Study and analysis of working capital management in current business scenario

This paper is about to the various mode of working capital management. In current business scenario the role of working capital management is very crucial. Organization is more attentive for their working capital management. Working capital is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Also known as operating capital, it is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash. Gradual increase in profit results in capital growth of the firm. Increasing sales volume results in increasing profits. Sales are done on either cash or credit basis. Sale of goods will not be converted into cash immediately when sales are done on credit basis. Therefore additional capital is required to have uninterrupted business operations as the sales amount gets locked up in current assets like accounts receivable, inventory etc. Gradual increase in profit results in capital growth of the firm. Increasing sales volume results in increasing profits. Sales are done on either cash or credit basis. Sale of goods will not be converted into cash immediately when sales are done on credit basis. Therefore additional capital is required to have uninterrupted business operations as the sales amount gets locked up in current assets like accounts receivable, inventory etc. Introduction Working capital management involves the relationship between a firm’s short-term assets and its short-term liabilities. The basic goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable, accounts payable and cash. Working Capital is the money used to make goods and attract sales. The less Working Capital used to attract sales, the higher is likely to be the return on investment. Working Capital management is about the commercial and financial aspects of Inventory, credit, purchasing, marketing, and royalty and investment policy. The higher the profit margin, the lower is likely to be the level of Working Capital tied up in creating and selling titles. For that cash is also the part of working capital management. Cash is the most liquid asset of all and is vital for existence of any business firm. Its efficient management is crucial to the solvency of the business because as we all know cash is the focal point of the funds flows in a business. It can be understood in two senses, one is actual cash held by firm and deposits withdraw able on demand, and in another sense it includes marketable securities, which can be convertible into cash immediately. The goal of cash management is to reduce the amount of cash that is being used within the firm so as to increase profitability, but without reducing business activities or exposing the firm to undue risk in its financial obligations. Working capital is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Also known as operating capital, it is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash. Working capital is of two types. They both are interlinked with each other. In the first, working capital refers to gross working capital and in second it is understood in terms of net working capital. CONCEPT OF WORKING CAPITAL There are two concepts of working capital: 1. Gross working capital 2. Net working capital The gross working capital is the capital invested in the total current assets of the enterprises current assets are those Assets which can convert in to cash within a short period normally one accounting year. CONSTITUENTS OF CURRENT ASSETS While dealing with the working capital management, this is the prime responsibility of the managers to understand the various constituents. Some of them are following 1) Cash in hand and cash at bank 2) Bills receivables 3) Sundry debtors 4) Short term loans and advances. 5) Inventories of stock as: a. Raw material b. Work in process c. Stores and spares d. Finished goods 6. Temporary investment of surplus funds. 7. Prepaid expenses 8. Accrued incomes. 9. Marketable securities. In a narrow sense, the term working capital refers to the net working. Net working capital is the excess of current assets over current liability, or, say: NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES. Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assts or the income business. CONSTITUENTS OF CURRENT LIABILITIES Following are the constituents of current liabilities. 1. Accrued or outstanding expenses. 2. Short term loans, advances and deposits. 3. Dividends payable. 4. Bank overdraft. 5. Provision for taxation 6. Bills payable. 7. Sundry creditors. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits. The gross concept is sometimes preferred to the concept of working capital for the following reasons: 1. It enables the enterprise to provide correct amount of working capital at correct time. 2. Every management is more interested in total current assets with which it has to operate then the source from where it is made available. 3. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital. 4. This concept is also useful in determining the rate of return on investments in working capital. The net working capital concept, however, is also important for following reasons: