Disclaimer: This dissertation has been written by a student and is not an example of our professional work, which you can see examples of here.

Any opinions, findings, conclusions, or recommendations expressed in this dissertation are those of the authors and do not necessarily reflect the views of UKDiss.com.

Working Capital Management Concepts and Methods

Info: 8998 words (36 pages) Dissertation
Published: 10th Dec 2019

Reference this

Tagged: EmploymentManagement

Introduction:

Working Capital is very needful essential for all business .without working capital a business cannot run and not live in the market. It is the life blood of every business concern. Business firm cannot make progress without adequate working capital. Every business organization cash to carry on its daily business activities and to produce goods for sale to earn profit..These cash or funds used for business production and daily business operation.

Insufficient working capital means shortage of inputs, whereas excess working capital bear to extra cost. So the balance in working capital in every business, firm should be neither more nor less than what is actually needed. In business a management has responsibility to see that funds invested as working capital in business for earn profit. If organization earn profit then possible for business invested anywhere else.

Working capital  refers to the cash a business requires for day-to-day operations, like for financing the conversion of raw materials into finished goods, salary and wages, all one year production expenses, which the company sells for payment.

Working capital represents the amount of liquidity of which is require in a organization daily operation. Working capital is considered a part of operating capital. It is calculated   as current assets minus current liabilities.

Businesses use this capital for purchase business construction, renovation, furniture, or machinery. It is also used to purchase inventory for business. Working capital is essential for any business to succeed.

 

Definition of working capital

Working Capital represents the excess of current .assets. Over current liabilities

                                                                                J.L. Brown and L.R. Housard.

Working Capital represents only the current capital asset

                                                                           Meal Baker Malott and Field.

Working Capital means a sum of Current Assets.

 J.S MILL.

Working Capital to a firm’s investment in short term assets cash short- term securities, accounts, receivables and inventories.

                                                                                           -Weston the Brigham

A Working Capital deficit exits if current liabilities exceed current assets

-Prof. C.W. Gerstoberg.

Working Capital equals the aggregate value of current assets. Minus aggregate value of current liabilities

Lincoln.

Gross Working Capital may be used to refer to total C.A. and net working capital refers to the surplus of C.A. over current liabilitie      Prof. S.C. Kuch

 Current assets:

The following items constitute the current assets of a firm:

  • Inventories
  • Trade Debtors
  • Prepaid Expenses
  • Loans & Advances
  • Investments
  • Cash & Bank balances
  • Receivables

Current liabilities:

The following items comprise current liabilities:

  • Sundry creditors
  • Bank Overdrafts
  • Short Term Loans
  • Provisions
  • Outstanding expenditure

Working capital Management 

Working capital management involves the how to manage and control of the gross current assets.

All business success depends on better working capital management. In working capital management arrange the cash flow in a business then business run smoothly.  In proper working capital management include managing the proper relationship between a firm’s short-term assets and its short term liabilities. short term assets are those assets that are easily convert in cash within one year same short term liabilities we can say those short-term liabilities which are payment in one year. The main goal of working capital management is to ensure that organization   is able to continue its daily operations and that it has sufficient cash funds for short-term debt and upcoming operational expenses.

A   good management strategy is focusing on maintaining the efficient levels of working capital, and its components of current assets and current liabilities. Working capital management ensures an organization has sufficient cash flow to meet its short-term debt s and operating expenses. A best management keep proper working capital management that is increases its strength in market. In other word we can say a working capital is breath for all organization. if working capital have in business, a business   take breath otherwise business will be die.

Management of working capital

Management will use a best combination of best policies and techniques for the working capital management. The policies aim is manage the current assets and the short-term financing. In our study we analysis that how RCDF FIVE UNITS AJMER, ALWAR, BHILWARA JAIPUR AND UDAIPUR union manage its working capital. These five union how to arrange cash funds and where its uses .So these analysis we take different data collection for require working capital management.

Cash management.   

