“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 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.
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 &
accounts payable, taxes owned to government).
Need of working
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
Types of Research methodology
Scope and limitation of the study
3. WORKING CAPITAL SIZE AND ANALYSIS
Working capital trend analysis
Current liability analysis
Changes of working capital
4. Working Capital 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