various factors. A wide variety of considerations may effect the quantum of working capital required and these considerations may vary from time to time. The working capital needed at one point of time may not be good enough for some other situation. The determination of working capital

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT Following are some of the factor which are relevant in
determining the working capital needs of the firm: 1. Basic nature of business. 2. Business cycle fluctuations. 3. Seasonal operations. 4. Market competitiveness. 5. Credit policy. 6. Supply conditions. 7. Inventory policy. 8. Accessibility to credit. 9. Growth of business. 10. Environment factor. 11.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT BASIC NATURE OF BUSINESS :

The working requirement is closely related to the nature of the business of the firm. In case of retail shop or a trading firm, the amount of working capital required is small enough. Most of the transaction are undertaken in cash and the length of the operating cycle is generally small. The trading concerns usually have smaller needs of working capital, however in certain cases, large inventories of goods may be required and consequently the working capital may be large. In case of manufacturing concerns, different types of production process are performed. One unit of raw material introduced in the production schedule may take a long period before it is available as finished goods for sale. Funds are

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT BUSINESS CYCLE FLUCTUATIONS:

Different phases of business cycle i.e., Boom, Recession, Recovery etc., also effect the working capital requirement. Incase of Boom condition, inflationary pressure appears and business activities expand. As a result, the overall need for cash , inventories etc. increase resulting in more and more funds blocked in these current assets. In case of recession period however, there is usually a dullness in business activities and there will be an opposite effect on the level of working capital requirement. There will be a fall in inventories and cash requirement etc.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT SEASONAL OPERATIONS:

o If a firm is operating in good and services having seasonal fluctuating in demand, then the working capital requirement will also fluctuate with every change. o In a cold drink factory, the demand will certainly be higher during summer season and therefore, more working capital is required to maintain higher production, in the form of larger inventories and bigger receivables. o On other hand, if the operations are smooth and even throughout the year then the working capital requirement will be constant and will not be affected by seasonal factors.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT MARKET COMPETITIVENESS:

The market competitiveness has an important bearing on the working capital needs of a firm. In view of the competitive conditions prevailing in the market, the firm may have to offer liberal credit terms to the customers resulting in higher debtors. Even larger inventories may be maintained to serve an order as and when received; otherwise the customer may go to some other supplier. Thus, working capital tends to be high as a result of greater investment in inventories and receivables. On other hand, a monopolistic firm may not require larger working capital. It may ask the customers to pay in advance or to wait for some time after placing the order.

FACTORS DETERMINING WORKING CAPITAL CREDIT POLICY : REQUIREMENT

The credit policy means the totality of terms and conditions on which goods are sold and purchased. A firm has to interact with two types of credit policies at a time. One, the credit policy of the supplier of raw materials, goods etc., and two, the credit policy relating to credit which it extends to its customers. In both the cases, however, the firm while deciding its credit policy, has to take care of the credit policy of the market. Example : A firm might be purchasing goods and services on credit terms but selling goods only for cash. The working capital requirement of this firm will be lower than that of a firm which is purchasing cash but has to sell on credit basis.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT SUPPLY CONDITIONS:

The time taken by a supplier of raw materials, goods etc. After placing an order, also determines the working capital requirement. If goods are received as soon as or in a short period after placing an order, then the purchaser will not like to maintain a high level of inventory of that goods . Otherwise, larger inventories should kept.

FACTORS DETERMINING WORKING CAPITAL INVENTORY POLICY: REQUIREMENT

The traditional production systems generate more stock of finished goods and high levels of raw materials and WIP stock are maintained and stock holding period is also more working capital is needed. ACCESSIBILITY TO CREDIT : Creditworthiness is the precondition for assured accessibility to credit. Accessibility in banks depends on the flow of credit i.e., level of working capital. GROWTH OF BUSINESS: Growth and diversification of business call for larger volume of working funds. The need for increased working capital does not follow the growth of business operations but precedes it.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT ENVIRONMENT FACTORS:

Political stability brings in stability in money market and trading world. Things mostly go smooth. Risk ventures are possible with enhanced need for working capital finance. Similarly, avaibility of local infrastructure facilities like road, transport, storage and market etc., influence business and working capital need as well.