In cash management in RCDF UNITS first management and identify the cash balance and management of cash with see how to arrange cash and where use of these funds are.  Which allows for the RCDF UNITS meet day to day expenses, and management also keep in mind that cash holding costs how to reduce?

Inventory management.

Identify the level of inventory in all business which allows for in continuity. Production for smoothly running business. With also keep in mind that in business has reduces the investment in raw materials—and minimizes reordering costs—and thus increases cash flow. And also management sees that the production time should be less. And also management see that the finished goods  level should be keep according market demand to avoid over production

Debtor’s management.

When company sells its good or production credit base that time have possibility to make bad debts or may be risk to not giving money on time. so that time management decide to how to control on bad debts or timely require of its funds . If company do proper debtors management that is very good condition for company. So management has control on company credit policy, length of credit period, collection policy etc.  If management the accomplishment of debtors management then its help for easy flow of cash in business.

Short-term financing.

In business short terms needs and daily operation expenses management fulfill with take short term loans. Short term financing are related to one year or some financing are may be 24 month .Management distinguish the all source of financing, which are given in cash conversion cycle. In Business all short term sources are uses for short terms requirement.

Working Capital Management is the process of planning and controlling the level of different sources of funds and where its uses. In business financial managers have decide  how much quantities of cash require at the time and how much cash will might require in future.

Objectives of Working Capital Management:

–       Deciding favorable outcome Level of the investing money for profit  in various WC Assets

–       Decide best Mix of Short Term capital and Long Term Capital

–       Decide suitable means of Short Term Financing

The keep proper balance between current assets and current liabilities therefore the main aim of the working capital management.

 The aim of working capital management is to maintain the firm’s current assets and liabilities in such a way that a suitable level of working capital is maintained

Characteristics of working capital

The aspect of Working Capital different it from the fixed capital are as follows:

  • Short term needs.
  • Circular movement.
  • An element of permanency.
  • An element of fluctuation.
  • Less risky.
  • Liquidity..
  • Different proportion for each industry.

Short-Term Needs

In all business have required some short term needs for daily operation activities. These demands are fulfill in business with current assets, and these current assets we are easily saleable in market when a business have need capital.  Short term needs entire different from fixed capital   because fixed capital shows funds in long term assets. The time taken by current assets to cash dependent on the time taken by the production process.

Circular Movement

Working Capital is generated in regular flow. Working capital continues to be   converted into cash and then cash turns into Working Capital. Then this cash is used by a business to purchase raw stock for a business production and when product is released then cash is generated by sale of the finished product. This process of modification goes on regularly and working capital is generated regularly.

An Element of Fluctuation

The requirement of Working Capital is different in every business organization and working capital is changes while fixed capital are not changes. Working capital varies depend on the level of production in a business. Working capital changes according changes in the purchase and sale policy, price level and the level of demand also.  So these changes in working Capital called variable Working Capital. And this is depending on company policies.

An element of Permanency

We all know Working Capital is a short term capital, in every business have required of working capital always. And this requirement is fulfill with going on productive activities as long as production continues. And an organization runs fluently with sufficient working capital.

Liquidity

Working Capital is easily liquid than fixed capital. If any business need arises company sell its currents assets and fulfill its short term needs. This is possible and business have continue run and make liquidity in business. Company converts working capital in cash and fulfill requirement. And it’s done very short time.

Different Proportion for Each Industry

In every business working capital is different as per type of business, business demand and nature of business e.g. In Building or Ship Building Industry proportion of Working Capital is high while in Public Utility Units where services use sold speedily the proportion of Working Capital is less. The proportion of Working Capital changes from industry to industry. Like our research work in RCDF ltd .In this dairy requires more working capital. Because this type business daily purchases and daily sale product.

Less Risky

If a business Funds invested in fixed assets then that business capital gets locked up for a long period of time in fixed assets and business cannot be recovered easily. Business cannot easily sale its fixed assets for fulfill any requirement. If a business invests its fund in current assets then it’s good condition for business because any requirement in business easily fulfill with working capital. In business any requirement of easily converted into cash to sale its current assets. It is less risky for a business.

Constituents or factors of current assets

Current assets have a short life span. Current assets are engaged in daily operation of a business and normally used for short– term operations in the business during an accounting period. The two main features  of current assets are, current assets are we can  easily convert in to cash and very short life less than one year .

Fitzgerald defined current assets as, “cash and other assets which are expected to be converted in to cash in the ordinary course of business within one year or within such longer period as constitutes the normal operating cycle of a business.”

There are two aspect as presented by the parts of working capital are  here.

  • Cash in hand
  • cash at bank
  • debtors
  • Bills receivables or Account Receivables
  • Short term loans and advances.
  • Inventories of stock as:
  • Raw material
  • Work in process
  • Stores and spares
  • Finished goods
  • Prepaid expenses
  • Short term -investment
  • Accrued incomes.
  • Marketable securities.

Parts of current liabilitie_

Current liabilities –Those liabilities are relevant to one year all Current liabilities. Current liabilities are pay in one year. This liability is produce when business purchases any product, services, or raw material on credit base. Then that payment in same or next year. Current liabilities are shown in financial accounts. The credit payment within one year is known as current liabilities.

Current liabilities are

  • Accrued or outstanding expenses.
  • Short term loans, advances and deposits.
  • Dividends   payable.
  • Bank overdraft.
  • Provision for taxation.
  • Bills payable.
  • Sundry creditors.

Working capital elements

The main elements of working capital are:

Cash. 

Cash is very essentials for all business. Without cash we cannot image for smooth running of a business. In other word we can say that cash is one of the most liquid and important components of working capital. Cash is kept in proper balance in business because only cash is a non-earning asset. – Proper cash management in business is very important. Because with Proper cash business easily completes all business work and generates profit. So cash management is very important in all business.

Marketable Securities. 

Marketable securities especially use for against cash balance .when in business not has enough cash balance then these type securities we can easily sell and manage the adequate cash balance in business. Marketable securities don’t give much produce because of two reasons, these securities act as a is substitute of cash, and these securities are used for temporary investments.

Bills  Receivable. 

Bills Receivable or accounts receivable is an important factor for deciding the working capital .In a business credit  sales  done are call account receivable Bills receivables are shown in a balance sheet as current assets. In bills Receivables customer makes a promise for his payment that he will pay in future date. When in business accounts receivable are less, this is considered a source of cash, and as such, it increases the Bills Receivables this is considered a use of cash.

Inventory.

Inventory or stock refers to the goods and materials that a business  have for the sale .In stock contain is all goods which are a business keep for sale like raw material, work in process, finished goods. Stock   is one of the most important assets for all type business. An optimum level of inventory is managed and maintained for smooth running and profit generate is very essentials.

 

 

Prepaid Expense

Definition: Prepaid expenses related to future. Prepaid expenses that have been paid in advance. Prepaid expenses and prepaid revenues are prepayments by businesses and customers. Prepaid expenses aren’t actual expenses, but these expenses recorded in the financial accounts at the time of the prepayments.   Prepaid expense is an expenditure  that is paid in advance for upcoming year. An example of a prepaid expense is Taxes, rent, insurance, which is frequently paid in advance for multiple future periods a prepaid expense is listed within the current assets section of the balance sheet

Accrued Income

Accrued income earned but not received in that year. Accrued Income must be recorded in the accounting period in which it is earned. Accrued income is shown in the financial accounts profit & loss A/c and balance sheet.

Marketable security’

Any equity or debt instrument that it readily salable and can be converted into cash, or exchanged like Stocks, bonds, short-term commercial paper and certificates of deposit are all considered marketable .These securities easily converted into cash.

Unearned revenue: Unearned revenue is the postpone revenue. We can say unearned revenue is a liability.  Unearned revenue occurs when a company or organization sells good or service to a customer of the received money in advance Organization give to customers discounts for paying in advance for goods or services. Unearned revenue is an important concept in accounting

Current Liabilities

Outstanding expenses

Outstanding expenses are the opposite of prepaid expenses.. Even though they are to be paid at some future date, like wages, rent, etc.they are indicated on the firm’s balance sheet and firm have liability to pay this outstanding expenses in future when firm have cash in hand.

Creditor Definition: ……“Creditor is an accounting expression to indicate a party that has delivered a product, service or loan, and is owed money by one or more debtors”.

In simple way we can say creditors are that those which are we purchase product, service or take money in credit base and we can make a promise to creditors to we can pay those money in future.

Overdraft

When a person or business require money this time overdraft facility can be use. In this facility money is withdrawn from a bank account. In this facility a person or business withdraw money and the available balance goes below zero. In this  situation call to be “overdrawn”.

Provision for Income Taxes

All provision is making for uncertain timing and amount. The provision for income tax makes by an organization for coming estimated income tax. Provision for Income Taxes will pay in a given year. This is represented in financial statements quarterly with each earnings .Income taxes are paid annually.

 

 

Concept of working capital

Working capital refers to the current assets of a company that are converted in cash call working capital. .Working capital requirement depends on business conditions and business requirement.

Image result for working capital concept

Related image

Chart of working capital cycle 3.1

Every business organization requires cash to carry on its business operating expenses & to produces goods. It is also require of cash pay for different Planned and unexpected expenses..Working capital is the money need to cover business expenses, meet short-term obligations, and to grow business. When a new business established. Start-up and working capital can come from different sources like loans, grants, investor’s personal financial resources etc. Working capital is the money that allows a business organization to function by providing cash to pay the bills and keep daily operations without working capital; we cannot operate our fixed assets properly.  In business to getting profits, we need to buy some current assets and fixed assets.

.Source and components of working capital 

Sources of finance for working capital are two ways like long term loan and short terms loan. In working capital or short term  source are include bank loans, retained earnings, credit from suppliers, long-term loans from financial institutions, or proceeds from sale of assets.

 

Sources of working capital finance

Long-Term Loans

Long term loan is the amount of money that is given to an individual or a company on the agreement .In this agreement they agree for pay the borrowed amount in a period that exceeds 12 months. In long term loan interest rate are .pre decided by the both parties and    usually secured against certain assets .This type loan are given by different financial institutions .This type of loan taken by business men secure for long-term working capital for the business.

Short-Term Loans

Short-term loans are to be repaid within a year. Many financial institutions give this type loan like ….Savings banks, cooperatives and the government, private financers are some of the institutions that offer these loans. Bank overdraft is one such source of business finance.

Trade Credit

Trade credit is the credit given by one business trader to another for the purchase of goods and services. Or in other words we can say This credit service offered by suppliers for business to get goods and pay for them later.

Asset-Based Financing

An organization may use its assets to take some loan from different financial institutions. These type loan taken by business for secure its working. This type assets include fixed and current assets like accounts receivable, machinery, vehicle etc.

Inventory Financing

These loans are secured with the business` inventory acting as the security. Finance for working capital may be acquired through its inventory although the business cannot sell it until the loan is repaid because the lender has the right to the inventory until the loan has been repaid.

Current asset cycle:.

Current assets cycle define how a company manage its working capital. Current assets cycle shows how much are company debtors and creditors .And how many time company  take for collects money from its  debtors and how much time have company for paying money for its credit purchase. The speed with which the working cycle completes one cycle determines the requirements of working capital. We can say that    current assets cycle shows how a business firm manages its short term fund. Longer the cycle larger is the requirement of working capital.

Chart of current assets cycle   3.2

 

Finished goods

Work in progress

Account receivable

Wages, salaries etc.

Raw material

Suppliers

Cash

Why Working Capital Management

It is a very big question for all businessmen why working capital management? We can say all business criteria, business success, growth, up and down, everything depends upon working capital management. Most of the business growth depends upon its management, planning of working capital.

And if any business has any problem, or any obstacle, this is dependent on company’s poor management. And this poor management includes management of different things like…current assets, inventory management production policies, credit policy. Thus a business’ success depends on better management, better manager knowledge of working capital is very essential. We can say a business’ backbone is better working capital management. If a business does not have more cash fund but have better management, it will easily maintain its working capital. On the other hand, if a business has more funds but doesn’t have better credit polices then that business requires much fund but have much working capital required. This second business condition is not is good but though the first business has less fund, better credit policies, and then it will be in good condition. Thus we can say from a better management, a business can achieve its business goal and can easily stand in the market for a long time.

 Working capital requirements factors

Nature of business:        working capital requirement depend on business conditions.  Production and industrial type business more requirement of working capital. And less investment in fixed assets other hand in public utility and service type business less requirements of working.

.Production policy:          If in a business have the policy is to keep production steady it will require higher working capital.  Many businesses are seasonal productivity and this type business fluctuations in production and sales accordingly customer and market demand .so these type business requirement of working capital will also fluctuate.

Seasonal variations:        Seasonal business generally, during the busy season, a firm requires larger working capital than in slack seasonal like cooler, Ac, freeze, woolen clothed.

Credit policy  of enterprises— In some  business most of  sales are cash of its product and most of cases these type business  received in advance  This type business require less working capital. While, other business have credit sales and payment received after sales 15 to 45 days. So these type businesses have much working capital comparison to first type.

Length of production cycle:

Working capital requirement depend on business production cycle .The longer the production time the raw material, work in progress and other supplies have to be long time so process cycle is long. Then product  have a time for make its finishing time and sales but production cost like labor ,electric service cost , is obtained. So working capital is more requirements vice versa less requirement of working capital.

Working capital cycle:

In a business requirements of working capital depend on speed of cash conversion cycle. Long time   cycle generate more requirement of working capital. And short time cycle decide short requirement of working capital.

Volume of sale— In a business its sales  is directly indicated of working capital requirement, if sales are increase then more working capital is needed for finished goods and debtors, And if sales are less then less working capital requirement in business

.

Business cycle:   In A business also effect on market condition if market are boom condition, business and product goodwill are good in market that type business have less working capital.. On the other hand if market is rescission  conditions then business have many difficulties like less sales, credit sales , recovery of payment late  that time a business have  more  requirement of working capital.

Rate of growth of business:  In fast and new growing business require more working capital for future growth of business.

Earning capacity and dividend policy: Some business have good  earning capacity , good image in market ., and  have  goodwill of its product and brand name .These type business easily earn cash from operations .These business use these cash in management of working capital… And a business dividend policy effect on working capital.

Price level changes:  A business also effect of its product pricing policy .If price are increase  then more and more working capital will be needed. Because raw material other services price also increase in the market. The effect of rising prices will be different for different enterprises

Conditions of supply- A business is often affected by its inventory level. If in a business inventory supply is satisfactory and timely that is very good condition for a business .These type of business requires less working capital. And if a business inventory supply   is seasonal or unpredictable, then those type of business requires more funds for its inventory.

External Environment ─ In present time development of financial institutions, transport facility, are increasing .So needs of working capital is reduced because these financial institutions easily gives cash when a business requires it.

Others factors: These are:

  •      Operating efficiency.
  •      Management ability.
  •      Irregularities of supply.
  •      Import policy.
  •      Asset structure.
  •     Importance of labor.
  •     Banking facilities, etc.

Significance of working  capital Management

  • In a business working capital is very important; with working capital a business fulfils its daily requirements. The most important work is in his business is thinking about managing the working capital. With  satisfactory working capital a business can run smoothly .In other word we can say that working capital is life blood for a business. If management does not proper estimated and manage the working capital then have a chance to risk in continue production .Then without adequate working capital business will not live in market for long time. And business not will be able its daily expenses.  so  a business have very essential for keep working capital .In all business do its most of investment in working capital for its smoothly running . Working capital has been described as the “life of any business

.

Goodwill:     Adequate working capital enables a business to make all payment on timely that point increase goodwill of business in market. And we can say that company goodwill is increase and that is help for increase of business life time, stable in market, and make good image of business in market.

Solvency of the business:     Proper working capital helps in maintaining solvency of .The business. With adequate working capital uninterrupted flow of production.

Easy loans      In a business adequate working capital, high solvency and goodwill in market help in arrange loan from banks and other financial institution.

.Regular payment of salaries, wages and other day-to-day commitments: A company

Which has adequate working capital can make regular payment of salaries, wages and other daily expenses.  Which help in satisfaction and moral of its employee? And we all know a satisfied employee help in reduce cost, wastage and increase production level.

 Cash Discounts: Adequate working capital, better goodwill also enables cash discounts on the purchases and hence it reduces costs.

Regular supply of raw materials:  If a business has sufficient working capital then it will help timely payment of supplier that will ensures regular supply of

Raw materials and continuous  production.

Exploitation of favorable market conditions… Only with adequate working capital can exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.

High morale: Adequacy of working capital creates an environment of security, confidence, high morale and creates overall efficiency in a business

Ability to faces Crisis… Adequate working capital help to face business crisis in emergencies like depression, strikes, uncertainties because during this periods, generally, there is much pressure on working capital.

Quick and Regular return on Investments… Every Investor wants a fast and timely return on his investments. Sufficient working capital help in business run on profit and it is help to pay quick and regular dividends to its investors.. This satisfied investor creates a favorable market to raise additional funds in future.

Classification of working capital

We can understand classification of working capital with this chart.

http://managementation.com/wp-content/uploads/2012/09/classification_working_capital.png

Chart of working capital classification  3.3

Types of working capital On the basis of concept

There are two concepts of working capital – Gross working capital and net working capital. But they are defined by different names.

(a)Gross working capital:     Gross working capital means which capital are  invested in the current assets  is a gross working capital. In other words we can say that all current assets are gross working capital. Current assets mean those assets which are easily converted into cash within one year.

(b) Net working capital:     working capital refers to net working capital. Net working capital means excess of current assets over current liabilities. It helps in a business to finding out business capability to meet short term liabilities. Net working capital indicates the financial soundness of any business.

Net working capital        =         current assets – current liabilities

At the end we can say, that both the working capital are important but according to the suitability gross working capital is suitable for companies having separate ownership or management while net working capital is suitable for sole trader companies or partnership firms.

Types of working capital on the basis of time

 

In all business have needs of funds according time. Working capital requirement are varies from time to time. So in all business needs of funds depend on time

Permanent working capital:      Permanent working capital also called fixed or regulating working capital. Permanent Working capital means to run a business day to day expenses the business is required to maintain the minimum amount of working capital. In other words we can say that the working capital which is fixed in nature. which  are can not be varied due to variation in sales these are permanent working capital. It is the minimum level of current assets kept by the business always for business daily operation even if there is fluctuation in sales.

The permanent or fixed working capital is of two kinds:

Regular working capital, and Reserve working capital..

 Regular working capital-      Those fund or cash    which  are keep in business for business daily expenses are call regular working capital. In these capital maintain a sufficient level of cash for business . These capital are use for maintain reasonable quantities of raw materials for processing of finished goods to sales.

 Reserve working capital-      Reserve working capital   means the excess amount of cash over the regular working capital for any uncertain circumstances. These contingencies may be rise in prices, recession business depression, labor problem strikes, lock-outs, fires and unexpected competition.

Temporary working capital:       , Temporary capital is required for seasonal demands and any special purposes. it is also called variable working capital. In other words we can say with this formula – Total Current Assets – Permanent Current Assets is temporary working capital.   It changes according to change in business operational activity. This type of   working capital is also called as Temporary, Seasonal or Special Working Capital.

Charts  of  types of working capital on the basis of time   3.4

(a)Seasonal working capital     Seasonal working capital require for seasonal demands  of the business. It refers to liquid capital needed during the particular season. During the particular season, the business has required purchase of raw materials like sugarcane by sugar mills, wool by woolen mills.

 (b)Special working capital- it is required for some special purposes in an organization. For example advertising the product, sale promotion activities, any research experiments activities of the business, special orders of Government requires special working capital,

A firm, business  may have to  face the following adverse consequences from inadequate working capital:

Investors are not Attract

A small business  have require working capital that time if business have insufficient fund may find to difficult to attract investors and lenders. Sufficient  working capital shows investors and creditors that a company have capacity  to pay back its loan or can earn a t profit that make interest  in investors to earn a return on their investments. Creditors have a interest in a company’s when company have sufficient working capital without any risk.

 Difficult for Day-to-Day Operations

 

Working capital measures by a business ability to change short-term assets into cash. A lack of working capital may risky for business daily operations.  In daily operations business have different expenses like salaries, inventory purchases and equipment needs etc. A lack of cash or working capital is very difficult. If  any emergencies like recession ,strike ,labor  problem management cannot fight them and that condition is not good for business.

Difficult to Grow Business

With positive working capital a business will be grow in the future. When a  business  have a desires to grow or is trying to  meet  according customer demands, and want to   purchases assets needed for  products or services  these all possible when business  have  sufficient  fund. A lack of working capital in business have create problem in business.

Improving Working condition

Small businesses struggling to maintain a positive working condition. For this the company or the business tries to maintain all the conditions favorable.  These all depends when the organization timely get its cash payment .If company has inadequate cash balance then the company working conditions are adverse.

Others some problems  are………

  • Business growth may be stunted. If  business due to non-availability of funds
  •  If business not availability of fund then business have difficult of Implementation of operating plans and may be the profit goals may not be achieved.
  • Insufficient cash may create problems.
  • Fixed assets may not be efficiently utilized
  • The business might lose credit opportunities due to lack of working capital.
  • The firm loses its reputation when it is not in a good status.
  • If a business has insufficient cash then it is unable to take the advantages of new opportunities.
  • A business with inadequate working capital might lose trade and cash discounts.
  • . Financial reputation and goodwill of business is lost due to non-payment of timely to creditors.

So in short we can say that if business not have sufficient fund business have faces many problems and may be business cannot run and out of market.

Techniques for analysis of working capital:

Working capital management techniques includes intersection of different costs, Working capital financing policy, cash budgeting etc. Working capital techniques includes EOQ and JIT to manage different components of working capital like cash, inventories, debtors, etc. These effective techniques are used for managing different elements of current assets. Working capital management techniques are very effective tools in managing the working capital efficiently and effectively. Major focus is on current assets because current liabilities arise due to current assets only. Therefore, managing the current assets can automatically manage the current liabilities. So in current assets we include all Inventories, Debtors, Loans and Advances, Cash in hand and Bank Balance.

All working capital management techniques use for find optimum level of working capital in business because both excess and shortage of working capital bear cost by business. Excess working capital increase the ‘carrying cost’ or ‘interest cost’ and most of capital are unutilized. Shortage of working capital carries ‘shortage cost’ which creates disturbance in production planning, loss in sales revenue etc. So main goal of all business is maintain the optimum level of working capital in business. There are certain techniques are used for finding the optimum level of working capital.

Intersection of Carrying Cost and ordering Cost: One of the important methods of finding the optimum level of working capital is the point where intersection of carrying cost and ordering cost .The total of carrying and ordering cost is minimum point. That point is good for business. At this point, the total cost, is minimum and this is the level of current assets is to be optimal.

 

Working Capital Financing Policy:

Working capital can be divided into two types. Permanent and Temporary. Permanent working capital is the level of working capital which is essential to maintain all business. Temporary working capital is the level of working capital which are fluctuate according situation. It is high in good seasons and low in bad seasons. And for all business two types of financing available long term financing and short term financing. In business three strategies are possible with respect to financing of working capital. Efficient financing of working capital help in reduces carrying cost of capital.

