Working Capital Managment

charge Of operative chapiter Introduction operative big(p)-Definition works gravid is the coin needed to give way for the day to day operation of the business. on with long bourne investiture notess , business also needs funds for short-run purposes to finance actual operations. Investment in short term assets ilk immediate payment, inventories, debtors etcetera , is called Short-term Funds or Working Capital. Hence, the commercial enterprise of Working Capital is in truth weighty for the smooth running of business. Calcution of Working CapitalWorking Capital of a comp each is the difference between the oc modern Assets and the circulating(prenominal) Liabilities of the company. Working metropolis=Current Assets-Current Liabilities Current Assets Assets of the business held in the formula of cash(e. g cash at the bank) or that bath be cursorily turned into cash. Current Assests Stocks Cash Debtors Investments Current Liabilities Money owed by a business org anization which is to be paid within next 12 months Current Liabilities Trade Creditors DividendsTaxation Short term loans Circulating cap worksss gravid is also known as circulating capital or current capital. The use of the term circulating capital instead of running(a) capital indicates that its flow is circular 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 graph as follows Working Capital daily round makes it clear that the tote up of cash is obtained chief(prenominal)ly from issue of shargons, borrowing and operations.Cash funds be used to barter for fixed assets, stabbing materials and used to pay to identificationors. The raw materials are urbane wages and overhead expenses are paid which in result spring up finished goods for sale. Working Capital circulation is like the blood circulation in the b enignant body as once it stops the whole business becomes lifeless. salmagundi of Working Capital Working Capital can be classified advertisement ad in various ways. Conceptual miscellanea in that respect are devil thought of working capital viz. , quantitative and qualitative.The quantitative concept takes into handbill 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 descend of current liabilities exceeds the amount of current assets. The above can be summarized as follows (i) Gross Working Capital = Total Current Assets (ii) top Working Capital = Excess of Current Assets over Current Liabilities (iii) Working Capital Deficit = Excess of Current Liabilities over Current Assets. compartmentalisation on the basis of financial reports The nformation of working capital can be collected from Balance Sheet or Profit and Loss grudge as such the working cap ital whitethorn be classified as follows (i) Cash Working Capital This is calculated from the information contained in profit and loss account. This concept of working capital has assumed a dandy significance in recent years as it shows the comme il fautness 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 divide in three more types, viz. gross Working Capital, discharge Working Capital and Working Capital deficit. Classification on the substructure of Variability Gross Working Capital can be split in two categories viz. ,(i) permanent or fixed working capital, and (ii) temporary worker, Seasonal or variable working capital. Such type of classification is very important for hedging decisions. (i) Temporary Working Capital Temporary Working Capital is also called as fluctuating or seasonal worker wor king capital. This represents additional investment needed during prosperity An favorable seasons. It increases with the egression of the business. Temporary working capital is the additional assets required to meet the variations in sales above the permanent take. 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 due to variation in sales. there is always a minimum level of cash, inventories, and accounts receivables which is always maintained in the business correct if sales are reduced 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 workin g capital is very essential. Efficiency in this area can help, to utilize fixed assets gainfully, to curb the solids long- term success and to achieve the overall death of maximization of the shareholders, fund. Shortage or bad anxiety of cash whitethorn result in loss of cash discount and loss of account due to non-payment of obligation on due dates.Insufficient inventories whitethorn be the main cause of production held up and it may compel the enterprises to purchase raw materials at unfavorable rank. Like-wise facility of credit sale is also very essential for sales promotions. It is rightly observed that many another(prenominal) a time business failure takes place due to lack of working capital. competent working capital provides a cushion for bad days, a concern can pass its period of depression without much bafflingy. The significance of adequate working capital is to avoid interruption in the production memorial and maintain sales, a concern equires funds to fin ance 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 entrust impair the profitability and general health of a concern. The risk of excessive working capital are as follows Heavy investment in fixed assets A concern may invest severely in its fixed assets which is not justified by actual 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 aforementioned(prenominal) time it may increase the cost due to mishandling, waste, theft, etc. spoilt tendencies Speculative tendencies may increase and if profit is increased dividend distribution give also increase. This will hamper the image o f a concern in future when speculative loss may start. Liberal credit imputable to liberal credit, size of accounts receivables will also increase.Liberal credit facility can increase bad debts and wrong practices will start, regarding delay in payments. neglect Excessive working capital will lead to carelessness most costs which will adversely affect the profitability. Paucity of working capitalist also bad and has the following dangers 1. Implementation 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 creep 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 sideline in case of need. 8. Sometimes, a concern may be limitation to sale its product at a very reduced rates to collect funds which may harm its image. Meaning of Working Capital Management The care 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 any business for carrying on day-to-day operations. Working capital funds are regarded as the life blood of a business firm. A firm can exist and know 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, each 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 position in the recent past for the pit objects of profitability and liquidity. In period of rising capital costs and dismay funds, the working capital is one of the most important areas requiring management review. It is rightly observed that, Constant management review is required to maintain countenance levels in the various working capital accounts. Mai nly the success of a concern depends upon proper management of working capital so working capital management has been determineed upon as the driving seat of financial manager. It consumes a great deal of time to increase profitability as swell up 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 canvass of working capital management is very important for internal and international 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 substan tial portion of total investment is invested in current assets, and (ii) level of current assets and current liabilities will change quickly with the variation in sales.Though fixed assets investment and long-term borrowing will also chemical reaction to the changes in sales, but its response will be weak. Conclusion Although some companies began the process of improving their working capital management five 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 nowadays in both operational practices and strategic priorities.