“More business fails for lack of cash than for want of profit”. Efficient management of working capital is one of the pre-conditions for the success of an enterprise. Efficient management of working capital means management of various components of working capital in such a way that an adequate amount of working capital is maintained for smooth running of a firm and for fulfillment of twin objectives of liquidity and profitability. While inadequate amount of working capital impairs the firm’s liquidity. Holding of excess working capital results in the reduction of the profitability. But the proper estimation of working capital actually required, is a difficult task for the management because the amount of working capital varies across firms over the periods depending upon the nature of business, production cycle, credit policy, availability of raw material, etc.
Thus efficient management of working capital is an important indicator of sound health of an organization which requires reduction of unnecessary blocking of capital in order to bring down the cost of financing.
Working capital management
Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses.
The goal of working capital management is to manage the firm s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.
According to Guttmann & Dougall- Excess of current assets over current liabilities.
According to Park & Gladson- The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries &
Wages payable, accounts payable, taxes owned to government).
Need of working capital management
The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales cannot convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labor and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.
1. WORKING CAPITAL MANAGEMENT
Need of working capital
Gross W.C and Net W.C
Types of working capital
Determinants of W.C
2. Research Methodology
Types of Research methodology
Objective of the study
Scope and limitation of the study
3. WORKING CAPITAL SIZE AND ANALYSIS
Working capital level
Working capital trend analysis
Current assets analysis
Current liability analysis
Changes of working capital
Working capital leverage
4. Working Capital Ratio analysis
Role of ratio analysis
Limitations of ratio analysis
Classifications of ratios
5. Working Capital components
6. Working Capital Finance and Estimation
Sources of working capital finance.
Working capital loan and interest.
Estimation of working capital.
7. Conclusions and recommendations