  1. All business is use of long term financing for both permanent and temporary WC.
  2. Management are can use of long term financing for permanent and some part of temporary WC. And if any remaining part of temporary WC is have financed through short term financing..
  3. Management can use of long term financing for permanent and short term financing for temporary WC.

These are some important techniques discussed here. They are very effective in managing working capital. Managing working capital means managing current assets. Current assets can be managed using different techniques. Stock can managed using inventory techniques like EOQ and JIT. Debtors In business and can be managed using suitable sources of finance.

Cash Budgeting:

Cash budgeting is another important technique for management of working capital which helps in business for maintaining optimum level of cash. In business first we need to estimate the requirements of cash according to last year’s cash needs records which are very helpful in business. For effective management of cash always try to maintain a cash balance in business

 

Inventory Management: 

Inventory is an important component of working capital or current assets. In a business maintain adequate level of stock can save a heavily cost on inventory. There are some methods which are use in a business management can help in decrease its inventory cost.

  • EOQ:         Economic Order Quantity (EOQ) is a method for managing the inventory level in business. In this method management know how to control on inventory to give right quantity order .That help to reduce extra cost in inventory. In this method management considering other factors like cost of ordering, carrying costs, purchase price and annual sales. If a business give  a order right quantity at right time that help in smoothly and continue production process and also manage cash in other uses .  The formula used for finding EOQ is as follows:

EOQ = √{ (2 * A * O) / (P * C)}

A – Annual Sales

O – Cost per Order

P – Purchase price per unit

C – Carrying Cost

  • Just-in-Time:

Just-in-time is also another important method which management control on inventories.. Just-in-time means buy or obtain raw material or manufacturing product at the time when business have  need it. This method is some difficult but if implemented in business can bring down inventory cost to minimum levels.

 

 

Methods for Estimating Working Capital Requirement

There are three methods of calculate the need of working capital in an organization. Percentage of revenue or sales, regression analysis, and operating cycle method. Estimating working capital means calculating future working capital. It should be as accurate as possible because planning of                working capital would be based on these estimates and bank and other financial institutes finances the working capital needs based on such estimates only.

Methods of Estimating  Working Capital are as follows:

Percentage of Sales Method:

It is the easiest methods for calculating the working capital requirement of a business. This method is based on the last year’s sales. For estimating, relationship of sales and working capital with know take last 5 years sales, the next year estimation of working capital based on the last year’s sales.

This method is very simple to understand and calculate also. This method is not useful in new startup projects and new business because there is no past.

Regression Analysis Method:

This statistical estimation method is utilized by mass for various types of estimation. In this method tries to establish trend relationship. We will use it for working capital estimation. This method expresses the relationship between sales revenue & working capital in the form of an equation (Working Capital = Intercept + Slope * Revenue). Slope is the rate of change of working capital with one unit change in revenue. Intercept is the point where regression line and working capital axis meets

Operating Cycle Method:

This is probably the best of the methods because it takes into                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              account the actual business or industry situation into consideration while giving an estimate of working capital. A general rule can be stated in this method. Longer the working capital operating cycle, show more requirement of working capital and vice versa. We would agree to the point also. Following formula can be used to estimate or calculate the working capital

Working Capital = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle / 365 Days) + Bank and Cash Balance..

In this method, each component can also be calculated.

Proper management of working capital requires a careful inquiry of current assets and current liabilities and trends in the terms that are included in working capital i.e. components of current assets and liabilities.

Cite This Work

To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Related Services

View all

Related Content

All Tags

Content relating to: "Management"

Management involves being responsible for directing others and making decisions on behalf of a company or organisation. Managers will have a number of resources at their disposal, of which they can use where they feel necessary to help people or a company to achieve their goals.

Related Articles

DMCA / Removal Request

If you are the original writer of this dissertation and no longer wish to have your work published on the UKDiss.com website then please: